The Scottish Government today announced a further three projects that will be developed using the Tax Incremental Financing (TIF) model. This is a mechanism whereby future non-domestic rates (business rates) that arise as a consequence of the TIF financed development (being a new road, pier etc.) is used to pay back the initial capital that is borrowed by the public authority. The Scottish Government explain the background to the Pilot Scheme here.
The first TIF scheme in Scotland was approved for the Leith docks and I wrote a critique of the proposal at the time (one of the interesting aspects of the Leith scheme is that the Scottish Government themselves will face increased business rate bills because their Victoria Quay Offices incur Â£1.6 million in business rates each year!
My principal objection to TIF is that the burden of paying back the loan falls on new businesses that are established within the TIF “red line” zone when the logic of TIF is that ALL land values will rise universally within and (to an extent) outwith the zone. This uplift is not captured by the local authority and provides a windfall to landowners on the back of public investment. Existing businesses within the area will also face increased business rates (such as Victoria Quay mentioned above).
TIF is a useful mechanism for generating investment but it exploits the fact that businesses pay disproportionate sums of money in tax to local authorities when other landowners pay nothing. The goal of tax reform should be to spread the burden of any tax on land and property evenly among all who benefit. That can only happen if a universal land tax is adopted.