Tax Increment Financing

In a move widely welcomed by local governments and the infrastructure sector, the Deputy Prime Minister, Nick Clegg, recently announced that local authorities in England are finally to be granted new powers to undertake Tax Increment Financing ("TIF"). To read the Treasury press release, please click here.

What is TIF?

TIF is a mechanism enabling local authorities to finance infrastructure and regeneration projects in the bond or bank debt markets today off the back of anticipated future increases in local tax revenues. TIF works on the assumption that the projects once completed will lead to increased property values and further development in the relevant area, in turn generating increased tax revenues which the local authority can then use to repay its borrowing over time (often a 20 - 30 year period). In the USA, where TIF has been used for over 50 years, investors in TIF-backed municipal bonds are further incentivised to lend by a tax exemption on the interest they receive.

TIF - a long time coming

Since the beginning of the credit crunch, there has been renewed focus in the UK on new ways of funding infrastructure and regeneration in a new era of public spending constraints. Reports published in 2008 by the British Property Federation (Tax Increment Financing: a new tool for funding regeneration in the UK? (November 2008), and PriceWaterhouseCoopers and the Core Cities Group (Unlocking City Growth: Interim Findings on New Funding Mechanisms (2008)) both discussed the possibility of using TIF schemes to accelerate regeneration projects in England.

In 2009, the previous Labour government invited expressions of interest in TIF from local authorities, but the schemes which came forward have not got beyond the drawing board. Then in the March 2010 budget, the Chancellor set aside £120m to kick-start a series of pilot projects where local authorities could access this fund to start paying off the early-years' debt associated with TIF schemes. It is unclear whether this fund will survive the Coalition Government's Spending Review due on 20 October, notwithstanding Mr Clegg's announcement to give local authorities the requisite borrowing powers to undertake TIF.

What is the timetable for introducing TIF?

In England, new enabling legislation will be required to allow local authorities to borrow against predicted growth in business rates (they can already borrow against their overall revenue stream, but this does not include business rates...