Two adolescent brothers smiling together in front of their home.

Why they matter: Tax increment financing districts

What is tax increment financing?

Local governments use tax increment financing, or TIF, as a tool to encourage economic development in a targeted geographic area. These local districts that are slated for improvement leverage the anticipation of future development in order to fund community investments and revitalization efforts. Municipalities use the additional property taxes generated by publicly supported community development to finance or reimburse those projects and support other economic revitalization activities in the area. 

Tax increment financing is the most popular method for spurring economic development in the U.S. These districts are typically established in areas where development likely would not occur without intervention through public financing or subsidy. 

How do TIF districts work? 

State governments must authorize the creation of TIF districts, and when they do, they often impose additional conditions for their use. Local municipalities are responsible for establishing and implementing these initiatives, but they must comply with the state’s rules. 

When a local government designates an area as a TIF district, the current property value of all the real estate within its boundaries becomes the base property value. As new development occurs, any increases in existing or new property values are set aside for future revitalization activities. 

Facts and figures about TIF districts 

Parents holding two young kids standing in their doorway.

Habitat in action 

In 2019, the Indiana General Assembly passed legislation to authorize localities to create residential TIF districts with the primary purpose of building single-family homes in counties with fewer than 100,000 people. Habitat for Humanity of Indiana was a strong proponent of the legislation and worked alongside a coalition of housing champions to support the expansion of this method for developing housing in more rural residential areas. 

Things to keep in mind with TIF districts 

  • Before creating a TIF district, localities should consider the need for long-term affordability in the community for both rental and ownership, whether with newly constructed or existing homes. 
  • Sometimes, cities require that the tax increment captured in a TIF district be used only to support future development within that district. If a TIF district has a small geography, this requirement can limit that municipality’s ability to help alleviate displacement pressures that may be felt in areas immediately surrounding the district. 
  • TIF districts do not increase costs or create any additional requirements for housing developers; developers pay the same property taxes inside a TIF district as they would outside of one. As a result, TIFs do not disincentivize developers from building affordable homes in the district. 
  • Depending on how they are structured, TIF districts and other development incentives can be detrimental to racial equity. However, by targeting TIF benefits to communities that have been historically disadvantaged and keeping the process transparent and inclusive, TIF districts can boost racial equity.