Tuesday, February 22, 2011

Economic development: Hybrid Public Financing Mechanisms

November 2004, the citizens of North Carolina approved an amendment to the state constitution that enabled for the first time the use of tax-increment financing in the state. North Carolina became the 49th state to permit the use of this public financing tool that allows bond debt from public investments in infrastructure and other public facilities development to be secured by the increase in tax revenue anticipated from private development spurred by those public investments.

An offshot of traditional TIF is a "Synthetic TIF".  This method of public fiancing has some similarities to TIF but that does not depend on the amendment to the state Constitution and the issuance of bonds backed by an anticipated increment in tax values. Synthetic TIFs can take a variety of forms. One example is where the developer agrees to finance and construct the public facilities or infrastructure, and the local government agrees, contingent upon sufficient increase in tax valuation over time, either to acquire the completed facilities or to make an economic development grant to the developer to cover the project costs. Thus, the risk that the tax increment will be sufficient to cover the project costs is borne by the developer rather than the local government. The local government may pay the developer out of general funds or issue debt, knowing that the incremental tax revenue is available to meet the payment obligation.

Here's what it looks like:
            Empty 1 acre lot/vacant building = $50,000 tax value
$ 770 total annual tax (before development)

Completed development = $1,000,000 construction/development  = $750,000 tax value
$ 11,550 total annual tax (after development)

Under the above example, owner pays $11,550 annually in county and city taxes.
Owner is "granted" back annually $10,807 ($11,550 - $770) for 5 years = $53,900 total grant!
These synthetic TIFs create revenue streams through grant payments and no public debt is issued. Additionally, they are project specific and much easier and cost effective.

All in favor, say I!

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