Tax Increment Financing: a new source of transport funding for all, or a few?

Tax Increment Financing (TIF) has long been championed as the way to get transport projects vital for redevelopment off the ground. But will the Government’s proposals make TIF an attractive funding mechanism for all authorities, or just a few?

TIF will be irrelevant to areas where business rates revenue is falling, says think-tank Centre for Cities

TIF will be irrelevant to areas where business rates revenue is falling, says think-tank Centre for Cities

Tax Increment Financing (TIF) may sound complex but the basic concept is reasonably simple: local authorities borrow the funds to deliver infrastructure vital for development and repay the borrowing from the increase (the ‘increment’) in business rates generated by the new economic activity.

It’s taken a long time for TIF’s advocates to persuade the Government to embrace the funding mechanism but, now that they have, attention is turning to the fine detail of how TIF is designed. Scotland is leading the way in the UK, with three TIF pilots already selected and the Scottish Futures Trust and Scottish Government are currently scrutinising bids for three more. Two of the pilot schemes have, however, attracted unwanted headlines in recent months. Uncertainty surrounds the £84m TIF package for Edinburgh’s waterfront project, following the change of ownership at project partner Forth Ports. Meanwhile, in Glasgow, a plan to use TIF to fund £80m of public realm work to complement the Buchanan Galleries shopping mall extension has angered the owners of a rival shopping centre, which says the TIF project will harm the vitality of the rest of the city centre. A legal challenge to the plan has been mooted.

In England, ministers plan to implement TIF in 2013/14 and outlined the possible delivery mechanisms as part of this summer’s Local Government Resource Review consultation on allowing local authorities to retain business rates. The review put forward two TIF options:

• Option 1 would allow local authorities to make use of business rate revenue growth across their area to fund borrowing for infrastructure improvements. They would, however, face considerable uncertainty in doing so because, firstly, under the business rate retention scheme, councils face having to pay central government a levy on disproportionate gains in business rates revenue. And secondly, the Government expects to periodically reset the business rates retention system under which tariffs are paid by local authorities with strong business rate revenues for redistribution to authorities with lower revenues.

 • Option 2 is complementary (rather than an alternative) to Option 1 and would give authorities more certainty by allowing them to keep the uplift in business rates from a defined TIF area for a defined period of time, with the revenues exempt from the levy and resetting mechanisms.

Urban policy think-tank the Centre for Cities has just published a detailed discussion paper on the two options, which it calls Generalised TIF (Option 1) and Ringfenced TIF (Option 2). Generalised TIF has some attractions, it says, pointing out, for instance, that “if revenues from a specific project fail to materialise, the authority’s general tax base can always be used to meet the cost of a loan”. 

But Centre for Cities says the viability of Option 1 TIFs will be hampered by the Government’s plan to exclude the uplift in business rates on existing properties (following revaluations by the Valuation Office Agency) from the business rate revenues retained by local authorities. The Government says this will incentivise authorities to boost the physical amount of business activity in their areas. Centre for Cities accepts the policy has some merit – for instance, discouraging authorities from constraining commercial space in order to push up rental values, and ensuring that authorities do not benefit from growth they have not supported. But it says the approach will deprive authorities of much-needed revenues to pay for infrastructure investment. “The Jubilee Line extension in London has been shown to have a large impact on both commercial and residential property values around Southwark and Canary Wharf,” it notes. It says the policy will make Option 1 TIFs “far more difficult to introduce”.

Tax Increment Financing will be one of the funding mechanisms considered at LTT’s ‘New funding mechanisms for transport infrastructure’ conference on 10 February. Download the full event programme

Limiting the number of TIFs

Local authorities with Ringfenced TIFs (Option 2) are expected to be allowed to capture the increases in local property values in the TIF area to pay for infrastructure, says Centre for Cities. It adds: “The direct link between the site and business rates growth and, most importantly, the ringfencing of TIF increment from the wider world of local government finance, means that this is the model favoured by the development community.” 

The Government says that, if it approves Option 2, there will need to be a limit on the number of such schemes, both to ensure that the shared business rates pool is large enough to pay for local government services across the country and because local government borrowing for TIF counts towards national debt.

Centre for Cities calls for a “light touch” approach to rationing, opposing a national “arbitrary limit” on the number of Option 2 TIF schemes. It instead suggests that the Government could limit the amount of Ringfenced TIF borrowing to a proportion of business rate revenues within each Local Enterprise Partnership (LEP) area. “A light touch approach would ensure that the LEPs could rapidly approve potential TIFs and avoid the creation of a bureaucratic and centralised appraisal process [for TIF projects],” it says.

The think-tank also opposes central government appraisal of individual TIF proposals, saying this would be against the Government’s localism agenda, take too long, and be too bureaucratic.

Sheffield City Council shares that view, saying in its response to the consultation that there should be “no Government appraisal of the individual business case for each TIF”. Leeds City Council, however, sees things differently, commenting: “We believe that Government involvement, through a business case approval process, would be the best way of ensuring that projects are viable and that they are in line with national economic policy objectives.”

One way in which the Government could restrict Option 2 TIFs would be by limiting their use to areas with the strongest regeneration needs. Such an approach is supported by Sheffield. “A simple step would be to only allow those councils who are net recipients of national non-domestic rates to pursue Option 2 TIFs,” it says. But the idea does not attract Centre for Cities. “TIF is meant to unlock the potential of an area and bring value to the economy,” it notes. “While some regeneration areas may do just that, opportunities in successful TIF areas may create more relative value for the national economy.”

Not a universal solution

Overall, Centre for Cities warns that TIF will only be appropriate for places with scope to grow their business rates tax base. It points out that many local authorities – including Nottingham, Middlesbrough, Reading and Wakefield – have seen business rates revenue fall over the last five years.

The joint response to the Local Government Resource Review consultation from the ten Greater Manchester districts raises more fundamental concerns about TIF. The authorities say the need to boost business rate income just to fund basic services will put councils off implementing TIF schemes. “Having to generate business rates growth to ‘stand still’ in funding terms in order to fund basic services … means that there will be no practical opportunity to invest the proceeds of growth in new economic initiatives, including TIF-type schemes,” they warn.

Though supportive of the Ringfenced TIF model, they say it does not go far enough. The uplift in business rates should be supplemented by the uplift in other tax revenues (income tax, corporation tax, etc) generated by the infrastructure. “This would allow for significantly higher levels of upfront investment,” they point out. “There is also a need to integrate TIF with other Whitehall budgets and decision-making, most notably in terms of transport.” 

Tax Increment Financing will be one of the funding mechanisms considered at LTT’s ‘New funding mechanisms for transport infrastructure’ conference on 10 February. Download the full event programme