The Mandate: Tax Increment Financing, often referred to as TIF, is a gap financing¹ tool that taps the incremental increase in tax revenues resulting when a formerly vacant or underutilized property is redeveloped.  The increased property tax revenues that would normally go into a municipality’s general fund are instead used to pay off the debt obligations² that are issued to help finance the real estate development project.  However, New York’s TIF law currently only permits the municipal portion of local real property taxes to be used to finance debt service for such projects.  School districts’ real property tax revenues, which comprise approximately 61% of all property taxes levied in the State, are excluded from the TIF program.  

What follows is an example of how TIF should work in New York.  First, for a redevelopment project to qualify for TIF in New York, an area must be designated as a Municipal Redevelopment Project Area.³ Take, for example, a particular property within the Municipal Redevelopment Project Area that has a value of $250,000 and generates $6,250 in annual real property taxes.⁴ A plan to redevelop that property would increase its value to $1,250,000, and would generate an additional $25,000 in annual real property taxes.⁵ However, the developer is unable to secure sufficient funds to fully finance the redevelopment project and needs $375,000 to cover the remaining costs.  After reviewing the plan, the local government approves the property as a TIF project, thereby authorizing the taxes generated from the incremental increase in the property’s value to be used to pay off $375,000 in tax increment bonds that will be issued by the municipality to help finance the redevelopment.  The municipality continues to receive the original $6,250 in annual real property taxes.  However, for 15 years after the issuance of the tax increment bonds, the additional $25,000 that the municipality collects in real property taxes resulting from the increase in the property’s value is used to pay off the bonds that were issued to help finance the redevelopment project in the first place.  After the tax increment bonds are paid off, the municipality then receives the $25,000 incremental increase in property taxes in addition to the original $6,250.  Please note that this example is extremely simplified and does not take into account many variables that come into play in TIF projects.  It nonetheless illustrates how TIF projects can work.

Critics often question,“Why should local governments forego these tax revenues?”  The answer to that question is simple: but for the TIF, which is used to close a gap in the development’s financing, there will not be any additional tax revenues because the development will not be undertaken.  In addition, it must be noted that during the period that the incremental increase in the tax is used to pay off the TIF bonds, the development will be generating other economic benefits for the community.

TIF bonds are needed as a source of financing in New York because many older properties in municipalities are environmentally contaminated, have antiquated structures and/or require demolition, thereby rendering the cost of redevelopment higher than it would be on a piece of vacant property that has no environmental contamination or existing structures to deal with.  Consequently, amending New York’s TIF program is long overdue.  It is time that New York’s economic and community redevelopment programs be put on an equal footing with the rest of the country so that our struggling communities can be revitalized into the thriving local economies they were only a few decades ago.  And at a time when there are very few sources of revenue to finance economic and community redevelopment activities, it is imperative that the State amend the TIF law to allow communities to help themselves revive their local economies.

The Cost: As the law currently stands, only the municipal portion of the real property tax is allowed to be used to fund TIF bonds; school district real property tax revenues are excluded.  This severely hinders the functionality and utility of the TIF bonds by significantly reducing the amount of debt that can be leveraged for public infrastructure improvements.   In fact, since its enactment in 1984, New York’s TIF program has never been used because of the deficiencies in the law.  As a result, local government efforts to spur economic development have been severely hampered.

The Solution: New York’s Municipal Redevelopment Law must be amended to permit school districts to allow incremental increases in the school portion of local property taxes to be used to fund TIF development programs.  This would result in greater utilization of this financing mechanism, stimulating local economies and encouraging private investment in local infrastructure.  

TIF legislation championed by Assemblyman Schimminger and supported by NYCOM has been pending in the New York State Legislature for several years.  Assemblyman Schimminger’s bill (A.2378-A) is currently sponsored in the Senate by Senator Stachowski (S.1716-A) and is a very comprehensive bill, which, while not requiring school districts to participate in the tax increment financing program, gives schools the option of doing so.  Individual boards of education would have the opportunity to analyze proposed redevelopment projects, weighing the costs and benefits and the short- and long-run implications for the school districts property tax revenues, before determining whether to allocate the school portion of the real property taxes to pay for the TIF bonds.  In addition, this legislation would authorize the use of several alternative revenue sources to pay for the debt service on the TIF bonds, including sales tax receipts, municipal assistance agreements, and benefit assessments.    

NYCOM also supports TIF legislation sponsored by Assemblyman Hoyt (A. 9142) and Senator Valesky (S. 6337).  While less comprehensive than the Schimminger/Stachowski bill, this legislation does makes the essential improvement to New York’s TIF law of allowing the school portion of property taxes to be used to finance redevelopment bonds.

<sup>1. "Gap financing" is financing that completes the total funding needed to undertake a development project when all other available funding sources have been tapped to their limit.
2. In New York, TIF debt is specifically authorized in the form of "tax increment bonds or tax increment bond anticipation notes." See General Municipal Law § 970-p.
3. See General Municipal Law Article 18-C.
4. In this example, the real property tax rate is $25 per $1,000 in assessed valuation.
5. Assuming that the real property tax rate of $25 per $1,000 remained constant.</sup>