TIF vs Tax Abatement
The central idea of a tax abatement area is a temporary delay in collection of incremental property taxes to encourage growth and new development thereby increase the tax base. In tax abatement the taxes stay in the pocket of the owner. Abatement has little effect upon purely maintenance issues because in general even good maintenance does not significantly increase the taxes on a property.
The conceptual opposite of tax abatement is Tax Increment Financing or TIF. With TIF the city invests in a project then collects ALL the increase in tax based upon the development of the area for a limited period of time. Getting the share of taxes which would normally go to the school district and county, the city’s purse is refilled faster. Later both school and county will benefit from the investment. It is important to note that TIF and Tax abatement can not exist in the same area at the same time. If taxes are abated there is nothing to collect to repay the investment in a TIF
One feature of TIF not present in tax abatement allows (and in some cases REQUIRES) the City to use TIF funds to improve properties which may not be part of the TIF area. When a TIF area includes housing either the housing must benefit low and moderate income families or a percentage of the TIF income must be set aside for low and moderate income projects. Projects of this nature can include costly maintenance items like roofing, gutters, insulation and windows. The projects may be determined either on an individual qualification basis or on a neighborhood basis where the neighborhood meets certain economic criteria. Recently Sioux City had such a project that encompassed the Greenville area. Outright grants were available for improvements to owner occupied homes.
TIF has a risk associated with it. If for example, the city built a new street rather than a limited share of the cost as they have before and then there was no development then there is no incremental tax collected which can repay the cost incurred. The ability to collect TIF expenditures “sunsets” about 12 years after the expense was incurred.
I think the City should consider a larger percentage of contribution to future development areas but with the intention of recovering costs through TIF. The establishment of TIF areas would create funding which could be applied elsewhere in the City. A developer that partners with the City should anticipate reduced lot prices, made posible through increased City contribution to the project and posible “in-kind” payment through some limited contribution of lots to the City. New Home Owners would not be eligible for tax abatement. On the other hand if the lot was $5,000 less than it might have otherwise been that might be beter than spreading the same benefit out over 4 years of reduced taxes.
Tags: Tax Abatement, TIF