Governement allows Tax Increment Funding for Infrastructure Projects
On 20th September 2010, the Deputy Prime Minister, Nick Clegg announced that the Coalition would allow local authorities to use Tax Increment Financing [TIF] in order to finance infrastruture projects. This would be implemented by the Local Government Finance Bill 2010 Р12 which is currently awaiting report stage in the House of Commons
TIF is being considered as a method of financing major retrofitting projects such as that proposed by Professor Andy Gouldson in his ‘mini stern’ report for the Leeds City Region, which calls for investment of £5 billion, repaying £1 billion per annum, creating jobs and implementing carbon reduction on an ‘industrial’ scale.
TIF has been used in the USA for approximately 40 yeras and has generally been seen as a success. It is also being developed in Scotland. It works by allowing local authorities to borrow money for infrastructure projects against the anticipated increase in business rates income expected as a result of the project.
The Core Cites Group which campaigned for TIF’s published a ‘Rough Gide’ to TIF’s in conjunction with the British Property Federation in 2010 that noted that,
‘a Lead agency, a local authority, private sector partner or some combination, raises money upfront to pay for infrastructure, on the basis that the increased business rate revenues generated by the scheme can be used to repay that initial investment.
The Treasury may enjoy the wider fiscal benefits of the scheme, higher stamp duty revenues resulting from rising property values, higher income and corporate tax revenues due to more economic activity and lower health security and benefits costs as the community enjoys the social benefits of regeneration.
The full increased revenue from business rates in the designated area will also be available to the Treasury after the funding cost for the infrastructure project has been paid off. It’s a neat solution where the risks can be clearly allocated to the lead agency or the private sector partner and controlled’
The Government ran a consultation on the proposal until 24th October 2011 and the response was published on 19th December 2011. This suggested two options for the implementation of TIF.
Option 1 This would see local authorities able to borrow against their income within the business rate retention scheme.
Option 2 would allow a limited number of TIF schemes to be permitted in which the business rates growth would not be subject to the levy or reset for a defined period of time.
Although most respondents favoured Option 1, many felt that this would not deliver business rate funded TIF for large scale developments, only for small scale projects that can be completed and borrowing repaid within the reset period.
The Government therefore decided to go ahead with both options in the Local Government and Finance Bill for 2010 -12. Further details of how the government intents to manage the process of limiting the number of Option 2 schemes, along side a technical document is promised.
In the 2010 – 12 Finance Bill, Option 1 is provided for by simply providing local authorites to retain an element of their business rate income. Option 2 is provided for in para 37 of Schedule 1 of the Bill. This would create additional funding by allowing the Secretary of State to designate an area which would not be subject to future levies and resets, thereby creating an area which is in effect outside the retention of business rate system. This should bring a steady and consistent future income stream and additional headroom against which the local authority could borrow.
The Bill permits the Secretary of State to issue regulations to designate the TIF area including issuing a map and calculations relevant to the likely future income stream available to that area. TIF has not been introduced in Wales, although there have been calls from Welsh Liberal Democrats to do so.
Any borrowing undertane by local authorities would have to meet the requirements of the Prudential Code, developed by the Chartered Insitute of Public Finance and Accountancy [CIPFA], which aims that capital investment plans of local authorites are affordable, prudent and sustainable.
The New Local Government Network proposed an alternative in its report ‘The Devil in the detail, designing the right incentives for local economic growth‘ as they believe that both options will restrict TIF schemes going ahead, even where there may be a sound business case. They prefer exempting business rate growth from the reset process for a defined period ( say 25 years).
The 2012 Budget promised additional investment towards TIF projects, including making £150 m available from 2013 – 14 for large scale projects in core cities by means of a competition. At the same time a city deal for Manchester was announced with a TIF variation known as ‘earn back’ in relation to a £1.2 billion transport infrastructure project.
Source, Parliament briefing papers published 24th April 2012 Standard notes SN05797
Originally posted 2012-05-05 00:00:00.
