Washington State's Expanded TIF Authority Creates Powerful Catalyst for Public-Private Partnerships

On May 10, 2021, Governor Jay Inslee signed ESHB 1189 (TIF for Jobs bill), completing a bipartisan legislative effort to grant new powers of Tax-Increment Financing (TIF) to the state's cities, counties, and port districts.

What Is Tax-Increment Financing?

Tax-Increment Financing is a powerful public-private partnership tool. TIF allows local governments to encourage private development in targeted areas by financing public infrastructure and improvements with the additional property taxes from increased property values resulting from that public investment and the ensuing, related private investment.

Under TIF, the taxing district establishes a geographic area that is expected to benefit most from the proposed new infrastructure (Increment Area) and then utilizes the increased tax revenues from that Increment Area to pay for the new infrastructure.

Often, the local government will issue bonds to raise funds to pay for the new infrastructure and use the tax increment to pay the bond debt service. Using TIF effectively allows the new private development to pay for the new public improvements without tapping the existing tax base.

Why Did the Legislature Pass TIF for Jobs?

TIF is widely used in most states, but in Washington a pair of unusual laws have prevented widespread adoption. First, the Washington Constitution requires property taxes levied by the state itself (rather than those property taxes levied by local government) be dedicated to the benefit of common schools.¹ Second, Washington statutes generally prohibit property taxes from increasing by more than 1 percent in any given year.²

Washington has adopted a variety of limited TIF statutes over the years, including the Community Revitalization Financing Act; the Local Infrastructure Financing Tool (LIFT) Program; the Hospital Benefit Zone Financing Program; the Local Revitalization Financing Program; the Local Infrastructure Project Area Financing program; and the State Land Improvement Financing program.³ However, all of these TIF programs are severely limited in scope and application, both to stay within the constitutional bounds decided in Leonard and by the One Percent Rule.

The new TIF for Jobs bill greatly enhances the utility of Tax-Increment Financing by excluding the increase in property taxes in designated Increment Areas from the One Percent Rule. Now, cities, counties, and port districts utilizing the new TIF for Jobs bill have authority to capture nearly all of that additional local property tax revenue to finance the designated public infrastructure and improvements. This substantially increases the borrowing capacity of these municipalities for purposes of providing new public infrastructure.

What Types of Development Can Municipalities Use TIF For?

Washington cities, counties, and port districts may use the TIF for Jobs bill to finance development of local government-owned infrastructure such as:

• Streets and roads;
• Water and sewer systems;
• Sidewalks and streetlights;
• Parking, terminal and dock facilities;
• Park-and-ride facilities of a transit authority;
• Park and community facilities and recreational areas;
• Electric, broadband or rail service; or
• Mitigation of brownfields.

Such infrastructure improvements may be within the Increment Area or outside the Increment Area if the improvement serves the community within the Increment Area. This is an important distinction because critical infrastructure investments are not always located directly within the community or communities most benefitted. By way of example, water treatment, power generation, and highways can provide critical public services to communities even from outside that community's boundaries.

These local governments also may use the TIF for Jobs bill to pay the cost of the following:

• Long-term affordable housing (including retrofitting for energy efficiency);
• Childcare facilities serving children and youth that are low-income, homeless, or in foster care (including retrofitting for energy efficiency);
• Providing maintenance and security for the public improvements; or
• Acquiring real and personal property, maintenance and restoration for historic preservation purposes under RCW 35.21.395.

Are There Limits on TIF?

The legislature did impose certain limits on this new TIF authority. The sponsoring jurisdiction may have only two active Increment Areas at any given time. Those Increment Areas may not overlap, and no Increment Area may comprise the entire geographic area of the jurisdiction.

At the time of their creation, the Increment Areas may not have an aggregate assessed valuation of greater than $200 million or 20 percent of the jurisdiction's total assessed value, whichever is less. The TIF must have a sunset date no later than 25 years after the first year in which tax revenues are allocated.

Finally, the sponsoring jurisdiction must make certain findings to justify the creation of a TIF program, including a finding that the financed TIF improvements will encourage private investment and development within the Increment Area that would not reasonably be expected without those improvements. The $200 million/20 percent assessed value limitations in particular greatly limit the scope and application of the TIF for Jobs bill.

What Are the Benefits of TIF for Private Developers?

Tax Increment Financing is especially useful to catalyze public-private partnerships. Where public infrastructure is needed to support private development, a TIF program can give the private developer assurance that the infrastructure will be built, while the local jurisdiction gains comfort that the private project will catalyze new property tax revenue to help pay the cost of that infrastructure.

The TIF for Jobs bill anticipates such public-private partnerships by expressly allowing private developers participating in the process to cover certain administrative costs that a local jurisdiction incurs in establishing a given TIF program. The bill also anticipates that public improvements financed with TIF may be constructed by private developers, provided that the private developer meets all applicable state and local laws.

Local jurisdictions and private developers that are contemplating using the new TIF for Jobs bill should consider negotiating a development agreement or other similar binding instrument to memorialize their expectations regarding public improvements and private investment.

More Information on Tax-Increment Financing

DWT's public-private partnership attorneys are carefully analyzing this new municipal authority to determine how Washington's cities, counties, port districts, and private developers—including community advocates—may deploy this legislative change as quickly and effectively as possible. If you would like to discuss your ideas for a new community development project powered by this expanded TIF authority, please do not hesitate to contact us.

For more information about the TIF for Jobs bill, see these background papers from the Washington Economic Development Association:

• Bring Tax Increment Financing to Washington
  
• Tax Increment Financing Frequently Asked Questions

For a more thorough, national-level overview of TIF policy, see:

• The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government
  
• Tax Increment Financing: A Tool for Local Economic Development

FOOTNOTES

1  See Leonard v. City of Spokane, 127 Wash.2d 194, 198-99 (2005).
2  See RCW 84.55.010 (for purposes of this article, the "One Percent Rule").
3  Miki Gearhart, Washington State Department of Revenue Legislation and Policy Division, TAX INCREMENT FINANCING TYPE PROGRAMS IN WA, 2016.