Tax Increment Financing 101
As Route 1 redevelopment progresses with the East Campus and other projects, there may be opportunities for the public sector to use tax increment financing as an incentive for developers. Tax increment financing, a form of a public-private partnership, is an agreement between a developer and municipality in which future tax revenues are used to subsidize infrastructure or other public amenities.
The idea is that certain projects have such positive economic impacts that municipalities are willing to provide financial incentives to the development community in order to help the projects get built. Because the municipality is borrowing the money, it receives discounted rates on bonds from financial lenders. The money is then used to fund improvements to the project site, which can range from land acquisition to infrastructure improvements.
The municipality realizes that the development will increase its tax base over the life of the project. A percentage of the increase in tax revenue collected within the district is then used to pay off the bonds used to finance the improvements. In Prince George’s County, tax increment financing is typically, if not always, used for specific project sites rather than districts, so the percentage of the increase in tax revenue from each particular project is used to pay its bonds.
Although this method of financing appears to some as a solution to all of Route 1’s problems, too much tax increment financing can be risky for a municipality or county to undertake. Some issues with the financing methodology include the over-allocation of future tax revenues and the unpredictability of future tax revenues. All things aside, if used correctly these partnerships can have positive economic impacts on entire communities.
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