Local economic development officials face the daunting challenge of attracting new businesses and promoting worthy projects in challenging economic times, when every community in the country is prepared to vigorously compete for any new project. As local economic development officials in Tennessee strive to promote their communities, they try to utilize every possible tool in the economic development toolbox to make their location as attractive as possible. At the local level, however, the breadth of incentives in Tennessee is fairly limited, and the mythical toolbox is not very full.
However, one type of incentive that has become a tool frequently used by local governments in Tennessee to promote economic development is tax increment financing, which is commonly referred to as a “TIF.” While tax increment financing is inherently a broad category, the term generally describes, as to Tennessee, the mechanism by which certain incremental local property tax revenues that are created within a designated area are allocated to a tax increment agency to be used to assist in the payment of costs related to a specified project. The tax increment financing process essentially diverts local property taxes from the coffers of a taxing entity, such as a city or county, to provide support to a specific project.
Because tax increment financing has not been used widely in Tennessee until recently, little has been written about the applicable laws in this area. The goal of this article is to provide an overview, from a legal perspective, of how tax increment financing is undertaken in Tennessee. It is not our goal to argue, from an economic development perspective, whether the use of tax increment financing is wise or wasteful, as that discussion is well beyond the scope of this article. Suffice it to say that use of tax increment financing to support a project frequently generates acute public interest and community discussion, and economic development officials will be well served to understand the legal underpinnings of the TIF process to be able to respond to the inevitable inquiries that arise relating to the utilization of a TIF. This article will hopefully help inform not only legal practitioners in this area, but also provide a resource to local government officials and developers that are considering a tax increment financing.