Understanding Tax Increment Financing (TIF)

Updated: Apr 26, 2020

Tax Increment Financing, or TIF, is used as an incentive to spur economic development and helps developers finance new construction and redevelopment projects. TIF has been used in many projects throughout the United States, including Amazon’s HQ2 in Arlington, Virginia. Closer to home, TIF has been used to finance projects like Cabela’s in Rogers, and the historic Water Street Inn in downtown Stillwater, Minnesota.

While TIF has played an important role in both big-name and small projects, not many are familiar with what it is and how it works. To help you understand TIF, we’ve explained the basics and some common misconceptions below.

What is TIF?

TIF helps a company or developer finance new development in certain eligible “districts.” TIF funds come from the increase in property tax revenue generated by that new development, and are referred to as “tax increments.” The money captured by TIF is used to pay for costs associated with the project. Eligible expenses may vary from state to state, but often include:

  • Land acquisition

  • Demolition or renovation

  • Infrastructure improvements (sewers, streets, parking lots, etc.)

  • Planning expenses (studies, consulting, legal fees, engineering, etc.)

  • Cleaning up contaminated sites

  • Administrative costs

  • Funding training programs

How TIF Works

Before any funds can be distributed, a TIF district must be established. A TIF district is an area within a city that, after careful consideration from both the city and expert consultants, is determined to be in need of development or redevelopment. These districts can only be formed by local units of government, including but not limited to cities, economic development authorities (EDAs), housing and redevelopment authorities (HRAs), and port authorities.

For an area to be deemed a TIF district, certain criteria must be met. In addition, TIF districts can only be created for specific purposes. Each type of district has different restrictions in terms of how long tax increments can be collected, as well as expenses it can be used for. In Minnesota, TIF districts can be created for the following purposes:

  • Economic Developmen