Tax Credits, Tax Increment Financing & Land Value Capture

In recent years, the federal government has created a series of programs that use tax credits to incentivize investments in low-income communities including, in particular, the New Market Tax Credit (NMTC) Program and the Opportunity Zone Program.^{See footnote 1} Although the programs do not specifically target resiliency measures for these communities, they can support them. “The NMTC Program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs).”^{See footnote 2} These CDEs, in turn, are mandated to fund initiatives in low-income communities, including resilience initiatives.

The Opportunity Zone Program similarly employs tax incentives to promote investments in designated low-income zones (currently more than 8,700 designated census tracts). Investors in these zones gain benefits, from capital gain tax deferral, partial forgiveness of tax on capital gains, and forgiveness of additional gains on investments.^{See footnote 3} The Program was created to drive capital into areas with low-income communities, but concerns that the Program could support projects that are not wanted by, and could even harm, these communities compelled the identification of ‘guardrails’ to ensure that investments respond to community needs. The Kresge Foundation, for example, has detailed a set of underwriting covenants that create a level of transparency, accountability, and disclosure for Opportunity Zone-related measures.^{See footnote 4}

Some states, including, for example, Massachusetts and Maryland, have created state-specific tax credit programs similar to the NMTC. The Dudley Street Neighborhood Initiative, described below, is one example.

Tax Increment Financing & Land Value Capture

“Tax Increment Financing (TIF) is a method of financing a project or development in a designated geographic area based on the anticipated increase in property tax that will be generated by the project.”^{See footnote 5} It can be a source of equitable adaptation financing only to the extent increased property costs are not borne by low-income residents or property owners and improvements do not displace local businesses and residents.

The revenue generated by a TIF is the property tax assessed on the increase in property value of a designated district following a development project, compared to the baseline property value prior to the development project. Tax increment financing originally developed as a means of financing the redevelopment of “blighted” areas, but is now used for a broad range of infrastructure improvements.^{See footnote 6}

Green infrastructure, and other adaptation measures, can be important to TIF development because such measures can increase property values.

Local governments can use tax increment financing for large capital projects (such as green infrastructure installation) or incremental, longer-term spending. A local government could issue municipal or private bonds to raise capital for a large-scale green infrastructure project, and use the TIF revenue to service bond payments. Alternatively, a local government could use TIF revenue incrementally—as the revenue is collected—to pay for smaller-scale green infrastructure projects or, in many jurisdictions, to provide a sustainable revenue source to pay for operations and maintenance of green infrastructure installations.^{See footnote 7}

Land Value Capture

The Land Value Capture (LCV) approach “allows communities to recover and reinvest land value increases resulting from public investment and other government actions.”^{See footnote 8} When, for example, property owners and developers secure financial benefits from government action, such as new roads, subway lines, among other measures, an LCV approach requires these owners and developers to share their windfall. An LCV approach could be used to secure capital for climate-resilient infrastructure — such as bridges and storm walls that provide benefits for developers. In this scenario, the benefitting developers would pay a fee that could, in turn, be used to pay off the bond issued to finance the infrastructure development. To date, however, the LCV approach has not been used significantly for resilience efforts.^{See footnote 9}

Considerations of Tax Credits, Tax Increment Financing and Land Value Capture

Lessons Learned

• Tax credit programs, tax increment financing, and land value capture approaches do not necessarily benefit disadvantaged communities. Efforts should be considered to ensure that they do.
• Similarly, funds from these efforts are not always used to finance climate resilience measures. Commitments to use funds this way should be evaluated before these programs are implemented.