Tax Increment Financing (TIF)

What is Tax Increment Financing?

Tax increment financing (TIF) in Washington State is a property tax financing tool that cities, towns, counties, port districts, or any combination thereof can use to fund public infrastructure in targeted areas to encourage private development and investment. See chapter 39.114 RCW.

To use TIF, the local government must designate an "increment area” surrounding the site of the public improvements. The property tax portion of increases in assessed value of properties within the increment area is allocated towards paying for the public improvement costs.

The local government may designate up to two increment areas that must be fully within the jurisdiction's boundaries, subject to certain limitations described later on this page.

What Can TIF Be Used For?

Local governments can use TIF to pay for a wide variety of "public improvement costs" that are necessary to encourage private development within a targeted geographic area.

These public improvement costs are defined in RCW 39.114.010(6) and (7). Any agency considering TIF must read the definitions carefully—but in general this includes various expenses related to the following facilities and infrastructure:

• Streets, roads, sidewalks, and nonmotorized transportation
• Water, sewer, stormwater, and drainage systems
• Fire, life, and public safety facilities and equipment
• Parking, terminal, and dock facilities
• Parks, community facilities, and recreational areas
• Electric, broadband, or rail service
• Brownfield mitigation
• Certain affordable housing and childcare facilities
• Historic preservation
• Relocation, renovation, or construction of a government-owned facility
• Maintenance and security for the public improvements

The TIF ordinance must identify the specific public improvements to be financed and whether the local government intends to issue bonds or other obligations payable in whole or in part from the TIF revenues.

The local government must make a finding that:

• The proposed public improvements are necessary to encourage private development and increase assessed valuations within the increment area;
• The private development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future without the proposed public improvements;
• The expected assessed value within the increment area without the proposed public improvements would be less than the expected assessed value with the public improvements; and
• The anticipated private development within the increment area is allowed under the permitting jurisdiction's zoning and development standards.

The public improvements may be located inside or outside the tax increment area, but they must be necessary for the ensuing private development within the increment area. The public improvements may be undertaken and coordinated with other programs undertaken by the local government or other taxing districts, and they may be funded in part from revenue sources other than tax allocation revenues.

Public improvement costs also include various administrative costs, including costs that may have been incurred before the adoption of the TIF ordinance, as well as expenses incurred by the county assessor and county treasurer (and reimbursed by the local government) for revaluing the properties and apportioning the property taxes.

Public improvement costs also include funding for mitigation to other impacted taxing districts as allowed under the TIF statutes.

How Are TIF Revenues Allocated?

The state's 101% "levy lid" generally restricts regular property tax levies to a maximum annual increase of 1% plus new construction. See RCW 84.55.005-.0101.

With TIF, each property within an increment area has a "base value" that is fixed at the time the tax increment area takes effect. Each local taxing district (city, county, fire district, etc.) continues to receive revenues calculated on this base value.

However, any future increases in the assessed value of the property (the "increment value") are taxed at the levy rates for all taxing districts (with limited exceptions) in the increment area, referred to as the "tax allocation rate." This portion of the property tax is received by the local government which created the increment area to pay for the public improvements.

The increment area takes effect on June 1, but the tax allocation revenues will not be collected until the following calendar year. In Washington's property tax system, a property's value is assessed one year – the "assessment year" – but the taxes based on that assessment are not collected until the following year – the "tax year."

The tax allocation rate includes all "regular property taxes" as defined in RCW 39.114.010(8) and RCW 84.04.140, including those that are subject to the $5.90 aggregate limitation in RCW 84.52.043 and/or the constitutional 1% aggregate limit codified at RCW 84.52.050, with just a few exceptions.

The only property tax levies that are excluded from TIF are:

• The state school levy;
• Emergency medical services (EMS) levies;
• Regular property taxes levied by port districts or public utility districts to the extent necessary to repay general obligation bonds; and
• Excess levies, including school district excess levies, excess operations and maintenance levies for any taxing district, and any excess levies for the repayment of general obligation bonds.

What Limitations Are Placed on TIF?

