Tax incremental financing in Scotland: a new tool for regeneration

Tax incremental financing (TIF) is a way of allowing local authorities to fund regeneration projects. In a TIF arrangement, the money will be borrowed against a predicted increase in locally-collected business taxes anticipated by the new development being created. TIF schemes have been successfully used in the US and elsewhere over the past 50 years to encourage investment.

The City of Edinburgh Council was the first local authority in the UK to propose using this new financing method. The Council's plan to use TIF in the £84 million regeneration of Edinburgh's waterfront was backed by the Scottish Government in September 2010. Other councils, with the help of the Scottish Futures Trust, soon followed with proposals for their own TIF schemes. The Glasgow Buchanan Quarter scheme now looks favourite to proceed first.

Devolved tax-raising powers have meant that TIF has been easier to progress in Scotland than in other parts of the UK. For more information on how TIF will be extended to councils in England and Wales, see our separate Out-Law Guide.

How does tax incremental financing work?

TIF allows a local authority, with or without a private sector partner, to borrow money for specific infrastructure projects. The idea is that the new project will attract new businesses to an area, which will result in additional tax revenue such as non-domestic rates. The local authority is able to set aside this anticipated incremental tax income and use that to repay the loan. In this way, TIF provides a means of both forward-funding and kick-starting regeneration in a specific area.

What are the risks?

The two main anticipated risks of TIF are:

• does such a scheme in fact create new investment in a local area, or does it simply displace it from elsewhere?
• what if growth in tax revenue from the area does not meet forecasts?

This second point is of particular concern, as this could lead to funds being diverted from other municipal projects. Ultimately, the taxpayer would have to underwrite any shortfall and so would be saddled with repaying the debt through increased rates and council tax.

The future of tax incremental financing

TIF can be a useful tool for local authorities, giving them the means to deliver infrastructure that both enables and gives rise to economic growth. However, its application does require careful consideration and the rigorous testing of any business case for using TIF will be crucial.