Legal Report-- States lessons flag issues over tax increment model

Tax increment financing (TIF) has resulted in some incredible projects in the USA and contributed immensely to the built environment.

It has part-funded brownfield redevelopment, reuse of abandoned facilities like military bases and obsolete industrial facilities and transit-orientated mixed-use development.

TIF offers the same opportunities in the UK if it can be transplanted into a different fiscal, planning and cultural context. In the USA, it has been used to fund new roads, parks and other infrastructure that has facilitated development.

But it has not often been used to fund skills training or tackle housing needs, which may be more relevant to economic growth in England.

More controversially in the USA, TIF can authorise the use of eminent domain and compulsory purchase powers. It is occasionally challenged by affected businesses, particularly where one retailer is replaced by a higher-value one. Will there be restrictions on what TIF can be used for in England, including compulsory purchase powers?

Historically in the USA, TIF was meant to support schemes that remedy blight. In some two-thirds of the states, a finding of blight is required before a TIF zone can be created. However, this hurdle is not difficult to overcome, with lack of maintenance being deemed sufficient in some cases. What conditions precedent should govern TIFs in England?

- Zones tied to development test

At local level in the USA, the money is also new. In some jurisdictions TIFs are not permitted unless new development, and the additional tax revenue, would not happen without them. Despite this test, some may argue that TIF revenue simply reflects growth that would have occurred elsewhere.

This is generally not the evidence from the USA, although TIFs may still offer an overall benefit even if there is some local displacement. Perhaps the solution is to allow local authorities to decide whether the effects are acceptable, giving them more fiscal autonomy about levels of non-domestic rating and freedom to use TIFs as part of that. This would fit well with the localism agenda.

In the USA, property revaluations tend to take place at one, three or four-year intervals. In England, the pattern is for five-yearly revaluations. A delay of five years before being able to identify the increment will be problematic.

The issue solves itself if there is redevelopment and a creation of new hereditaments. If not, annual revaluation may be needed in TIF zones. Also, we should not underestimate the impact of rates appeals. In the USA, one solution has been to impose limits on appeals within TIF districts.

The Treasury statement on TIFs implies that councils will use their prudential borrowing powers to fund the infrastructure that leads to property value increases. The expectation is that the TIF zone will deliver extra revenues to repay the debt. They will be taking a risk on this, with potential consequences across the whole of their expenditure.

- Income link to bonds at issue

In the USA, TIF bonds have tended to be secured only against anticipated income. In some cases municipalities have pledged other revenues, while usually stopping short of issuing general obligation bonds. Non-recourse financing now poses a problem in some US markets where property values have fallen and TIF revenue has not been generated.

In some cases, the beneficial effects of TIF-funded infrastructure are widespread. Some effects will benefit a city as a whole. Should a TIF zone be tightly or widely drawn?

If widely drawn, is there any rationale for excluding non-commercial property owners? Should home owners be included where houses move up bands due to infrastructure investment?

The USA offers many TIF models. Different states operate differently and models emerge and evolve over time, responding to changes in circumstance and lessons learnt. One of the dangers in England is that we develop a national model that may work in London and Manchester but not in Plymouth or Lincoln.

At least one response to most of the questions raised above is that decisions about the use of TIFs should be left to local authorities. They should be free to decide the architecture of a TIF relevant to their area. That would be true localism. TIFs may be a test of whether the Treasury genuinely accepts the localist agenda.

- Jack Lawlor is an attorney in the Chicago office of SNR Denton US LLP. Stephen Ashworth is a consultant to SNR.

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