Tackling the Tiffs Over TIF Districts

Keith Staats, JD Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law

Tax increment financing (TIF) is a seemingly simple economic development tool that has become anything but—and now it’s somewhat controversial in its means to promote improvements in certain city areas, too. Proponents contend that TIF provides requisite funding for redevelopment to municipalities. Opponents contend that TIF can starve taxing bodies of much-needed funds, while being ineffective at truly spurring redevelopment. Let’s decode TIF in this very high-level overview.

The Statutory Basis of TIF

TIF is not unique to Illinois. In fact, TIF districts are found in all 50 states, and Illinois adopted its Tax Increment Allocation Redevelopment Act, aka the TIF Act, in 1977. The act is a portion of the Municipal Code, and Section 11-74.42 sets forth the legislative findings and the General Assembly’s intentions when passing the act.

The act provides that the basic purpose of TIF and the designation of TIF districts is to eliminate blighted areas, institute conservation measures, and to undertake redevelopment of such areas. The legislature found that successfully removing and alleviating adverse conditions in these areas requires actions that encourage private investment, which further restores and enhances the tax base of the taxing districts through development or redevelopment of the project areas.

As such, municipalities have the legal authority to designate TIF districts. A municipality is required to demonstrate that the proposed TIF area is either blighted or a “conservation area.” To determine if an area is blighted, the municipality must show a combination of five or more of the factors in the statutory definition of “blighted area,” which includes factors like dilapidation, obsolescence, deterioration, structures below code, excessive vacancies, and inadequate utilities. There’s even a different set of factors for determining blight if the redevelopment project area is vacant.

On the other hand, a “conservation area” is likely not what you might think—it has nothing to do with conserving natural resources. Instead, a “conservation area” is an improved area within the boundaries of a redevelopment project in which 50 percent or more of the structures in the area are aged 35 years or more. The area is not yet a blighted area, but because of a combination of three or more statutory factors, the area is detrimental to the public’s safety, health, morals, or welfare and may become a blighted area if action isn’t taken. Among these factors are dilapidation, obsolescence, deterioration, and the presence of structures below code. So, many of the same characteristics of a blighted area apply to a conservation area, except the area is not yet deemed to be blighted.

To be designated as a TIF district, the municipality must demonstrate the existence of the statutory factors and that “but for” the establishment of the TIF district, the conditions in the district will not be addressed. In other words, without the TIF, development or redevelopment would not occur.

What Happens to Property Taxes When a TIF Is Established?

Once a TIF district is established, property taxes in the district aren’t frozen. Instead, the equalized assessed value (EAV) of the properties in the TIF district are determined at the time the TIF is established. This sets the base level EAV for the TIF district and taxes on this base level are distributed to the taxing bodies for the duration of the TIF district designation. The increase in the EAV over the base is the “increment.” The property tax system continues under a TIF—taxing bodies set levies, and taxes continue to be assessed on fair cash value. However, taxes collected on the increment are diverted into a fund used to pay for public and private TIF-related projects in the TIF district.

By law, these increment funds can only be spent on “redevelopment project costs.” These costs include such things as the cost of the redevelopment planning, rehabilitation, reconstruction, repair, remodeling, public works, and job training or retraining.

TIF district designation lasts 23 years and can be extended for an additional 12 years providing there’s agreement between the affected taxing bodies and General Assembly, who must pass legislation to extend the TIF designation.

The 2019 TIF Review

The General Assembly’s Property Tax Task Force from a couple of years ago had a subcommittee that reviewed TIF districts. As you may recall, the task force held a series of meetings but never issued a final report. And even though the task force never issued a final report, the TIF subcommittee reached several conclusions and issued recommendations which were turned into legislation issued just this year.

The TIF subcommittee identified several problems associated with TIF districts, including that TIF districts reduce funds to their taxing bodies because of the diversion of the increment; some TIF designations have been in place for so long they continue beyond the point where they are needed to pay for the initial economic development projects and, in such situations, the TIF district may be hoarding money for little or no public purpose that would otherwise go to local government.

The TIF subcommittee made three recommendations:

1. Shorten the timeframe for TIF districts from 23 years to 10-15 years. This recommendation was based on data submitted to the subcommittee that the benefits of a well-structured TIF district is typically realized with 10 years of creation.
2. Tighten the definition of “blighted” to incorporate objective standards, rather than an open interpretation of the “but for” requirement. The subcommittee found that the term “blighted” is used too expansively and that the “but for” standard is used too loosely.
   
3. Increase transparency around TIF district impacts on property tax collection processes in other taxing bodies. The subcommittee recommended that the impact of a TIF district on other taxing bodies should be an ongoing process of documentation made public to taxpayers.

The recommendations have been introduced into legislation as HB 571 and SB 2298. HB 571 expands the required information to be included in reporting to the Illinois comptroller and taxing districts. The bill was opposed by the Illinois Municipal League, but the bill passed the House despite the opposition. The bill was unanimously voted out of the Senate Revenue Committee and appears poised for passage at the time of publishing this article.

The proposals in SB 2298 include shortening the life of TIF districts from 23 years to 10 years and modifying the definition of blighted areas. The Illinois Municipal League also opposed this legislation. The bill’s sponsor, Sen. Ann Gillespie (D-Arlington Heights), agreed not to move the bill forward but plans to establish a working group to examine and prepare possible changes to the TIF Act.

The Future

TIF districts have proponents and opponents, and positives and negatives, but as legislation proposed this year demonstrates, they’re deemed important to economic development in Illinois. With TIF districts unlikely to go away, there are features of the law that can be modified to ensure that the primary goals of remediation of blighted areas and stopping other areas from slipping into blight can be realized—if we can navigate the complication and controversy.