Called “Project Development Financing” in North Carolina, tax increment financing (TIF) is used by local governments to provide incentives to developers and others who presumably would not otherwise choose to invest in certain areas. Such financing often entails providing subsidies for land acquisition and/or for installing or improving infrastructure for water, sewerage, streets, and local services. The financing may even entail giving away or selling land at an attractive price to developers.
The TIF concept is based on the idea that development will enhance property values in a particular area and, in turn, bring about an increase in property tax revenue. The projected revenue increase is used to secure bonds or guarantee the repayment of other funds. Municipalities can therefore issue bonds without committing the “full faith and credit” of the government and without voter approval. The incremental increase in property tax revenue from a proscribed area is then used to pay back the bond or borrowed funds. Once the money is repaid, the increased tax revenue goes into the municipality’s general fund.
Tax increment financing was first implemented in California in 1952; it has been used for more than 40 years in some states, and for only a few years in others. Only Arizona does not permit its use. In 2004, following the General Assembly’s 2003 passage of the Project Development Financing Act, North Carolina voters narrowly approved a constitutional amendment to allow TIF. Proponents argued that the financing method is needed for blighted areas that are too risky for privately financed development. They claimed the financing would attract jobs and revitalize communities. Opponents argued that in addition to encouraging suburban sprawl, such financing is just another form of corporate welfare that takes voters out of the local decision-making process. Moreover, TIF represents a risk for existing taxpayers who are obligated to repay such loans if new development fails to cause an increase in tax revenue.