Tax Increment Tools for Downtown Revitalization and Economic Development

Tax increment financing (TIF) has been used by local governments across the country as a funding mechanism for public improvements to spur economic development, particularly in struggling downtown areas.

Increased tax revenues from increment areas are used to pay for public improvements such as street maintenance, utility improvements, sidewalks and streetlights, parking facilities, and parks.

While this blog will review just a few TIF options currently available for Washington local governments, the Washington State Department of Revenue (DOR) has written on all TIF programs available in the state as of 2024.

History of Tax Increment Financing in Washington

The roots of tax increment financing in Washington began in 1982 with the Community Development Refinancing Act (CDRA).

The CDRA faced constitutional challenges in the uniformity of property tax rates, gift of public funds, and impacts on the state property tax levy for public schools and was consequently struck down in Leonard v. Spokane (1995).

Since then, Washington has implemented various forms of TIF, sometimes referred to as “TIF-light.” Some forms of TIF are no longer available, and one form is only available to specific local governments in specific counties.

Two programs are currently available to cities, towns, counties, and port districts:

• Community Revitalization Financing (CRF, Chapter 39.89 RCW) and
• TIF (Chapter 39.114 RCW).

Community Revitalization Financing

CRF was made available to Washington cities, towns, counties, and port districts in 2001. Pursuant to RCW 39.89.020(8), these taxing districts can create an increment area to finance public improvements, including permanently affordable housing, using increased property tax revenues generated within the increment area.

In order to create an increment area under CRF, the sponsoring jurisdiction(s) must get approval from local governments that are imposing at least 75% of the regular property taxes within the increment area. Additionally, any fire protection district within the boundaries of a proposed increment area must agree to participate.

When an increment area is created, the current assessed value at that time becomes known as the ‘tax allocation base value’, and future increases in assessed value are considered the ‘increment value’ and are shared with the sponsoring jurisdiction.

The sponsoring jurisdiction gets 75% of the increment value revenues, while all other taxing districts in the increment area get 25% of the increment value revenues. Once the increment area sunsets, the participating taxing districts receive their full portion of the increment value.

Tax Increment Financing

TIF was made available to Washington cities, towns, counties, and port districts in 2021. Pursuant to RCW 39.114.010(7), these taxing districts can create an increment area to finance public improvements, including the creation/preservation of long-term affordable housing, using increased property tax revenues generated within the increment area.

Under TIF, sponsoring jurisdictions cannot create an increment area with an assessed valuation of more than $200 million or more than 20% of the sponsoring jurisdiction’s total assessed valuation, whichever is less. (This $200 million limit will be adjusted annually by the consumer price index beginning June 1, 2027.)

A sponsoring jurisdiction may only have two active increment areas at any time. Active increment areas may not overlap, and when combined, must not exceed the assessed valuation amounts listed above.

HB 2451: Requiring Earlier Notice for Proposed Increment Areas

During this most recent legislative session, HB 2451 was passed to address concerns expressed by taxing districts that have been impacted by the formation of increment areas. Previously, there were no statutory requirements for a jurisdiction creating an increment area to negotiate with other taxing districts in the proposed increment area.

With the passage of HB 2451, a sponsoring jurisdiction is required to give impacted taxing districts earlier notice of the proposed increment area, must negotiate with impacted districts, and must provide more detailed information in its project analysis about the public improvements and revenue impacts on other taxing districts within the increment area.

Once a new increment area is formed, the sponsoring district must also provide an annual report to the residents of all impacted taxing districts.

For more information, check out MRSC’s Tax Increment Financing (TIF) webpage that has been updated to include changes made by HB 2451.

Conclusion

Both CRF and TIF are useful tools for cities, towns, counties, and port districts to fund public improvements necessary for downtown revitalization and economic development. These tools have numerous requirements, and their impact on property taxes can be complex.

Jurisdictions considering either funding option will need to engage professionals who can advise an agency on which option is best for a particular scenario. Such professionals include a TIF consultant, a financial advisor, and bond counsel. An agency should also seek advice from their county assessor and agency attorney.