Attracting investments in urban infrastructure for Latin American municipalities is a daily challenge, exacerbated by the effects of COVID-19. Already scarce resources are now scarcer, and financing alternatives are limited.
Land value capture, an urban development strategem that has become increasingly common, holds significant promise for the region. In particular, the tax increment financing mechanism (commonly known as TIF) is worthy of our attention. TIF is a land-based finance instrument commonly used by local governments in the United States to turn underutilized land into more productive uses.
What TIF is and how it works
TIF enables local governments to use the expected income from taxation on a designated territory to finance investments needed in urban infrastructure. This allows projects to be structured based on future tax revenues resulting from the development of a specific area and the revenues produced above a specified baseline property value established at the project’s inception.
TIF implementation starts with the local government establishing a “TIF District”—a geographic area whose purpose is to capture a portion of the increase in the property tax value resulting from new infrastructure investments. These resources are collected into a specific fund committed to the repayment of TIF debt obligations. To develop a TIF, the local government uses the property value on a specific date as a baseline. They set a period for the TIF, over which all the expected property value increases relative to the baseline will be considered income that can be reinvested in public infrastructure.