What Is Tax Increment Financing and How Does It Work?

Redevelopment uses a funding mechanism called "tax increment" financing in a project area. Tax increment is created in the following manner:

When a project area is declared "blighted" by the City Council and redevelopment is needed, property tax revenue collected and used by the various taxing agencies such as the county, school systems and special assessment districts is "frozen" at the level of revenue being received at that time (except for the annual 2% property valuation increase allowed by law). The taxing agencies then continue to collect all taxes on such properties in the project area, up to the level established at the time the project area was formed. The additional tax revenue generated over the frozen level is called "tax increment" and is given to the Redevelopment Agency. The Agency then uses the tax increment to assist in renovating or constructing new residential, commercial and industrial developments. These funds may also be used to assist first-time homebuyers. Any time a property in the project area sells or receives significant improvements, it is reassessed resulting in increased property tax revenue to the Agency.

The standard time frame of a redevelopment project area is 30-40 years. After the period of redevelopment ends and all costs of redevelopment have been paid, then the new, higher tax income reverts back to the original taxing agencies. In this way, a community can revitalize itself both physically and economically through the careful implementation of redevelopment activities.