What Is Tax Increment Financing?

By using an expected increase in property taxes, TIF financing allows cities and towns to fund community development and other projects without raising everyone’s taxes.

TIF can be quite effective for:

• Attracting new businesses
• Creating jobs
• Increasing property valuations

But it's not without controversy. Opponents raise concerns about TIF taking money away from school districts and other important services that rely on property taxes. Some also worry that it can lead to gentrification, pushing out long-time residents.

As such, municipalities must carefully consider the pros and cons for the entire community before pursuing TIF financing. Engaging a credible TIF attorney who can help you navigate the TIF laws in your state is also critical to making informed decisions.

In this article, we explore some of the fundamentals of this relatively new funding mechanism. But first, let’s briefly explore the history of TIF financing.

A Brief History

Tax increment financing began in California in 1952 as a way to provide local matching funds for federal grants. At the time, many cities were struggling with urban decay and needed money to improve rundown areas. The federal government offered grants to help. But cities needed to match some of the funds.

TIF was created as a solution to this problem. The idea behind it was simple:

• Improve an area
• Watch its value go up
• Use the extra taxes from the increased value to pay for the improvements

This meant cities could make necessary changes without raising everyone’s taxes.

In the decades that followed, federal funding for urban renewal began to decrease. More states then started to adopt TIF laws. Before long, TIF financing became a popular way for local governments to fund development projects independently.

As of 2025, 49 states and the District of Columbia have laws allowing for TIF financing. Arizona does not.

The use of TIF has also expanded beyond fixing up old urban areas. Cities have started using it for all kinds of public and private development projects. For example, Chicago, Illinois, has used TIF funds to improve public transportation, build new schools, and develop affordable housing.

Redevelopment Projects

TIF financing is commonly used to fund redevelopment projects. These are improvements to existing areas that have become rundown, outdated, or underused.

We commonly see downtown revitalization and brownfield redevelopment projects. "Brownfield" refers to property that's difficult to use because it's contaminated with hazardous substances, pollutants, or contaminants. TIF can fund environmental cleanups, allowing repurposed land uses.

Other redevelopment projects might include:

• Renovating historic buildings
• Transforming old industrial waterfronts into recreational areas
• Converting old factories for commercial/residential use

These projects aim to breathe new life into neighborhoods, business districts, or industrial areas.

How Does TIF Work?

Specific processes for TIF projects and financing vary based on state law and local regulations. But a few general principles apply.

TIF District

Most TIF projects require the creation of a defined TIF district. This is the specific geographic project area where the tax increment will be collected and used.

Typically, the municipality will freeze the property values in the TIF district at their current property tax base. It then uses the future increase in property taxes to fund the project costs.

As property values rise later due to the improvements, the locale collects the extra property tax revenue to pay for the project. We call this increase in future tax revenues the “tax increment” or incremental tax revenue.

Tax Increment

The tax increment is usually calculated based on the combined tax rates of all affected jurisdictions. TIF financing diverts the incremental tax revenue from these jurisdictions to a TIF fund.

It’s not uncommon for multiple tax jurisdictions to overlap in a TIF district. This naturally affects the revenue allocation process.

Benefits of TIF

At its core, TIF financing is about reinvestment of the new tax revenue in the TIF district to further improve the area and attract more development. This means the TIF revenues stay within the district for targeted local improvements. They don’t go into the municipality’s general fund.

While TIF-funded improvements are frequently redevelopment projects, they can take many forms.

This might include:

• Environmental remediation or cleanup
• Public infrastructure improvements like roads and utilities
• Land acquisition for new development
• Public improvements like greenspaces and plazas
• Accessibility upgrades to sidewalks and structures

Because TIF financing reduces some of the risks and costs associated with development, TIF-funded improvements may attract private investment. The private investments and improvements can benefit property owners by increasing real estate values and generating more tax revenue for further reinvestment. This also tends to create jobs.

The ideal TIF scenario generates a self-sustaining cycle of reinvestment and growth without raising taxes.

Challenges of TIF

TIF financing offers a unique way to stimulate economic growth and fund improvements in many communities. But it can also bring risks and associated challenges.

For example, if the expected tax revenue increase doesn’t occur, the municipality might struggle to repay the project costs. Conversely, revenue increases may potentially push out low-income residents and small businesses.

TIF projects can also be complicated. They require careful planning and management to be successful.

Getting Legal Advice

Before determining whether TIF presents a viable option for your project or community, consider speaking with a credible TIF attorney. They can help you understand your options and the TIF laws specific to your jurisdiction. They may also be able to explain alternatives if TIF financing isn’t right under the circumstances.

This highly specialized area of law can be complex, but finding an expert to guide you through it doesn’t have to be. Findlaw’s directory of tax increment financing attorneys can get you started. Just click on your state to view contact information for local TIF lawyers. You can also narrow the search results by city if you prefer.

Consult with a qualified advisor who can help you understand if TIF financing is right for your project.