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Tax Increment Financing

Tax increment financing (TIF) is a tool that local governments can use to publicly finance needed structural improvements and enhanced infrastructure within a defined area. These improvements are associated with economic development; i.e., they usually are undertaken to promote the viability of existing businesses and to attract new commercial enterprises to the area. The statues governing tax increment financing are located in Chapter 311 of the Texas Tax Code.

Tax increment financing is based upon the pledge of future real property (not personal) taxes generated by new development within that defined geographic area. The public improvements make development of the area possible, which in turn enhances the value of the property. The taxes generated as a result of the enhanced property values are used to fund the public improvements within the area and other incidental costs.

In areas designated as TIF districts, tax-base increases are removed from the general tax rolls, and the revenue from the "captured" tax base is used to finance site improvements or other economic development costs.

In the standard model, public-sector bonds are used to raise the money needed to finance site improvements at the beginning of the project. The revenue from the captured tax base is then used to repay the bonds. When the bonds have been retired, the captured tax base reverts to the general tax rolls.

Project Example

The complexity of tax increment financing can be daunting and it is very difficult to provide an example of the average project. In fact, it can almost be assumed that most, if not all projects, are unique. However, we can provide a simple scenario of how the basic tenants of TIF work.

A primary consideration of a project's eligibility for TIF involves the project's projected costs. Since bonds are usually issued to raise the capital needed to fund the project, the amount of annual principal and interest payments needed to sufficiently repay the bond will need to be known. This is correlated with the location of the project and the designated area in which the TIF will be applied. Using TIF funding, the principal and interest of the bond are repaid based on the taxes collected from the growth consisting solely of new real property within a designated area. If growth of new development is expected to be low or none, tax revenues collected annually may be insufficient to pay off the bond.

Imagine having a $2 million economic development project within the City of Tyler and TIF is being considered to fund the project. The project would require the City of Tyler to issue a $2 million bond at an interest rate of 8.25%. How much would the average annual payment, consisting of principal and interest, need to be to pay off the bond in 10, 15, and 20 years?

YearsAnnual Payment Total Payments 
10$301,428$3,014,280
15$237,237$3,558,550
20$207,508$4,150,160

This example is rather simplistic. In reality, the bond lender could have structured the payments in such a way to allow higher interest payments or smaller payments in the initial few years to allow new development to occur, and thus, increased tax collections, in the designated TIF zone. In addition, since lower principal payments are made during the initial years of the bond's life, more interest would be due and subsequently increase the total payments. But for the sake of this example, let us assume that the total payments represent the amount of tax revenues that will need to be generated from new real property inside the designated TIF area within the bond period.

Now let us assume that the designated area's current assessed taxable value of real property is $50 million and the area is affected by four taxing entities: the City of Tyler, Smith County, Tyler Junior College, and Tyler ISD. The ISD, however, cannot participate in TIF's; therefore, any new real property taxes collected by the ISD will not be used to fund the project. If the current assessed rate for the remaining three taxing entities is $0.750 per $100 valuation, then these taxing entities will collect $375,000 for the current year.

($50 million x $0.750) / $100 = $375,000

This is a very important value, for if all three of the taxing entities agree to participate in the TIF, the $50 million will serve as the base value for the TIF. Any future taxes collected on new real property beyond the $375,000 within the designated TIF area will be reserved to fund the $2 million project and retire the bond for the next several years. How much of an average annual increase will be needed to generate enough taxes to pay off the bond in 10, 15, and 20 years?

To pay off the 10 year bond, an average annual growth rate of 10.50% will be needed.

TIF YearTotal ValueNew ValueNew TaxesCumulative New Taxes
1$55,250,000$5,250,000$39,375$39,375
2$61,051,250$11,051,250$82,884$122,259
3$67,461,631$17,461,631$130,962$253,222
4$74,545,103$24,545,103$184,088$437,310
5$82,372,338$32,372,338$242,793$680,102
6$91,021,434$41,021,434$307,661$987,763
7$100,578,684$50,578,684$379,340$1,367,103
8$111,139,446$61,139,446$458,546$1,825,649
9$122,809,088$72,809,088$546,068$2,371,717
10$135,704,042$85,704,042$642,780$3,014,498

To pay off the 15 year bond, an average annual growth rate of 5.92% will be needed.

