There was quite the fanfare back in 2004, when we amended the State constitution to authorize our version of tax increment financing (called “project development financing” in our statutes, but we’ll call it TIF). Money was raised to support the ballot question, prominent Tar Heels made public appearances on its behalf, and the question narrowly passed with 51% of the vote, making North Carolina the 49th state to authorize some form of TIF. Many in the economic development community thought this new, powerful funding tool would unlock even heightened prosperity for our State.
But it hasn’t worked out that way. While TIF is a valuable tool in many states, it never caught on here. In fact, only two TIF financings have been completed in North Carolina. For a primer on TIF in general, here’s an explainer by the School of Government.
Why did it never catch on? There are three main reasons, in no particular order:
1. The first TIF financing was a public relations disaster that turned TIF into something between a big joke and a curse word.
“Randy Parton Theater.” The pros and cons of the financing were overwhelmed by gossipy discussion of the merits of trusting the management of a significant public enterprise to someone known primarily as a relative of a big star. The Town that borrowed money through the TIF may have cut a bad deal, the project did not succeed as imagined, and the Town suffered financially as a result. TIF as a development tool was severely damaged by association.
2. Our statute is far less flexible than those in other states.
In other states, a local government can establish a TIF district long before any particular project emerges. This gives a financing a “running start,” letting property values in the district appreciate for many years and thereby locking in a substantial initial “increment” with which to support a financing. In North Carolina, we can’t establish a district and a base value until a specific project emerges. In addition, our statute puts limits on where a TIF-financed project can be located, and limits how much of a locality’s property can go into TIF districts. (And these are statutory limits; they aren’t limits required under the constitutional approval.)
3. We have easier ways to develop the public improvements that TIF seeks to finance.
If a local government wants to build a parking deck, or utility lines, or other public amenities to support private development, there are simpler, more established tools available. The LGC would rightly ask you why you wouldn’t use installment financing or revenue bonds instead of TIF. (And if your answer is that you want an easy way out if the private development fails, you won’t get far in the approval process anyway.)
As a result, many localities have turned to the now widely used “synthetic TIF” approaches. In a synthetic TIF, a local government borrows money to finance a public improvement that will help spur private development, and counts on using the increased tax revenues created by the development as a source for repaying the financing. This tax increment, however, is not expressly pledged to the repayment, and is not the only security offered to the lender. You can read our previous blog posts on synthetic TIF and synthetic TIF for grant matching. By the way, “synthetic TIF” is just a shorthand term for that kind of plan. It’s not a term that appears anywhere in the statutes.
Click here for our disclaimer, click here to send us a message, and click here to learn more about our public finance practice.