Is TIF the panacea?

The government’s recent announcement that it will allow local authorities to use tax increment finance caused a real stir. Nicola Raistrick and Simon Randall assess whether it can be used to kick-start stalled redevelopment schemes.

In September the Deputy Prime Minister and Liberal Democrat leader Nick Clegg announced a new measure to allow local authorities to raise finance to unlock regeneration schemes, known commonly as Tax Incremental Finance, or TIF.

The announcement was closely followed by a separate announcement by the Scottish government giving the go-ahead for the UK’s first TIF scheme, the £84m redevelopment of Edinburgh’s waterfront. There can be no doubt that this scheme will be watched closely by local authorities in England and Wales.

TIF is a financing model pioneered and widely used in the US that allows a local authority to borrow significant amounts of money for specific infrastructure development, with the loan secured against increases in tax revenue expected from the development. In simple terms, it enables a local authority to trade anticipated future tax income for a present benefit.

The base for the new model is that the building of new infrastructure will lead to more businesses being attracted to an area which in turn leads to higher tax revenues from those businesses. These are then used to repay the loan, typically over a 10 to 20 year period.

A change in legislation would be required in England and Wales to allow local authorities to direct taxes in such a way. In Scotland, devolved powers give authorities this power.

Borrowing against unknown tax revenues is not, however, without its risks. Local authorities need to think before then enter into such a long term and potentially risky funding arrangement. If business growth in a TIF area is not as great as first predicted, it will leave the local authority liable to meet any shortfall. This would inevitably lead to increases in council taxes or business rates, making the area less attractive, and could set a city back many years.

Local authorities are however unlikely to enter into such agreements on their own, choosing to partner with a commercial developer and sharing the risk. Existing legal structures such as joint ventures, co-operatives and trusts can be used to facilitate this type of agreement.

Putting the risk aside, another criticism of the TIF model is that it does not actually generate additional tax revenues; it just moves the tax revenue from one region to another.

In the US, the TIF model has seen neighbouring regions and city districts create competing TIF schemes. The city of Chicago has, for example, some 900 TIF schemes. With TIFs so widespread, TIF schemes are finding it increasingly hard to attract businesses without offering significant tax breaks, leaving less tax revenue to service the loan.

The detail and exact shape of TIF in England is as yet unknown. It seems that it will take the form of what is called a Business Increase Bonus. The coalition government is expected to publish further detail in due course. In any event, we would expect TIF schemes to be different to those used in the US.  Whether this will be a ‘TIF light’ or a more complex version remains to be seen.

TIF schemes are also likely to benefit social housing providers. The regeneration schemes unlocked by TIF funds are likely to include a mix of development, including elements of social housing. We expect providers to be able to bid for parts of these funds.

More interestingly, social housing providers will themselves be able to propose schemes. Providers with funding will have the potential to unlock greater capital from local authorities offering to match TIF funding.

The lack of private sector funding over the past two years has seen regeneration schemes stall and collapse. The dramatic public sector spending cuts of 25 to 40% to be announced in the Spending Review will only further exacerbate the problem. TIF funded schemes echo the government’s Big Society and localism agenda and will play an important role in persuading local communities to accept regeneration and infrastructure schemes.

Nicola Raistrick is a partner in the planning department and Simon Randall is a consultant specialising in local government at law firm Winckworth Sherwood.  Nicola and Simon can be contacted through the firm’s website ­– www.wslaw.co.uk.