A Rough Guide to Tax Increment Financing
Core Cities Group and the British Property Federation
Recent history
The Deputy Prime Minister, Rt Hon Nick Clegg MP, announced at the Liberal Democrat
Party Conference 2010, that the Government will implement Tax Increment Financing
(TIF). The Core Cities Group has campaigned for TIF – also called Accelerated
Development Zones – for more than three years, alongside the British Property
Federation and other groups like the Chambers of Commerce. Core Cities and BPF
have produced this rough guide due to the level of interest in TIF since these
announcements.
Although the idea of TIF has been around in the UK for some time, and was originally
developed in the US 40 years ago, it was the Core Cities Group, along with
PricewaterhouseCoopers, that developed the first detailed study of how TIF could
operate in a UK context, work that has been very influential in making the case. The
original report can be found here ‘Unlocking City Growth’.
However, we did not start the process by simply campaigning for TIF, we started by
recognising a challenge and working out the best solution.
The challenge
The United Kingdom faces unparalleled challenges in delivering economic and private
sector employment growth during a time of greatly reduced public spending. While the
private sector is the primary generator of jobs and growth, it relies on the public sector to
help stimulate growth and create the conditions for business activity, particularly through
infrastructure development.
Infrastructure brings greater economic returns on
investment than many other forms of capital expenditure, producing £10 of benefit for
every £1 spent, creating jobs, supporting business growth and reducing carbon: a triple
win.
The UK ranks only 34th in the world for its infrastructure, behind Saudi Arabia and
Malaysia, and 6th amongst the G8 countries. 1.5% of UK GDP is spent on infrastructure
compared to 6% in Japan and 3% in France, resulting in France having 20% greater
productivity despite its less flexible labour markets. The OECD states that infrastructure
investment should be one of the top three priorities for the UK over the medium term. But
a national infrastructure deficit of some £500 billion over the next decade is compounded
by shrinking public capital finances and a lack of private sector investment, which is
stymied by weak demand, low market confidence and the difficulty of raising finance. So
without additional investment tools it is hard to see how the growth or jobs the country
needs will happen – or how the economy can be rebalanced.
The UK Government launched their National Infrastructure Plan 2010 on 25th October,
which sets out how some of these challenges will be met. TIF can help to support
elements of its implementation.
The opportunity
Tax Increment Financing is an investment tool for financing infrastructure and other
related development that has been successfully employed in North America for 40 years.
The UK version of TIF has been developed by industry and local government to work in
the UK context. It does not involve any additional taxation and results in a net gain for
the local and national economies, delivering private sector jobs and physical and social
regeneration which can save public money. UK TIF is a national framework through
which responsibility and power for local economic growth and renewal is given to local
communities.
Case studies developed in Core Cities, London and other parts of the UK show how this
model can work for schemes where other sources of funding are not appropriate or
simply not available. All the case studies so far have demonstrated increased economic
output and job numbers. It’s a win for business, for government and for people.
How it works
The UK TIF model is based on reinvesting a proportion of future business rates from an
area back into infrastructure and related development. It applies where the sources of
funding available for a scheme to deliver economic growth and renewal cannot cover the
cost of infrastructure required by the scheme. Often this will be a regeneration project,
and although UK TIF could be used more widely, it will not be suitable for all schemes.
A lead agency – a local authority, private sector partner or some combination – raises
money upfront to pay for infrastructure, on the basis that the increased business rate
revenues generated by the scheme can be used to repay that initial investment. The
upfront funding may be borrowed from public or private sources, or it may be provided
by the developer from capital available to it.
The Treasury may enjoy the wider fiscal benefits of the scheme – higher stamp duty
revenues resulting from rising property values, higher income and corporate tax
revenues due to more economic activity, and lower health, security and benefits costs as
the community enjoys the social benefits of regeneration. The full increased revenue
from business rates in the designated area will also be available to the Treasury after the
funding cost for the infrastructure has been paid off. It’s a neat solution where the risks
can be clearly allocated to the lead agency or the private sector partner and controlled.
Progress on UK TIF
The Deputy Prime Minister’s announcement on TIF, confirmed in the Comprehensive
Spending Review, is warmly welcomed. Further detail has been set out in the Local
Government White Paper, which consults on TIF, alongside proposals for incentives like
the Business Increase Bonus and the potential for retention of locally raised business
rates in the future (deadline for responses is 1st December 2010).
Prior to this, a lot of work has already been done on the detail of UK TIF by Core Cities
Group, British Property Federation, London, Chambers of Commerce, the Department
for Communities and Local Government, the Treasury and others. This work has
answered many of the challenges of implementing UK TIF and so we should get off to a
flying start.
