Tax Increment Financing

TIF (Tax Increment Financing) programs are measures to use increase property tax revenues generated by urban development to pay for public costs of that development. It is a public financing method that is used for subsidizing redevelopment, infrastructure, and other community-improvement projects in many countries.  Similar or related value capture strategies are used around the world. TIF is often designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur.

• TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues. Tax Increment Financing (TIF) enables local economic development officials to collect the property tax revenue attributable to increased assessed value resulting from new investments within a designated area (TIF district).
• Once a TIF district is established the property tax revenue attributable to new assessed value within a the district accrues to the redevelopment district rather than the traditional taxing units (schools, civil city, township, county etc).The new revenue can be used to pay for infrastructure or other improvements within the designated area.

In 2012, the Greater Hyderabad Municipal Corporation (GHMC) has applied TIF to fund capital improvements by accessing bank loans to be repaid by the households, as an annual tax increment, getting immediate benefits due to the implementation of the TIF programme in select neighbourhoods. A total approach was followed to develop complete hard infrastructure in all peripheral neighbourhoods to take up capital improvements in peripheral localities lacking roads, underground drains and water supply, parks and street lights with resident’s contribution 30% of the local water project cost if internal distribution lines had to be laid.

• Nearly 800 neighbourhoods were identified based on the existing infrastructure gaps in the peripheral neighbourhoods.
• The focus was on augmenting city-level hard infrastructure like over bridges and white top roads. Financial institutions was approached for loan the general body of GHMC and the government of Andhra Pradesh accorded permission to raise the loan from State Bank of Hyderabad was selected because it offered the lowest interest rate of 10.75%.
• The loan repayment period was 10 years and the loan is to be accessed in tranches according to requirement and progress of works. Largely, the loan repayment is planned to be accomplished through property tax enhancement by 5% every year for 10 years on all the properties in the neighbourhoods and the surrounding areas that are to benefit from the development works.
• The property tax increment is proposed to be collected only after the infrastructure works are completed in the neighbourhoods.

Ordinarily, in India that most cities are unable to provide lumpy funds at the back end to complete infrastructure development projects like JNNURM, maintain the infrastructure created, from user charges and fees. In such cases, TIF can be major policy tool for public finance. JNNURM can be extended to include neighbourhood infrastructure development, in addition to the existing focus on city-level capital improvement plans. Additionally, the ULBs should commit to incrementally increase property taxes to pay their contribution for capital improvement at the neighbourhood and city levels based on the ‘pay as you use’ arguments — those using the facilities should pay for them, borrow today and pay back debt over time, and neighbourhoods are better able to afford payments over time rather than pay for large capital outlays at a single point. (Input: Economic Times)