Gordon Brown’s acknowledgement that the Government needs to do better on housing is good news. Much of the new housing needed should be built on brownfield land, meaning that new funding mechanisms need to be introduced that will help local authorities attract developers to difficult sites. In the United States, city leaders use a system called Tax Increment Financing (TIF). The Government seems unenthusiastic about introducing TIF here, but it should think again. Properly regulated TIF would empower local communities, and help them attract the private sector resources that can deliver change.
The basic idea behind TIF is simple – though there are many variations. Local decision-makers borrow against the expected increase in property tax revenue that follows a public investment. The additional tax revenue created through the investment is then ring-fenced and used to help pay for the initial loans. Once the debt is repaid, the TIF mechanism closes and the revenue stream returns to the relevant tax authority.
TIF schemes are useful because they help local leaders attract investment to sites that might not otherwise get it. Sometimes the remediation and infrastructure related costs of brownfield sites can be so large that property developers are put off altogether. In these circumstances, there is a clear role for the public sector in helping to prepare land for development.
But in the UK, local leaders lack the financial tools to make these up front investments. The Government needs to come up with a solution. In the run up to this autumn’s Comprehensive Spending Review, Supplementary Business Rates, Roof Taxes and the proposed Planning Gain Supplement are all under consideration. The Government should also be taking a serious look at TIF.
In the United States, TIF schemes are used widely for projects ranging from street lighting and road building to utilities, schools and shopping centres. It’s a popular economic development tool for city leaders trying to kick-start areas in need of regeneration.
Chicago has more than 130 TIF schemes in operation. The Chicago Housing Authority is using a series of TIF programmes to help rebuild or regenerate 25,000 homes and connect isolated communities with employment opportunities across the city. Elsewhere in Chicago, TIF has also been used to decontaminate a large, run down industrial park and prepare it for development.
Overall, TIF schemes in the United States have generated billions of dollars of investment – creating more jobs, more affordable housing and better public spaces.
So why don’t we have TIF here? There are a number of issues. First, in the US, some observers question the way TIF is used. They argue that the use of TIF in prosperous areas is more likely to displace businesses and employment than create new activity.
Second, TIF works well when the economy is strong, but it’s less effective when the economy slows. TIF depends on increases in tax revenue, but what if these increases don’t come? There are plenty of factors that could prevent taxes from rising in a particular city. What happens when TIF investments are made but don’t generate the revenue needed to pay the bill?
Third, and most important, because the tax bases of local authorities in the UK are currently very narrow, the Treasury would either have to devolve greater financial powers to them or underwrite any loans that local leaders were to take out. Both of these options seem unlikely given Gordon Brown’s approach to fiscal management thus far.
These are serious issues, but they’re not insurmountable. Properly regulated TIF - perhaps a pilot in the first instance - would enable local leaders to respond more effectively to the needs of their communities, whilst ensuring that the mechanism delivered good value schemes. Gordon Brown wants to empower local communities and increase house building. The introduction of Tax Increment Financing could help him deliver on both.
