Tax increment financing (TIF) works by freezing the property tax revenues that flow from a designated project area to the city, county, school district, and other taxing entities at the “base level” in the current year. Additional tax revenue in future years (the “increment”) is diverted into a separate pool of money, which can be used either to pay for improvements directly or to pay back bonds issued against the anticipated TIF revenue.
In California, TIF has historically been used by redevelopment agencies to raise funding for infrastructure improvements, land assembly, housing, and other projects in redevelopment areas. However, redevelopment agencies in California were required by state law to dissolve as of February 1, 2012. Unless the state legislature takes further action, TIF can no longer be used in its traditional form to fund new projects (i.e., by redevelopment agencies). However, cities may still be able to use infrastructure finance districts (IFDs), a more limited form of tax increment financing, in some situations.