Tax Increment Financing Now Available to Some Washington Local Governments

During the most recent legislative session, the Washington State Legislature passed HB 1189, which authorizes the financing tool for local governments known as tax increment financing (TIF). This blog will provide an overview of the legislation and how local governments can access this new tool.

Background

Most states currently have TIF as an option for municipalities to help finance infrastructure projects that will spur economic development in economically stagnant areas. TIF allows local governments to finance public infrastructure in targeted areas, with the goal that these improvements will encourage additional private development and investment. Any improvements to a targeted area may eventually result in increased property values, bringing benefits to property owners, investors, residents, and the local government.

As noted on our Tax Increment Financing webpage, there have been several attempts to authorize TIF in Washington State, but those attempts have either been rejected by voters or struck down by the courts. Washington State had allowed similar mechanisms to TIF in the past, but these versions were less successful as they relied on investment from the state general fund. Another hurdle to allowing TIF in Washington State has been the Washington State Constitution requirement that state property taxes be allocated to the common school fund. HB 1189 was drafted to both address this issue and not impact the state portion of property taxes.

Requirements for TIF

Under HB 1189, TIF is now available to counties, cities, towns, and port districts. These entities can use TIF for infrastructure projects typically undertaken by local governments, such as street and road maintenance or electric, broadband or rail service (Section 1 (7) of HB 1189 offers a detailed list of eligible projects.)

In order to utilize TIF, the county, city, or port district must pass an ordinance (or resolution, in the case of port districts) that designates an increment area (i.e., a specific geographic area that is expected to benefit from the development), identifies the infrastructure improvements to be financed, and states whether or not bonds will be issued.

Local governments must adhere to the following guidelines when creating increment areas:

• The local government must prepare a project analysis (see discussion below).
• There can be no more than two active increment areas at a time and those increment areas cannot overlap.
• An increment area cannot have an assessed value of more than $200 million or more than 20% of the total assessed valuation of the jurisdiction creating the area, whichever is less.
• Once an increment area is established, the boundaries cannot be modified.
• The local government cannot use TIF revenue for additional improvements that were not listed in the ordinance creating the increment area.
• The ordinance must include a start date for when the improvement will begin.
• The local government can only receive TIF revenues for the period required to pay the costs of the improvements.
• The increment area must be retired no more than 25 years after the adoption of the ordinance that created the increment area.

Impact on Property Taxes

Washington State limits taxing districts to a 1% increase annually on property taxes (outside of voter approved levies). Under TIF, the properties within an increment area are assessed the local property taxes for all local taxing districts based on the increase in assessed value after the increment area is created. The rates used are the current year’s levy rates for each local taxing district. These taxes must be used to finance the improvements specified when the increment area was formed.  

Generally, property taxes are assessed in the following manner:

• The previous year’s total levy + 1% + new construction

With TIF, property taxes are assessed as follows:

• Previous year’s levy+ 1% +new construction+(TIF assessed increase X levy rate / 1000)

The TIF portion of the property taxes is remitted to the local government that created the TIF. All other local taxing districts continue to receive the 1% increase to their previous year’s levy, plus new construction.

Project Analysis

Before creating an increment area, the local government must complete a project analysis. The project analysis must include, but is not limited to:

• Objectives for the increment area,
• Duration of the increment area,
• Identification of all parcels to be included in the increment area,
• A description of the expected private development within the increment area, including a comparison of scenarios with and without the proposed public improvements,
• A description of the improvements, including costs and methods of financing,
• A discussion of how private development would not reasonably be expected to occur in the foreseeable future without these improvements,
• An assessment of property value in the increment area and the amount expected to be generated from the increased increment assessment,
• Job creation and private development expected from the project, and
• An assessment of any impacts and necessary mitigation to address impacts on affordable and low-income housing; the local business community; local school districts; and local fire service (an impact of 20% of assessed valuation in the fire district or an increase in level of service to the increment area requires a negotiated mitigation plan). 

Other Requirements

Once a local government has compiled the required project analysis, it must also:

• Hold two public briefings exclusively on the project,
• Publish a notice in a local newspaper,
• Submit the project to the office of the Washington State Treasurer, and
• Give a certified copy of the ordinance or resolution (in the case of port districts) creating the increment area to the country treasurer, county assessor, and governing body of each local taxing district within the increment area.

A local government needs to consider these requirements and restrictions when looking at TIF as an option for encouraging economic development in their jurisdiction. Discuss your objectives and goals with your legal counsel when considering TIF.

If you have further questions regarding TIF, feel free to reach out to me at elowell@mrsc.org.