Scottish Enterprise Tax Increment Finance (TIF)

George Grace led one of the earliest UK studies of Tax Increment Finance (TIF) on behalf of Scottish Enterprise in respect of the Ravenscraig.

Ravenscraig will be the Scotland's first new town in more than 50 years - one of the largest regeneration projects in Europe, covering 450 hectares (1,125 acres) - an area equivalent to 13 London Canary Wharfs, 700 football pitches or twice the size of Monaco. Ravenscraig will become home to over 10,000 people, and is expected to create 12,000 jobs and attract in excess of £1.2 billion of private sector investment over the next 15 to 20 years. A project of national significance, Ravenscraig will provide many local and national benefits - it will lead to the construction of around 3,500 new homes, a new town centre with 84,000 sq m of retail and leisure space, up to 216,000 sq m of business and industrial space.

The study was based on TIF as used in the US where it is reported to be the most popular form of public infrastructure and community based financing.TIF is a financing mechanism that enables local authorities to pay for large scale infrastructure improvements by raising debt finance that is paid for by the property tax (ie business rates and council tax) revenue generated by that improvement. When the debt has been paid off, the tax reverts to the local authority in the usual way.

The study for Scottish Enterprise assessed the core process for creating TIFs:

1 Designating a geographic area for the TIF district and a plan for specific infrastructure improvements

2 Arranging debt (TIF bonds) to pay for the improvements

3 Stimulating higher existing property values and new development thereby resulting in higher property based taxes (ie business rates and council tax)

4 Using the higher (incremental) tax revenues over and above the level before the TIF to service the debt

Further examples were provided of how the mechanism is used in the US. For example in Chicago, one of the leading proponents of TIF, one third of the city’s property taxes are generated from TIF (a similar level of usage by a typical core city in the UK would enable the city to raise around £150m per annum which could raise over £2bn for infrastructure if paid off over 30 years).

The report concluded that key benefits underpinning the popularity of TIFs in the US is the fact that TIFs do not require local governments to give up any existing revenues; tax revenues are not diverted away from other projects; and finally the existing tax paying base does not pay either. This creates a very attractive scenario for local politicians and government officers. Furthermore, as TIF bond financing does not have recourse to the local authority, in the US it does not form part of municipal borrowing. This too is attractive to central government, particularly in the current spending climate.

Finally, in order to test the efficacy of the approach in a Scottish context, a financial model was created to explore the TIF approach on the redevelopment of one of Scotland’s largest regeneration projects and in which a significant infrastructure funding gap existed. The model showed the gap could potentially be met by a TIF arrangement that would pay for identified infrastructure via debt which would be paid off from subsequent property tax ‘increments’ in approximately twelve years.