Public Sector to use future Tax rises for leverage?

Funding and Finance: As conventional sources of funding for regeneration projects dry up amid the deepening recession, the focus has switched to the innovative US-style Tif model. Susie Sell examines its pros and cons.
With public and private sector investment dwindling and many development projects grinding to a halt, the challenge of finding new methods of finance has leapt to the top of the agenda in the regeneration industry. Over recent months, you would be hard-pressed to have missed hearing about Tax Increment Financing (Tif), an innovative finance model we are being encouraged to import from the US. Last week, the All Party Urban Development Group (APUDG), a coalition of parliamentarians and regeneration practitioners, declared that, without it, regeneration will stall for many years to come. But it also emerged last week that lobby group the British Property Federation, which has been vociferous in calling for the introduction of Tif to help the sector out of recession, previously admitted that the model performed best in economic booms (R&R, 29 June, p1).
Here we give you a rundown of the potential advantages and pitfalls of using Tif, as well as the barriers that prevent immediate implementation.
- What is Tif?
Tif is a tool that allows a local body to borrow for infrastructure developments by securing a loan against rises in tax revenue expected to be generated by the investment. It is underpinned by the notion that building infrastructure leads to more businesses being attracted to the area, which in turn increases the amount of taxes raised from businesses.
Tif is widely seen as a means of accessing finance that would not ordinarily be available, and it is currently being championed by the APUDG, the Core Cities group and professional services company PricewaterhouseCoopers, as well as regional organisations such as the Northern Way.
- Why hasn’t Tif been introduced in the UK before?
While some organisations have been recommending its use for more than a decade, the Tif model has yet to come to fruition in the UK. Many suggest that this is because there hasn’t been a need for Tif before now as high property prices have kept the market buoyant. But with the recession deepening, there is now acknowledgement in the sector that it will be much harder to fund regeneration in future due to a scarcity of public and private sources of finance. As a result, the profile of alternative funding mechanisms has grown in recent months. It has been suggested that central government reluctance has prevented Tifs from being introduced earlier. “On one level, Tifs can be viewed simply as the moving of taxation from one pocket to another, and the Treasury doesn’t like this kind of (mechanism),” says Chris Brown, chief executive at regeneration developer Igloo.
- What happens if business growth in a Tif area is not as great as predicted? Who would be responsible for that shortfall?
Ultimately, this comes down to who has made the investment in infrastructure in the first place, as they will have taken on the risk of recouping their investment from future business rates. This could be a local authority, a private developer or a partnership between the two. If a local authority is responsible, then it would have to meet any shortfall via conventional methods, such as drawing on reserves, land sales, council tax or business rates. “It is really important that judicious work is carried out to conservatively underwrite the scheme, and the best possible predictions are made about future rates,” says Chris Murray, director at Core Cities group.
- What does the experience of other countries tell us about the upside and the downside of Tif?
The Tif model was created in, and is now used most extensively in the US. It was launched in post-war California as a tool to address urban blight in the west coast cities. “From the US experience, we can see that Tif is an incredibly powerful tool, which provides a strong economic incentive for people to do urban regeneration,” says Brown. However, he also warns that the Tif model is sometimes being used for schemes with limited regeneration potential. “Property taxes are now being frittered away on subsidising shopping centres, rather than on developments for the public good,” he adds.
- How big an area would it be sensible to cover with a Tif scheme?
There is a difference of opinion over this aspect of Tif. Professor Michael Parkinson, director of the European Institute for Urban Affairs at Liverpool John Moores University, suggests that, because only a limited number of Tif schemes are likely to be implemented, the model should only be used on large-scale projects that will bring substantial benefits to an area. Brown, however, suggests that it should be used only on neighbourhood area schemes.
- What legislative or legal barriers must be overcome in order to implement a Tif scheme?
A number of experts suggest that a pilot scheme could take place without any changes to existing legislation. However, introducing a large-scale Tif scheme would be much harder. Since reforms of local government finance in the 1980s and early 1990s, the income from business rates flows directly back to the Treasury, and is currently unavailable as a revenue source for local authorities. This means that central government would have to change its existing policy and legislation before a Tif could be implemented.
- How soon could we see the first Tif scheme going ahead?
The APUDG is calling for the introduction of a Tif pilot scheme by the end of this year, but suggests that the earliest we might see a Tif scheme proper is by 2011, a view that is reiterated among professionals across the sector.