When creating increment areas, local governments are limited to the following:

• The local government can have up to two active increment areas. The increment areas cannot overlap one another or any increment area created by another local government.
• The assessed value of an increment area cannot exceed $200 million or 20% of the sponsoring jurisdiction's total assessed value, whichever is less, when the ordinance is passed. If the jurisdiction creates two increment areas, the total combined assessed valuation cannot exceed $200 million or 20% of the jurisdiction's assessed value, whichever is less, when the ordinances are passed. Beginning June 1, 2027, the $200 million limit will be adjusted every year in accordance with the Consumer Price Index.
• The sunset date for the increment area must be the earlier of (a) 25 years from the first year the allocation revenues are collected, or (b) the date on which the TIF-backed financial obligations are no longer outstanding.

If the TIF revenues exceed the amount necessary to finance the public improvements, the extra revenues must be allocated back to the other taxing districts within the increment area in proportion to their regular property tax rates for collection that year.

The apportionment of tax allocation revenues must cease when the city, county, or port district certifies to the county assessor in writing that the revenues are no longer necessary or obligated to pay for the public improvement costs (not to exceed the original sunset date).

How to Create a Tax Increment Area

To create a tax increment area and begin collecting revenues, a local government must follow the procedures set out by state law.

Prepare a Project Analysis

The local government must prepare a project analysis (RCW 39.114.020)(2) that includes the following elements at a minimum:

• The local government's objectives for the increment area;
• Property that the local government may wish to acquire within the increment area;
• The duration of the increment area (maximum of 25 years);
• The specific parcels to be included in the increment area;
• A description of the expected private development within the increment area, including comparisons with and without the proposed public improvements;
• A list of the public improvements to be funded, including individual improvements in priority order with each improvement's nexus to encouraging private development, estimated completion date, estimated costs and funding sources, and the amount of financing instruments expected to be issued and paid with the tax allocation revenues that can reasonably be expected to be completed within the first seven years of the project;
• The assessed values of the properties in the increment area and an estimate of the increment value and expected revenues to be generated from the tax allocation;
• An estimate of the job creation and private development reasonably expected to occur from the public improvements;
• An assessment of any impacts on:
  • Affordable and low-income housing;
  • The local business community; and
  • All other taxing districts—meaning any school district, fire district, library district, or other governmental entity that collects regular property taxes within the proposed increment area; and
• Any necessary mitigation to the other taxing districts.

The assessment of the revenue impacts to the other taxing districts must be done with the impacted taxing districts, as discussed below.

If a private developer agrees to participate in creating the increment area, the local government may charge the developer a fee sufficient to cover the cost of the project analysis and establishing the increment area, including staff time, professionals and consultants, and other administrative costs.

A local government may also enter into an interlocal agreement with another local government for the administration or other activities related to the tax increment area.

Consult With Other Taxing Districts

The sponsoring agency must provide written notice of the proposed increment area to the governing body of every affected taxing district at least 180 days before submitting the project analysis to the Office of the State Treasurer (OST).

The sponsoring agency must offer to consult with the taxing districts within 30 days to discuss the proposed increment area and the development of the project analysis, including revenue and mitigation impacts. The impact assessment must be done with the other taxing districts and must include the impact over the term of the increment area on:

• Tax allocation revenues
• Levy rate adjustments
• Other revenues including, but not limited to: impact fees, fire benefit charges, sales taxes, and utility taxes

The sponsoring agency must submit the completed project analysis to all affected taxing districts at the same time it submits the project analysis to OST..

Negotiate With Other Taxing Districts

If the project analysis indicates that an increment area will impact at least 20% of the assessed value in a public hospital district, fire protection district, or regional fire protection service authority—or if the public hospital/fire service agency’s annual report or adopted capital facilities plan demonstrates an increase in the level of service directly related to the increased development in the increment area—the local government must enter into negotiations with the public hospital/fire service agency to address level of service issues in the increment area. If the parties cannot reach agreement, they must proceed to arbitration.

Some of the anticipated TIF proceeds may be used to compensate the impacted taxing districts, as such mitigation funding is included in the definition of eligible “public improvement costs.”

Any jurisdiction that creates an increment area after June 1, 2026 must begin negotiations to develop an agreement with impacted taxing districts within 30 days of receiving the project analysis if any of the following conditions exist:

• The increment area will create at least 50 new residential units or impact at least 10% of the assessed value in the impacted taxing district;
• The impacted taxing district can demonstrate or has forecasted an increase in service demands directly related to the increased development in the increment area;
• The project analysis forecasts a loss of property tax revenue over the term of the increment area; or
• A taxing district is subject to more than one tax increment area and the proposed increment area will result in more than 20% percent of the taxing district’s assessed value being subject to tax increment areas.

