The subject of tax increment financing (TIF) has excited a reasonable amount of debate over the last year or so, as everyone looks for new ways to kick start regeneration projects in the current economic climate, with the British Property Federation and others contributing to the debate.
I added my own contribution on the subject in an article for BURA earlier this year but have no great claim to be a pioneer. Richard Rogers – bringing the idea from the States no doubt—mooted the idea of UK TIFs in his Urban Task Force guise a number of years ago, and the last Labour government gave a nod in the direction of a related conceptual framework with Accelerated Development Zones. Boris Johnson has also spoken in support of the idea.
Now Nick Clegg has announced proposals for the introduction of TIFs in England. In Scotland, progress has already been made, with TIF proposals for developments in Edinburgh, Glasgow and Lanarkshire, aided by the different statutory structure in Scotland, which may necessitate statutory instruments to deal with reallocation of business rates but does not face the statutory hurdles hitherto preventing progress in England.
Further detail of the Government’s proposals will emerge at the time of the October spending review, with a White Paper planned in due course. Nick Clegg has already indicated, though, that there will be a “carefully designed framework of rules” agreed with local authorities.
The basics of the idea are probably already familiar enough now. TIFs enable local authorities to fund infrastructure and development by borrowing against the business rates streams generated by the new development and enhanced values of existing properties in the designated TIF area. At present, local authorities can borrow only against guaranteed income, and that does not include business rates. The concept plays, to an extent, to the localism agenda, in allowing local authorities to retain long term revenues.
Local authorities will have to manage this new source of borrowing in conjunction with more traditional prudential borrowing, and the Treasury will no doubt have input on that issue. Prudential borrowing is relatively straightforward and inexpensive, albeit that the associated debt has to be serviced during the life of the loan.
Quite how the arrangement is to be structured remains to be seen. Will TIFs open up the opportunity for municipal bonds, subject to appropriate changes to tax legislation to encourage private investment by way of tax breaks?
There are familiar issues with TIFs, based largely on the US experience, where TIFs have been used for a long time – often on a very localised community basis, reflecting the differing local council structures in the US. Do TIFs just assist developments that would have happened anyway? Looking at this the other way round, proponents argue that you have to pass the so called “but for” test – the TIF can be justified only if you can show that the development would not have taken place “but for” the TIF. Are poorer areas by definition the ones that struggle most to generate values to make the scheme workable, so that in the end it is the better off areas that benefit? Is there a risk of a corresponding downward pressure on values of properties outside the designated TIF area? There is also the risk allocation issue in relation to shortfalls between projected and actual income, which would presumably affect the coupon on any projected municipal bond.
Clearly a few things to think about. At least, though, the Government appears at last to be joining in the thinking.