Several local authorities and private sector partners have identified schemes they think
are suitable for UK TIF. Some of these have carried out detailed work and could be up
and running very quickly if they had a green light.
Government has outlined proposals for the Business Increase Bonus, as above. BIB is
an incentive, designed to encourage local authorities to promote growth where they
might otherwise focus on different priorities, whereas TIF is designed to unlock major
economic renewal opportunities for which the money would otherwise be unavailable.
Although there are challenges for any scheme that attempts to link the behaviour of local
authorities to economic consequences, and previously it has proven complex, BIB could
be a welcome addition to the suite of locally available financial tools. BIB would not
however be able to unlock economic renewal through major infrastructure investment. It
will be more short term and therefore too uncertain for infrastructure development that
typically has longer-term payback periods, and BIB doesn’t link income to what it’s been
spent on, or apportion risk in the way that TIF does. Nevertheless, it may prove to be a
complementary tool in driving local economies.
In the meantime, the Scottish Government is forging ahead with a scheme in Edinburgh,
concluding that they can use their devolved powers to enable TIF.
Frequently Asked Questions
Isn’t this just more borrowing? In most cases, UK TIF will involve borrowing. But debt is
a vital source of capital, particularly for major capital-intensive investment projects. The
Government recognises that too – that’s why it’s encouraging the banks to lend more to
business. UK TIF is about identifying schemes which are low risk but would deliver
important benefits in terms of jobs, economic growth and physical and social
regeneration if they could be funded. It is not borrowing in the unsure hope that money
will be found at a later date, but investment with clear returns to support it. Both private
sector and local authorities would take a cautious approach, because they will take on
the risk. For local authorities this means using the Prudential Code, so the borrowing
would have to pass stringent tests, but some schemes might be developer led and
therefore not on the public balance sheet. Even for those that are, there is the potential
to take the borrowing off balance sheet further down the line, for example by issuing
bonds.
Won’t schemes just displace existing business from nearby areas? There may be some
displacement in some schemes and this can be factored in to calculating the additional
revenues, and what will be payable as a TIF. It’s something to be thought about
carefully in each scheme, but business needs opportunities to grow and thrive, and it’s
better it moves a short distance than leaves the area altogether because its needs can’t
be met. But schemes will need to show some new business growth and will only be
allowed to access incremental business rates which are truly additional.
How can you be sure the rates are additional? There will need to be a pragmatic
agreement on an overall formula that is negotiated for schemes. This will not be an
entirely scientific exercise, as modelling financial outcomes in alternative scenarios
inevitably involves assumptions and some guesswork. However, it is not impossible to
do and there are precedents that can help. The lead agency will be asked to take the
risk on this, which in most cases will be relatively small.
Isn’t it a bad time economically to be doing this? Actually, this is probably the best time
to do it. It is in the early stages of economic recovery that raising capital by ordinary
means is most difficult, but that is also the time when major, carefully targeted
investments can make the greatest contribution to driving recovery. In North America
properly underwritten schemes have performed well during recession, and Federal and
State Governments have worked to enable wider use of TIF and similar mechanisms
during the downturn. In the UK, it is needed to stimulate growth, recovery and jobs.
How would we decide which schemes happened? UK TIF isn’t the right tool for every
scheme. For example, schemes which are socially very valuable but are not expected to
raise additional business rate revenues couldn’t be funded using UK TIF. Government
would need to decide on what criteria future schemes should meet, in consultation with
local authorities and industry. But there are also other mechanisms already in existence
that will influence which schemes went ahead, like the planning system and the priorities
that Local Enterprise Partnerships might determine.
Why can’t schemes be funded through another route? Some schemes can be entirely
funded through other routes and so are not suited to this model. In reality, most schemes
are funded through a cocktail of financial mechanisms from both public and private
sources. But there are many cases where a scheme could deliver undoubted net
benefits but the upfront funding available for it simply isn’t enough to allow it to proceed.
Why won’t Business Increase Bonus do the job of UK TIF? There are things about BIB
that will be welcomed – this is the proposal to allow authorities to retain uplifts in
business rates. But the currently proposed timescale of six years is too short to finance
the kind of infrastructure projects we think need to happen, and it’s not certain that a
lead agency would be able to borrow against it in the same way. BIB is also proposed
for a whole local authority area, which is beneficial in some ways, but may be more
difficult to relate to a specific scheme. In short, BIB is valuable in that it reconnects the
actions of local authorities to the financial consequences of those actions – but in the
form currently proposed it simply cannot unlock the major infrastructure-led growth and
renewal that many communities need. However, BIB and UK TIF operating together
would provide a powerful set of tools to deliver private sector growth and jobs.