Pennsylvania enacted the Tax Increment Financing Act (TIF) as a way to improve the conditions of urban areas in the state that have been deemed “blighted”. The Act creates a system of financing for the redevelopment of the areas that is essentially privately funded.
What is a TIF District?
Local governing bodies have the power to create Authorities, which in turn have the power to declare an area a TIF District. A TIF District is an urban community that has become “blighted because of the unsafe, unsanitary, inadequate or over-crowded condition of the dwelling therein, or because of inadequate planning of the area, or excessive land coverage by the buildings thereon, or the lack of proper light and air and open space, or because of the defective design and arrangement of the buildings thereon, or faulty street or lot layout, or economically or socially undesirable land uses.” Additionally, a finding is required that the problems that exist are beyond remedy and will not be cured without the assistance of TIF.
How Does TIF Work?
The first step in using TIF to redevelop a certain urban area is to create a local Authority that has the power to declare an area as “blighted.” An area that is deemed blighted is called a TIF District. The local municipality is then allowed to issue bonds, allowing the municipality to use the borrowed money to finance the development in the TIF District. The money can be used to finance the redevelopment of industrial, commercial or residential areas.
When a TIF District is declared, the district’s property tax revenue is frozen at the value established at the base year. The year that the TIF District is established is considered the base year. The taxing authority will only receive tax revenues at that frozen level in subsequent years. However, as redevelopment occurs, property values will increase, thus increasing the tax levels. Any tax revenue generated above the frozen level will be used to pay off the municipal bonds that were issued. This creates a scheme of private financing initiated by local government.
The legislature has found that these conditions create numerous problems, including nuisance, fire and health hazards, criminal operations, depreciated property values, and a shortage of decent, safe or sanitary housing accommodations. TIF was enacted to remedy these problems in order to promote the public health, safety, convenience and welfare of these areas.