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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.
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:
For more details on the property tax calculations, see the examples at the bottom of this page.
Clarifications:
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 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.
When creating increment areas, local governments are limited to the following:
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).
To create a tax increment area and begin collecting revenues, a local government must follow the procedures set out by state law.
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:
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.
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:
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.
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.
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 local government must publish a notice in a legal newspaper of general circulation within the jurisdiction of the local government that:
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.
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.
| Taxing District/Levy Type | Levy Rate per $1,000 AV |
|---|---|
| City regular levy | $0.88 |
| County current expense levy | $0.95 |
| Conservation futures regular levy | $0.04 |
| Flood district regular levy | $0.10 |
| Fire district regular levy | $1.50 |
| Fire district excess levy | $1.49 |
| Port regular levy (not for G.O. debt) | $0.17 |
| Library district regular levy | $0.44 |
| Local school regular levy | $2.50 |
| Local school excess levy | $2.16 |
| State school levy | $2.93 |
| TOTAL PROPERTY TAX RATE | $13.16 |
| Minus fire excess levy | -$1.49 |
| Minus local school excess levy | -$2.16 |
| Minus state school levy | -$2.93 |
| TAX ALLOCATION RATE | $6.58 |
Important: For simplicity's sake, the local levy rates and the tax allocation rate in our examples will stay the same each year. However, in reality the levy rates for each taxing district may go up or down each year based on changes in assessed valuation, the 101% levy lid limit, voter-approved levy lid lifts, and other factors. As a result, the tax allocation rate will also change every year.
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.
| Property | "Base Value" (2021 AV for 2022 Levy) | City Regular Levy Rate | New Construction | Increment Value | Tax Allocation Rate | City Regular Levy Revenues | Tax Allocation Revenues |
|---|---|---|---|---|---|---|---|
| Parcel A | $100,000,000 | $0.88 | -- | -- | -- | $88,000 | -- |
| Parcel B | $125,000,000 | $0.88 | -- | -- | -- | $110,000 | -- |
| Parcel C | $110,000,000 | $0.88 | -- | -- | -- | $96,800 | -- |
| Parcel D | $6,000,000 | $0.88 | -- | -- | -- | $5,280 | -- |
| Parcel E | $5,700,000 | $0.88 | -- | -- | -- | $5,016 | -- |
| Parcel F | $6,500,000 | $0.88 | -- | -- | -- | $5,720 | -- |
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:
| Property | 2022 AV for 2023 Levy | City Regular Levy Rate | New Construction | Increment Value | Tax Allocation Rate | City Regular Levy Revenues | Tax Allocation Revenues |
|---|---|---|---|---|---|---|---|
| Parcel A | $101,500,000 | $0.88 | -- | -- | -- | $89,320 | -- |
| Parcel B | $127,000,000 | $0.88 | -- | -- | -- | $111,760 | -- |
| Parcel C | $111,650,000 | $0.88 | -- | -- | -- | $98,252 | -- |
| Parcel D | $6,090,000 | $0.88 | -- | $90,000 | $6.58 | $5,280 | $592 |
| Parcel E | $5,780,000 | $0.88 | -- | $80,000 | $6.58 | $5,016 | $526 |
| Parcel F | $6,600,000 | $0.88 | -- | $100,000 | $6.58 | $5,720 | $658 |
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:
| Property | 2023 AV for 2024 Levy | City Regular Levy Rate | New Construction | Increment Value | Tax Allocation Rate | City Regular Levy Revenues | Tax Allocation Revenues |
|---|---|---|---|---|---|---|---|
| Parcel A | $103,000,000 | $0.88 | -- | -- | -- | $90,640 | -- |
| Parcel B | $129,000,000 | $0.88 | -- | -- | -- | $113,520 | -- |
| Parcel C | $113,500,000 | $0.88 | -- | -- | -- | $99,880 | -- |
| Parcel D | $97,000,000 | $0.88 | $90,910,000 | $91,000,000 | $6.58 | $5,280 | $598,780 |
| Parcel E | $5,870,000 | $0.88 | -- | $170,000 | $6.58 | $5,016 | $1,119 |
| Parcel F | $107,000,000 | $0.88 | $100,400,000 | $100,500,000 | $6.58 | $5,720 | $661,290 |
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.
