One year ago, the Government made the latest in a long line of announcements spanning more than a decade that local authorities would have a new tool at their disposal to unlock economic growth - Tax Increment Financing, or TIF. Our new research, A Taxing Journey, looks at what this Government is doing to bring TIF into practice.
Nick Clegg, in making the announcement on TIF, stated that it would be “the first step to breathing life back into our greatest cities.” Since then, TIF has become entangled in a much wider and more complicated debate concerning the future of local government finance – the Local Government Resource Review (LGRR). Because of the competing objectives with the LGRR about how to reconcile a more inventive-based system with the current redistributive system, the future for TIF remains uncertain. Currently, Government is deciding how business property taxes will be retained locally, and it is likely to introduce a complex system of top-ups, tariffs, rebasing and resetting. All of this adds up to a lot of uncertainty that could render TIF useless in some cases.
To make TIF work, Government needs to keep it as simple as possible. If they make the system in which TIF will operate too complicated, it will create uncertainty and confusion that will deter investors and developers.
Our research also points out that TIF will not be the answer to growth for all places. It will only work in buoyant property markets and places which need new infrastructure to unlock demand. TIF requires adequate long-term demand for business property, so local authorities and investors need to be relatively certain that property tax revenues will come in to pay back the loan. TIF works when there is a real need for infrastructure to unlock economic potential. Not all places lack the infrastructure to grow.
With this in mind, Government needs to design TIF in a way that introduces as much certainty and clarity as possible so that each city is able to determine whether it’s right for them. Failure to do this will result in a very useful new tool becoming a rusty lever at the bottom of the policy toolbox.