TIFs were first legislated to municipalities by the state of California in 1952. However, widespread use didn't take hold in the U.S. until the 1970s and 1980s, as local governments were increasingly financially constrained under shrinking project funding from federal and state governments. At the same time, local government officials were confronted with voter backlash from attempts to extract more revenue by raising property taxes. This reaction was so severe in California that it led to the passage of Proposition 13, which effectively capped local property tax increases. Currently, 48 states in the U.S. have adopted TIF policies, though it is most frequently used in California, Illinois, Colorado, Florida, Wisconsin, Minnesota, and Indiana.
The nationwide popularity of TIFs grew out of a number of perceived funding advantages:
First, the "self financing" nature of TIFs makes them more politically palatable for economic development. Since the repayment of the debt does not require any new levies, property owners are not asked to pay more than their normal tax burden. In addition, there is no real loss to the community in using the taxes generated by redevelopment to pay for the financing of the project.
Second, financing is done on a local basis and does not necessarily require any direct subsidy from higher levels of government. This statement, however, is only partially true in the U.S. because many municipalities finance their investment with tax-exempt bonds.33 In effect, tax-exempt bonds represent a Federal subsidy, in which the interest earned by the holders of these debt instruments is not subject to Federal income taxes (and may even be exempt from state and local taxes). As a result, TIF bonds provide substantial interest cost savings to developers.
Third, and perhaps the biggest reason for the widespread use of TIF policy, is that it offers a convenient way for municipalities to skirt around constitutional and statutory debt limitations imposed by the state. And, there's the added perk that tax-supported debt usually does not require voter approval. Unlike traditional general obligation (GO) bonds, tax increment bonds in most states are not subject to municipal debt limits or public referendum requirements. Therefore, local officials have much more discretion to sell TIF securities than they do general obligation securities, which gives them more debt capacity to finance infrastructure improvements.34 As a result, this off balance sheet means of financing opens up a significant amount of capital for projects that may otherwise not have occurred if the municipality was restricted to traditional GO financing.