Tax Increment Financing (TIF)

Overview

Tax increment financing (TIF) is a financing tool that local governments in Washington State – defined as cities, towns, counties, port districts, or any combination thereof – can use to fund public infrastructure in targeted areas to encourage private development and investment (chapter 39.114 RCW).

A local government wishing to utilize TIF will designate an "increment area” surrounding the site of the public improvements. The property tax portion of increases in assessed value of properties within the increment area is allocated towards paying for the public improvement costs.

Allocation of Property Taxes

Regular property tax levies are generally limited to an annual maximum growth rate of one percent plus new construction (see RCW 84.55.005-.0101).

With TIF, each property within an increment area has a "base value" that is fixed at the time the tax increment area takes effect. Each local taxing district (city, county, fire district, etc.) continues to receive revenues calculated on this base value.

However, any future increases in the assessed value of the property (the "increment value") are taxed at the levy rates for all taxing districts (with limited exceptions) in the increment area, referred to as the "tax allocation rate." This portion of the property tax is received by the local government which created the increment area to pay for the public improvements.

The increment area takes effect on June 1, but the tax allocation revenues will not be collected until the following calendar year. (In Washington's property tax system, a property's value is assessed one year – the "assessment year" – but the taxes based on that assessment are not collected until the following year – the "tax year.")

The tax allocation rate includes all "regular property taxes" as defined in RCW 39.114.010(8) and RCW 84.04.140, including those that are subject to the $5.90 aggregate limitation in RCW 84.52.043 and/or the constitutional 1% aggregate limit codified at RCW 84.52.050, with just a few exceptions. The only property tax levies that are excluded from TIF are:

• The state school levy;
• Regular property taxes levied by port districts or public utility districts to the extent necessary to repay general obligation bonds; and
• Excess levies, including school district excess levies, excess operations and maintenance levies for any taxing district, and any excess levies for the repayment of general obligation bonds.

For more details on the property tax calculations, see the examples at the bottom of this page.

Authorized Public Improvements

The tax allocation revenues may be used to pay for a wide variety of “public improvement costs,” as defined in RCW 39.114.010(6) and (7). The TIF ordinance must identify the specific public improvements to be financed, as well as whether the local government intends to issue bonds or other obligations payable in whole or in part from the TIF revenues.

The local government must make a finding that:

• The proposed public improvements are expected to encourage private development and increase assessed valuations within the increment area;
• The private development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future without the proposed public improvements;
• The expected assessed value within the increment area without the proposed public improvements would be less than the expected assessed value with the public improvements; and
• The anticipated private development within the increment area is allowed under the permitting jurisdiction's zoning and development standards.

The public improvements may be located inside or outside the tax increment area, but they must be necessary for the ensuing private development within the increment area. The public improvements may be undertaken and coordinated with other programs undertaken by the local government or other taxing districts, and they may be funded in part from revenue sources other than tax allocation revenues.

Public improvement costs also include various administrative costs, including costs that may have been incurred before the adoption of the TIF ordinance, as well as expenses incurred by the county assessor and county treasurer (and reimbursed by the local government) for revaluing the properties and apportioning the property taxes.

After the ordinance is adopted, the local government may not add any additional public improvements to the project unless it is necessary to assure the originally approved improvements can be constructed or operated.

Limitations on Increment Areas

When creating increment areas, local governments are limited to the following:

• The local government can have up to two active increment areas which cannot overlap.
• The assessed value of an increment area cannot exceed $200 million or 20% of the sponsoring jurisdiction's total assessed value, whichever is less, when the ordinance is passed. If the jurisdiction creates two increment areas, the total combined assessed valuation cannot exceed $200 million or 20% of the jurisdiction's assessed value, whichever is less, when the ordinances are passed.
• The sunset date for the increment area is up to a maximum of 25 years from the first year the allocation revenues are collected.

If the TIF revenues exceed the amount necessary to finance the public improvements, the excess revenues must be allocated back to the other taxing districts within the increment area in proportion to their regular property tax rates for collection that year. The apportionment of tax allocation revenues must cease when the city, county, or port district certifies to the county assessor in writing that the revenues are no longer necessary or obligated to pay public improvement costs (not to exceed the original sunset date).

Creating a Tax Increment Area

To create a tax increment area and begin collecting revenues, a local government must follow the procedures set out by state law.

Prepare a Project Analysis

When considering whether to create an increment area, the local government must prepare a project analysis (RCW 39.114.020)(2) that includes the following elements at a minimum:

• Objectives of the local government for the increment area
• Property that the local government may wish to acquire within the increment area
• The duration of the increment area (maximum of 25 years)
• Identification of the parcels to be included in the increment area
• A description of the expected private development within the increment area, including comparisons with and without the proposed public improvements
• A description of the public improvements, the costs of the improvements, and the amount of financing instruments expected to be issued and paid with the tax allocation revenues
• The assessed values of the properties in the increment area and an estimate of the increment value and expected revenues to be generated from the tax allocation
• An estimate of the job creation and private development reasonably expected to occur from the public improvements
• An assessment of any impacts and any necessary mitigation needed to address:
  • Affordable and low-income housing
  • The local business community
  • The local school districts and fire service

If a private developer agrees to participate in creating the increment area, the local government may charge the developer a fee sufficient to cover the cost of the project analysis and establishing the increment area, including staff time, professionals and consultants, and other administrative costs.

If the project analysis indicates that an increment area will impact at least 20% of the assessed value in a fire protection district or regional fire protection service authority, or the fire service agency’s annual report demonstrates an increase in the level of service directly related to the increment area, the local government must negotiate a mitigation plan with the fire service agency to address level of service issues in the increment area.