YearTotal ValueNew ValueNew TaxesCumulative New Taxes
1$52,960,000$2,960,000$22,200$22,200
2$56,095,232$6,095,232$45,714$67,914
3$59,416,070$9,416,070$70,621$138,535
4$62,933,501$12,933,501$97,001$235,536
5$66,659,164$16,659,164$124,944$360,480
6$70,605,387$20,605,387$154,540$515,020
7$74,785,226$24,785,226$185,889$700,909
8$79,212,511$29,212,511$219,094$920,003
9$83,901,892$33,901,892$254,264$1,174,267
10$88,868,884$38,868,884$291,517$1,465,784
11$94,129,922$44,129,922$330,974$1,796,758
12$99,702,413$49,702,413$372,768$2,169,527
13$105,604,796$55,604,796$417,036$2,586,562
14$111,856,600$61,856,600$463,924$3,050,487
15$118,478,511$68,478,511$513,589$3,564,076

To pay off the 20 year bond, an average annual growth rate of 4.03% will be needed.

TIF YearTotal ValueNew ValueNew TaxesCumulative New Taxes
1$52,010,000$2,010,000$15,075$15,075
2$54,100,802$4,100,802$30,756$45,831
3$56,275,654$6,275,654$47,067$92,898
4$58,537,936$8,537,936$64,035$156,933
5$60,891,161$10,891,161$81,684$238,617
6$63,338,985$13,338,985$100,042$338,659
7$65,885,212$15,885,212$119,139$457,798
8$68,533,798$18,533,798$139,003$596,802
9$71,288,857$21,288,857$159,666$756,468
10$74,154,669$24,154,669$181,160$937,628
11$77,135,686$27,135,686$203,518$1,141,146
12$80,236,541$30,236,541$226,774$1,367,920
13$83,462,050$33,462,050$250,965$1,618,885
14$86,817,224$36,817,224$276,129$1,895,014
15$90,307,277$40,307,277$302,305$2,197,319
16$93,937,629$43,937,629$329,532$2,526,851
17$97,713,922$47,713,922$357,854$2,884,706
18$101,642,022$51,642,022$387,315$3,272,021
19$105,728,031$55,728,031$417,960$3,689,981
20$109,978,298$59,978,298$449,837$4,139,818

Through all three of these scenarios, the $375,000 in tax revenue that was being collected in the initial year will continue to be collected every year and distributed to all the participating taxing entities for the life of the TIF. In addition, only real property taxes are dedicated to the TIF project. It is very likely that along with all the new real property investments, thousands, if not millions will be spent to acquire new personal property, such as computers and equipment - and most, if not all, of these purchases will generate taxes which are distributed to all the taxing entities. Further, these new developments will likely create jobs and attract new residents to the area, which could directly and indirectly benefit the TIF project and the community as they spend their salaries to acquire or improve real and personal property in the Tyler area.

As a final note, once the project has been funded and the bond is paid in full, all tax revenues from real property which were once captured to solely fund the TIF project will now be collected by the participating taxing entities.

Actual Project Results

In 1998, the Tyler Junior College (TJC) proposed the construction of a $4 million Skills Training Center within the Tyler Industrial/Business Park located on West Loop 323. The 70,000 square foot facility would provide automotive, welding, and other highly technical classes that allow area employers to find and/or train a skilled labor force.

The proposed construction site, on TJC's West Campus, was located within a reinvestment zone, which had a 1998 average assessed value of $31,275,073 and was subsequently designated as the TIF area. The property rate among all participating taxing entities at this time was $1.71 per $100 valuation. A bond was issued on behalf of Tyler Junior College with the expectation to have it paid in full in 20 years. The average annual growth rate of real property valuations within the designated TIF area was projected to be 4.9% over the life of the bond.

The TIF's performance has been a huge success. The Skills Training Center was completed in 2000 and has expanded its course offerings to meet the needs of area employers. And due to remarkable growth in new real property in the TIF's designated area, the average growth rate has significantly surpassed the 4.9% projected growth rate, allowing additional principal payments on the bond, which subsequently have reduced the maturity date of the bond.

Download

The State of Texas Attorney General's office produces an annual Economic Development Handbook that provides detailed information about all available funding options available in the State of Texas. The publication is only available online and can be downloaded in PDF format.