The Budget included several measures to improve regeneration and said yes to property sectors push for Tax Increment Financing. TIF’s, as they are called in the US, are public financing instruments that are widely used in the US to raise revenue for infrastructure, affordable housing, economic and community development, and environmental clean up. It has been pushed in the UK for some time by local government. Most notably the London Borough of Barnet, which has been pushing the Treasury since 2007 to raise revenue for its infrastructure development plans through tax increment financing instruments.
So what is it?
Tax increment financing is a mechanism that allows local governments to borrow against anticipated increases in tax revenue. It is usually structured as a municipal bond, which is sold to investors who are paid back from tax revenue. In the US, the investors also receive a tax exemption for the interest they receive.
Is it good for regeneration in the UK?
There are many characteristics of TIF that makes it an attractive model for the UK. First, TIF models give local government an opportunity to raise revenue for regeneration independently. Councils has been severely limited in their ability, since the Thatcher era, to raise revenue for infrastructure and housing because of a deep rooted culture of distrust in their ability to be credit wise borrowers.
Secondly, the TIF model means that local governments can raise capital without raising taxes. This assumption relies on increases in tax revenue due to growth and investment. So what happens if the movers and shakers with the money bags don’t produce? Or what if you are in an area that experienced stagnant growth even before the recession? Which leads to the next question- Does the TIF model really provide a mechanism for really tackling regeneration? As the Regeneration Framework acknowledged last autumn, regeneration and economic development are not the same and the evidence from the last 30 years demonstrates that despite strong national and regional growth there has been an increasing gap between wealthy and poor areas since 2001. Well before we entered the economic crisis, there lacked a real redistribution mechanism that delivered wider economic benefit and inclusion. And now more than before, there is a need for a regeneration model that addresses the widening gap between wealthy and poor areas.
Will this further regeneration in the recession and after?
TIF is unlikely to provide a real boost of investment to the poorest most needing areas during the recession and recovery. The reliance on growth to secure bonds means that only areas that are most likely to provide quick and reliable growth will be targeted for TIF style financing. Put in another way, TIF is likely to be launched successfully in areas that would have been invested in without government backing in a better market, not the most difficult to transform or economically stagnant areas. TIF’s weakness as a model to finance regeneration is reflected in Section 106 and the yet to be launched Community Infrastructure Levy, which relies on property uplift to incur community benefit. By attaching revenue and benefit to expected growth, investment will only occur in areas that are most likely to be successful.
We need a model for recruiting capital for regeneration and housing that is not connected to local property growth. There is a need for a real redistribution mechanism. The Community Infrastructure Levy, which has been postponed till April 2010, was seeking to do this in part by allocating a portion of the revenue raised to regional and central government for large scale infrastructure projects that would have wider social benefit.
A real redistribution mechanism
The changed economic environment is unlikely for quite a few years to be earmarked by high speculative development and growth that characterised the pre-recession market and in turn fuels tax increment financing, Section 106 and CIL type models.
Investment for regeneration needs to be detached from raising capital for economic development. A simple means of more effectively redistributing revenue would be to pool Section 106 benefits and allowing them to be redistributed more widely throughout a local area or over an extended period of time. This would allow Section 106 revenue to be shifted to poor areas and saved for use on a rainy day.
TIF is a noble effort. There is a need for new locally controlled financing mechanisms, but growth based models will unlikely provide the capital for low investment areas during a period of no growth. Maybe it is time to look at the tax system- particularly tax relief as a way to raise revenue for local areas. The tax increases proposed provide an opportunity to push for tax relief models to finance regeneration.
Community Investment Tax Relief (CITR)
CITR is a finance model where individuals and corporate bodies invest in accredited Community Development Finance Institutions which in turn provide finance for qualifying businesses, social enterprises and community projects. This model is already in place in the UK and would only require raising the incentives and take up. This allows for regeneration to take place from the ground up where local businesses, organisations, and people are financed to drive forward growth.
US Style Low Income Housing Tax Credit (LIHTC)
LIHTC is a dollar for dollar sale of tax relief that individuals and investors purchase and in turn raises capital for affordable housing. Through the sale of tax credits enough capital is raised to lower the amount of debt taken on by housing providers and the cost savings are passed on to home owners. The tax credits are allocated to state and local governments who manage and distribute the credits to assist affordable housing builders.
It is without a doubt that the next few years will require an economic rebuilding effort near or equivalent to that of the post war era. There are real opportunities to address the widening gap between wealthy and poor areas that has characterised the last eight years. And when we finally emerge on the other side, we will have equipped local government and local people with the financial tools to regenerate their areas.
Written by Dekonti Mends-Cole, Rensaisi Senior Consultant