If parties cannot reach a final agreement, they must proceed to mediation within 30 days. If the parties cannot reach an agreement after 30 days in mediation, they must proceed to arbitration.

If an impacted taxing district passes a levy lid lift, the impacted taxing district and the sponsoring jurisdiction must review the agreement and address impacts related to the levy lid lift. Either party can initiate a review no more frequently than every five years.

Submit Project Analysis to State Treasurer

The sponsoring agency must submit the project analysis to OST for review. The OST may receive comments from other taxing districts. Within 90 days of receiving the project analysis, OST must submit its review of the project analysis to the sponsoring agency and any taxing district that submitted comments. The review should include any revisions or enhancements deemed appropriate based on the requirements of the law.

The sponsoring agency must consider any comments that OST provides.

Hold at Least Two Public Hearings

The sponsoring agency must hold at least two public hearings for the community that are solely on the tax increment project. See RCW 39.114.020(7). The hearings must occur no earlier than 90 days after submitting the project analysis to OST and all impacted local governments and taxing districts.

The public hearings must include the following elements:

• A description of the increment area;
• The public improvements proposed to be financed with tax allocation revenues; and
• A detailed estimate of tax revenues for the participating local governments and taxing districts, including amounts allocated to the public improvements.

The sponsoring agency must publish an announcement two weeks before each public hearing in a legal newspaper of general circulation and post the announcement on the local government’s website and social media accounts.

Adopt Ordinance Creating Increment Area

Following receipt and consideration of the comments from OST, the local government must adopt an ordinance establishing the increment area. The ordinance must contain the following (RCW 39.114.020(1)):

• The boundaries of the increment area;
• The sunset date of the increment area (up to 25 years);
• Identification of the public improvements to be financed and whether the local government intends to issues bonds or other financing payable in whole or in part from the tax allocation revenues, and an estimation of the maximum obligations to be issued;
• A provision that the increment takes effect on June 1 following adoption of the ordinance; and
• A deadline by which construction of the public improvements will begin, which cannot be more than five years in the future, with extensions not to exceed two years unless there is good cause.

The local government must publish a notice in a legal newspaper of general circulation within the jurisdiction of the local government that:

• Describes the public improvements,
• Describes the boundaries of the increment area, and
• Identifies the location and times where the ordinance and other public information concerning the public improvement may be inspected.

The notice must be published at least two weeks prior to the date on which the ordinance creating the increment area is adopted. Additionally, a certified copy of the ordinance must be delivered to the county treasurer, county assessor, and each taxing district within the increment area within 10 days of the date on which the ordinance was adopted.

Filing the TIF Annual Report

Every year, the sponsoring jurisdiction must prepare and make available to the residents of all impacted taxing districts a report on the status of the increment area, including:

• Progress on construction of public improvements funded by the increment value,
• The economic benefits created in the increment area,
• The status of mitigation to impacted taxing districts, and
• How the increment area has impacted tax revenues and rates in the impacted taxing districts.

The sponsoring agency must request statements from the other impacted taxing districts. If the taxing districts provide statements, the sponsoring agency must include those statements in its annual report.

Examples of TIF Ordinances and Documents

Below are selected examples of tax increment financing ordinances, resolutions, and other documents adopted by local governments in Washington. We will add more documents as they become available.

• Kirkland Ordinance No. O-4846 (2023) – Creating tax increment area to finance streets, parks, and water/sewer infrastructure to enable a mixed-use, transit-oriented, and walkable development near bus rapid transit station; includes project analysis and State Treasurer's review
• Port of Pasco Resolution No. 1569 (2021) – Creating a 150-acre, 25-year tax increment area to finance LTGO bonds to help construct publicly owned infrastructure improvements and enable development of $500 million milk processing facility; includes TIF procedural outline and State Treasurer's review
• Wenatchee Ordinance No. 2023-02 (2023) – Creating tax increment area to finance street grade separation/extensions to improve access to developable property and create opportunities for redevelopment. Includes final staff report, project analysis, and State Treasurer’s review.

Recommended Resources

• WA State Treasurer Tax Increment Financing – View TIF project analysis content requirements as well as all TIF reviews completed by the Office of the State Treasurer
• WA Department of Revenue Legislative Changes to Tax Increment Financing – Provides general guidance and assistance for county assessors, county treasurers, local governments, and other taxing districts impacted by a tax increment area