Understanding TIDs and TIFs

Understanding TIDs and TIFs

In my recent column about affordable housing, I mentioned that the City of Eagle River does not currently have an active Tax Incremental District in the expenditure period to provide incentives for development. That raises a broader question: What are TIDs and TIFs, and how can they benefit a community?

Although the terms are often used interchangeably, they mean two different things. A Tax Incremental District (TID) is a designated geographic area established for eligible development or redevelopment. Tax Incremental Financing (TIF) is the financing tool used to help pay for eligible improvements within that district.

When a TID is created, the value of the taxable property within its boundaries is established as the starting point, or “base value.” As development occurs and property values increase, the additional property tax revenue generated above that base value is called the tax increment. Those funds can be used to pay eligible project costs outlined in the district’s approved project plan.

For example, a developer may be interested in building a business, housing development or industrial facility, but the project may require expensive infrastructure improvements before construction can begin. Depending on the project and applicable state law, TIF may help pay for eligible costs such as roads, utilities, site preparation, environmental cleanup or other improvements needed to facilitate development.  The goal is to help make a project possible that would not otherwise occur. Wisconsin law requires a municipality creating a TID to determine that the development would not happen “but for” the use of TIF.

TIF can help communities attract businesses, encourage redevelopment of underused or blighted properties, expand housing opportunities and improve infrastructure. These projects can bring new investment, jobs, housing and additional taxable property value to the community.

TIF is not free money, however. Development may not generate the anticipated increase in property value, and a municipality can be left responsible for unpaid project costs. Careful financial analysis and project planning are essential. Like any project or investment, there are risks associated with using TIF.

While a TID is active, the municipality uses the tax increment to pay eligible project costs rather than making the increased value available to all taxing jurisdictions for their regular tax collections. Once the district’s costs are paid and the TID closes, the increased property value becomes part of the regular tax base shared by the city, county, school district and technical college.

The City of Eagle River is currently outside the expenditure period for its existing TIDs. The expenditure period is the time during which a municipality may incur eligible costs for projects under a district’s approved plan. It is separate from the district’s overall lifespan. 

That distinction matters because an existing TID may still be active even though its expenditure period has ended. Being outside the expenditure period means the city cannot use those districts to begin incurring new eligible project costs.

This also helps explain the challenge discussed in our affordable housing column. Without an available TIF incentive, the city has fewer financial tools to help make certain development projects feasible. TIF is not a solution for every project, and it cannot guarantee that affordable housing will be built, but it can sometimes help bridge the gap between development costs and what a project can financially support.

TIDs and TIFs are tools intended to encourage development that benefits the broader community. Like any financial tool, they have rules, limitations and risks. Understanding how they work helps explain both the opportunities they can create and why their availability can matter when a city is considering future development.