A local government may also enter into an interlocal agreement with another local government for the administration or other activities related to the tax increment area.

Hold at Least Two Public Briefings

Local governments wishing to create increment areas must hold at least two public briefings for the community that are solely on the tax increment project (RCW 39.114.020(7)).  The public briefings must include the following elements:

• A description of the increment area
• The public improvements proposed to be financed with tax allocation revenues
• A detailed estimate of tax revenues for the participating local governments and taxing districts, including amounts allocated to the public improvements

The local government must publish an announcement two weeks prior to each public briefing in a legal newspaper of general circulation as well as post the announcement on the local government’s website and social media accounts.

Submit Copy of Project Analysis to State Treasurer

Local governments must submit a copy of the project analysis for the proposed increment area to the State Treasurer’s Office for its review.  Within 90 days of receiving the project analysis, the State Treasurer’s Office must submit its review of the project analysis to the local government. The review should include any revisions or enhancements deemed appropriate based on the requirements of the law.

The local government must consider any comments that the State Treasurer’s Office provides.

Adopt Ordinance Creating Increment Area

Following receipt and consideration of the comments from the State Treasurer’s Office, the local government must adopt the ordinance establishing the increment area. The ordinance must contain the following (RCW 39.114.020(1)):

• The boundaries of the increment area
• The sunset date for the increment area (up to 25 years)
• Identification of the public improvements to be financed and whether the local government intends to issues bonds or other financing payable in whole or in part from the tax allocation revenues, and an estimation of the maximum obligations to be issued
• A provision that the increment takes effect on June 1 following adoption of the ordinance
• A deadline by which construction of the public improvements will begin, with the deadline being at least five years in the future with extensions allowed for good cause

The local government must publish a notice in a legal newspaper of general circulation within the jurisdiction of the local government that:

• Describes the public improvements,
• Describes the boundaries of the increment area, and
• Identifies the location and times where the ordinance and other public information concerning the public improvement may be inspected.

The notice must be published at least two weeks prior to the date on which the ordinance creating the increment area is adopted. Additionally, a certified copy of the ordinance must be delivered to the county treasurer, county assessor, and each taxing district within the increment area within 10 days of the date on which the ordinance was adopted.

Examples of TIF Property Tax Calculations

The following tables provide a simplistic example of tax allocation for a tax increment area. You can also refer to the DOR Special Notice Regarding Tax Increment Financing.

The first table shows hypothetical property tax levy rates per $1,000 assessed value (AV) for all taxing districts in the increment area. To calculate the “tax allocation rate,” add up all of the levy rates except the state school levy, local excess levies, and levies for port districts or public utility districts specifically to make payments for general obligation bonds.

2022 (Increment Area Created)

In the following example, a city created a tax increment area before June 1, 2022. The increment area becomes effective on June 1, 2022 following the adoption of the ordinance. However, tax allocation revenues will not be collected until 2023. (In Washington's property tax system, a property's value is assessed one year – the "assessment year" – but the taxes based on that assessment are not collected until the following year – the "tax year.")

Parcels A, B, and C are located outside the tax increment area, while Parcels D, E, and F (in bold) are located inside the increment area. For Parcels D-F, the January 1, 2021 assessed value (for collection in 2022) becomes the "base value" that will be used to calculate the increment value and levy amounts in future years.

2023

In this example, 2023 is the first year that tax increment revenues will be collected. Property values have increased on all properties compared to the base value, and none of the increases are due to new construction. The increase in the assessed valuation for Parcels D-F (inside the increment area) becomes the "increment value," which is multiplied by the tax allocation rate to generate the tax allocation revenues that will go to the city that created the increment area.

The value of Parcels D-F will increase for purposes of computing the state school levy and local excess/bond levies, but it will remain the same as the previous year for the purposes of computing all other property tax levies.

For instance, the value of Parcel D is calculated as follows:

• $6,090,000 for the state school levy and local fire/school excess levies.
• $6,000,000 (the "base value") for all other levies, including the city's regular levy.
• $90,000 (the assessed value minus the base value) for the tax increment value.

2024

In the second year of the TIF, property values again went up, and the increase in value for Parcels D and F was due to new construction. The value of new construction as well as the increase in assessed value is added to the increment value of those properties.

In this example, the value of Parcel D is calculated as follows:

• $97,000,000 for the state school levy and local fire/school excess levies.
• $6,000,000 (the "base value") for all other levies, including the city's regular levy.
• $91,000,000 (the assessed value and new construction minus the "base value") for the tax increment value.

Examples of TIF Ordinances and Documents

Below are selected examples of tax increment financing ordinances, resolutions, and other documents adopted by local governments in Washington. We will add more documents as they become available.

• Kirkland Ordinance No. O-4846 (2023) – Creating tax increment area to finance streets, parks, and water/sewer infrastructure to enable a mixed-use, transit-oriented, and walkable development near bus rapid transit station; includes project analysis and State Treasurer's review
• Port of Pasco Resolution No. 1569 (2021) – Creating a 150-acre, 25-year tax increment area to finance LTGO bonds to help construct publicly owned infrastructure improvements and enable development of $500 million milk processing facility; includes TIF procedural outline and State Treasurer's review
• Wenatchee Ordinance No. 2023-02 (2023) – Creating tax increment area to finance street grade separation/extensions to improve access to developable property and create opportunities for redevelopment. Includes final staff report, project analysis, and State Treasurer’s review.