The encyclopedia · Finance & Accounting · Financial decision · 1952–2011
Tax increment financing: borrow against the tax growth your own project will create
California's 1952 invention lets a city borrow against future property tax rises in a district, funding infrastructure without a vote.
California Redevelopment Agencies · US municipalities
The solution
Tax increment financing was first used in California in 1952, when the state empowered redevelopment agencies to use future property-tax growth to pay for urban renewal. The mechanism: a district's property-tax revenue is frozen at a baseline, the agency borrows via bonds against the expected 'increment' above the baseline, and the extra revenue repays the bonds as the district improves.
It solved a political problem — projects financed without voters approving new taxes or new debt — and spread to thousands of districts across the US. By 2008 California alone had over four hundred TIF districts with aggregate revenues above $10 billion a year, more than $28 billion of long-term debt, and over $674 billion of assessed valuation; by then the districts claimed about 12 percent of the state's property taxes, and some projects covered over 20,000 acres.
The mechanism's critics argue the 'blight' definition stretched almost to any land, and that schools and counties lose revenue during a district's life. Proposition 13 in 1978 had made the revenue squeeze more acute, pushing redevelopment agencies to enlarge districts to keep the money flowing.
Why it worked
- Borrowing against the increment lets a district self-finance rather than compete for general-fund money.
- Freezing the baseline means schools and other funds lose nothing they already had — only growth is diverted.
- No voter approval for debt or new taxes made the mechanism politically usable at scale.
- The district's own growth, not the general budget, services the debt.
What can be applied
If you cannot get public money for a project that will itself grow the tax base, borrow against that projected growth: the project's own increment finances its own infrastructure.
Aftermath
California, the birthplace, also became the graveyard: after the 2008 crisis, budget pressure exposed districts as revenue diversions, the state legislature dissolved all redevelopment agencies and ended TIF in 2011, and the mechanism survives mainly in other states, where it is credited with financing hundreds of billions of dollars of infrastructure while remaining one of the most-studied — and most-argued — instruments in local public finance.
Sources
spotted an error? The archive wants to know.