Extending the Lifespan of a Tax Increment Financing District

June 13, 2013

In the latest session of the General Assembly, the Illinois legislature approved extensions of two Chicago-area tax increment financing (TIF) districts. This blog explains what happens when TIF districts are set to expire and what local governments gain and lose from expirations and extensions. Next week, the Civic Federation blog will explore the specifics of the approved legislation.

TIF Districts

Tax increment financing (TIF) is a financial mechanism that is widely used by municipalities and other local governments to promote economic development and redevelopment. The use of TIF is intended to generate economic development activity that would not have occurred “but for” the incentives offered.

With sales and utility tax TIF districts, increases in revenues generated within the district boundaries above a frozen baseline are used to pay for development costs, such as land acquisition, site development, public works improvements and debt service on bonds to fund improvements within the district. In property tax TIF districts, the most common variety used in Illinois, the total equalized assessed valuation (EAV) within the district at the time of creation is measured and frozen. Then revenues generated from the application of the local composite tax rate to the incremental growth in property tax revenues over the frozen baseline amount are used to pay for redevelopment costs. Once a development project is completed and has been paid for, the TIF district is dissolved and the tax base is returned to full use by all eligible taxing bodies.

In Illinois, TIF districts are designated after an eligibility analysis is conducted, a redevelopment plan is reviewed and the municipal legislative body gives final approval. The district is authorized for a period of up to 23 years, with the possibility of renewal for an additional twelve years upon approval by the General Assembly. Municipalities seeking extensions must provide some documentation of the need for the time extension and an indication of support from overlying governments, particularly school districts, in support of the extension.[1] According to Cook County Clerk David Orr, in the City of Chicago, there were 163 active TIF districts that generated a total of $453.7 million in 2011.

TIF Effect on Overlapping Taxing Districts

TIF districts freeze the EAV, not the amount of tax revenue. By restricting the denominator of the basic tax rate equation (Levy ÷ EAV = Rate), TIF districts cause property tax rates of overlapping taxing districts (e.g., school districts, park districts) to be higher than they would have been otherwise. The higher tax rate applies throughout the taxing district, so taxpayers both inside and outside of a TIF district pay a higher rate than if the TIF district did not exist.

The impact of TIF on non-home rule jurisdictions in counties with tax caps such as Cook County is minimal. The tax cap restricts extensions regardless of changes in property value. The additional dollars going to TIF come from taxpayers, not governments. Thus, TIF does not take away tax revenue from any overlapping unit of local government in a county subject to PTELL such as the Chicago Public Schools; instead, as noted above it raises property tax rates higher than they otherwise would have been.

Capturing Revenue from Expiring TIFs

When TIF districts are allowed to expire, the district dissolves and the surplus of tax revenues collected on the district’s increment growth above the base level of EAV is returned to the municipality’s general fund and the general funds of the overlapping governments.[2] In Chicago, the Cook County Assessor collects the balance and distributes the TIF funds in proportion to each of the overlapping taxing districts’ share ratio.

Another way a tax-capped taxing district can increase revenue due to TIF is to capture revenue from existing property EAV growth that could not have been captured without a TIF district. Under PTELL, the growth of existing property EAV does not increase revenues to the taxing district – it simply lowers the tax rate. But the growth of existing property EAV in a TIF district becomes part of the increment and is eventually returned to the taxing district’s EAV base outside the tax cap, along with any new property within the increment. That is, the taxing body is permitted to tax the entire recovered TIF increment EAV in the year after the district expires and get extra revenue before the increment is returned to the tax base.

[1] ITIA Newsletter, Summer 2000. “Extending the Life of TIF Districts Beyond 23 Years” Volume 12, Issue 3.
[2] City of Chicago, TIF Reform Panel, Findings and Recommendations for Reforming the Use of Tax Increment Financing in Chicago: Creating Greater Efficiency, Transparency and Accountability (Chicago, 2011), p. 28-29.