The Pennsylvania Tax Increment Financing Act: An Analysis

Pennsylvania’s Tax Increment Financing Act (the “TIF Act”), 53 P.S. §6930.1 et seq., has recently generated some local controversy, prompting discussions to clarify misconceptions and to reexamine the law’s scope and purpose. Enacted in 1990, the TIF Act provides local municipalities with a tool to combat blight while simultaneously promoting economic development where a municipality does not have other available financial resources. As federal and state funding for redevelopment projects continues to diminish, tax increment financing has become an increasingly popular option to alleviate blight by increasing an area’s tax base, stimulating the local economy, and creating jobs.

A key municipal component to any TIF District is a formal finding of “blight”—an area with undesirable characteristics such as overcrowding, inadequate planning, faulty street layouts, or environmental contamination. From the outset, a TIF District can substantially improve an economically or socially undesirable area which cannot generate a sufficient tax base to finance a redevelopment project without a TIF.

Because a TIF project is aimed at revitalizing a blighted area, the redevelopment of such an area pursuant to a TIF Plan will generate increased tax revenue to the local taxing bodies. A TIF project typically involves the cooperation of three local taxing bodies—the county, the school district, and the local municipality (such as a township or borough). These taxing bodies agree to allocate all, or a portion of, the increased revenue (called the “tax increment”) to repay the bonds issued to fund the project.

Much apprehension about the TIF Act stems from the concern that the local taxing bodies involved in the TIF project will face financial liability in the event that the bonds issued to support a TIF project are not paid. This concern is unfounded, as the statutory structure is designed to avoid such a contingency. TIF projects require the involvement of a fourth legal entity, a redevelopment or industrial development authority. It is this entity—not the county, school district, or local municipality—which ultimately issues the bonds, and such debt payments on the bonds are paid from the incremental tax revenues. These debt service payments are often secured by one of several methods, including the levying of special assessments on property in the TIF district, or the furnishing of a guaranty from a third party such as a developer, or the furnishing of a guaranty under the Commonwealth’s TIF Guaranty Program.

By way of example, presume that a blighted area currently generates only $10,000 of tax revenue annually. After redevelopment, this area will generate $100,000 of tax revenue annually. The tax increase, i.e. the tax increment, is $90,000—the difference between the pre-development and post-development tax revenue. Upon completion of the project, the local taxing bodies agree to allocate a percentage of this tax increase (for example, $60,000 of the $90,000) to the authority which issued the bonds. The authority is then able to repay the bond obligations, and the local taxing bodies retain the excess tax increment ($30,000). The taxing bodies thus receive $40,000 annually compared to pre-development revenue of $10,000. Once the bonds are repaid in full, the local taxing bodies keep 100% of the increased tax revenue.

The TIF Act allows local municipalities to participate in a redevelopment project and to remediate a blighted area without contributing their own tax dollars and without raising taxes. Such increased tax revenue not only stimulates the local economy of the participating municipality, but also promotes economic growth in adjacent areas. TIF projects encourage the public sector to work directly with private developers, creating a partnership capable of solving unique local problems.

Issues regarding the TIF Act will continue to surface as the Lehigh Valley continues its accelerated economic development trend. If you have any questions or would like to know more, please contact me at jlushis@nmmlaw.com, or Julie Macomb at jmacomb@nmmlaw.com, and we will be happy to assist you.