What Happened?
California recently passed a law designed to help local governments generate revenue for vital infrastructure projects in light of constrained state and federal funding opportunities. The law encourages municipalities to implement tax increment financing practices to fuel much-needed projects at the local level.
Goal
California’s S.B. 628 law makes it easier for municipalities to deploy tax increment financing campaigns to pay for road, transit, water, sewer and other key infrastructure projects. Tax increment financing practices generate revenue for municipalities based on anticipated increases in property value and taxes in areas where infrastructure upgrades and improvements are completed. Once the infrastructure construction is complete, new developments will blossom and property values will rise.
Tax increment financing (TIF) depends heavily on private investment in developments around infrastructure to generate revenue. Under the new law, tax increment bonding will allow local governments to project new property tax revenues looking decades in the future. The California law broadens the spectrum of infrastructure projects eligible to receive funding through tax increment financing campaigns to make it easier for city to accomplish initiatives despite limited capital resources, GovExec reported.
Furthermore, S.B. 628 lowers the voter approval threshold required to both create a tax incrementing district as well as authorize bond issuing. The new law permits:
- Establishing tax incrementing districts without a vote
- Creating bonding authority with just 55 percent of ownership approval, down from 67 percent
- Calculating increases in property values based on projections for 45 years in the future
In addition, funds can be used inside and outside the established financing district to encompass a wider variety of projects within the municipality.
Infrastructure On The Mind
The IMF’s World Economic Outlook recently published a study discussing the global need for increased public investment in infrastructure projects. Many advanced economies worldwide are currently in a low growth and high unemployment state, borrowing costs are low. To continually fuel growth, the IMF recommends funneling more public funds into infrastructure projects now when demand is high.
According to the study, paying for public infrastructure projects will boost demand and raise output immediately, while strengthening the local economy’s productive capacity in the long term. An increase of just 1 percentage point of GDP in investment could increase economic output by 0.4 percent within a year, and by 1.5 percent after four years. If the investment is completed correctly, the boost to GDP would offset any accumulated debt, thus the project would pay for itself, the IMF reported.
The IMF explains that public investment in infrastructure offers the highest short-term boost to output during a period of economic slack and low interest rates. The long-term pay out of public investments in infrastructure are further strengthened when governments involved have processes to efficiently utilize all available funding across several projects with high rates of return. Furthermore, data suggests more sustainable growth is experienced when governments do not cut spending on other projects when investing in infrastructure.
Leveraging the TIF
Gov1 has followed tax incrementing financing practices to spur redevelopment projects, as well as other efforts to fuel growth.