Background: Tax Increment Financing (TIF). Traditional TIF financing taps increased property taxes generated by private development, and applies those taxes to pay bonds issued to finance the public infrastructure supporting the development. A particular TIF district will be located within various overlapping taxing districts, and the TIF mechanism captures the increased property taxes of all of the overlapping taxing districts.

Traditional TIF financing has been held unconstitutional under Washington law. In Leonard v. Spokane, the court held that a 1982 TIF statute violated Article IX, Section 2, of the state Constitution, which requires that the entire revenue derived from the common school fund and the state tax for common schools shall be exclusively applied to the support of the common schools. The 1982 TIF statute permitted the formation of TIF districts in which incremental property taxes, including the state property tax, could be applied to pay for public infrastructure. The court found the diversion of state property tax to be inconsistent with Article IX, Section 2.

The Legislature has since authorized TIF-lite districts that capture only increases in local property taxes. Additionally, TIF-lite districts must also work within the constitutional and statutory constraints on property taxes, including Washington's statutory 101 percent limitation on annual increases in property taxes. One exception to this limitation is for increased property taxes resulting from new construction or improvements. Accordingly, taxing districts generally can capture only the full increase in property taxes from new construction and improvements, and not the full increase in property taxes resulting from appreciation in property values within the TIF-lite district.

TIF-lite programs, such as the Local Infrastructure Financing Tool Program, the hospital benefit zone statute, and the Local Revitalization Financing Program also capture excise taxes in addition to the capped local property taxes. Increased state excise taxes are contributed in the form of a state sales tax credit. The state sales tax credit is applied through imposition of an increase in the local sales tax rate. The increased local sales tax is credited against the sales tax that would otherwise go to the state—resulting in no net increase in the tax rate paid by taxpayers.

Summary of Bill: The Building Business Ecosystems Program is created and made available to local governments for financing local public improvement projects intended to encourage economic development or redevelopment. As part of the program, a sponsoring local government—a city, town, or county—creates a business ecosystems area from which annual increases in revenues from local sales and use taxes and local property taxes are measured. Such increases in revenues and any additional funds from other local public sources are then used to pay for public improvements in the business ecosystems area and are also used to match a state contribution.

State funding for the program is provided through a credit against the state sales and use tax. The maximum state contribution that a sponsoring local government can receive each year is limited to the lesser of:

$500,000;
the amount of the project award; or
the total amount of revenues, from local public sources dedicated or, in the case of carry forward revenues, deemed dedicated in the preceding calendar year, as reported in the required annual report.

The state sales tax may be used towards the payment of bonds issued to finance public improvements in the business ecosystems area or to pay public improvement costs on a pay-as-you-go basis, or both. State sales taxes cannot be retained by a sponsoring local government for the program for more than 30 years.

Project awards must be determined through a competitive process. In evaluating applications for a project award, the Department of Commerce must develop the relative weight to be assigned to the following criteria:

the project's potential to enhance the sponsoring local government's regional or international competitiveness;
the project's ability to encourage mixed use or transit-oriented development and the redevelopment of a geographic area;
achieving an overall distribution of projects statewide that reflect geographic diversity;
the estimated wages and benefits for the project are greater than the average labor market area;
the estimated state and local net employment change over the life of the project;
the current economic health and vitality of the proposed business ecosystems area and the contiguous community and the estimated impact of the proposed project on the proposed business ecosystems area and contiguous community;
the estimated state and local net property tax change over the life of the project;
the estimated state and local sales and use tax increase over the life of the project; and
if a project is located within an urban growth area, evidence that the project utilizes existing urban infrastructure and that the transportation needs of the project will be adequately met through the use of dedicated building business ecosystems financing or other sources.

The maximum statewide contribution for all of the projects is initially capped at $5 million per year. During the fiscal years beginning July 1, 2021, through June 30, 2024, and for each subsequent fiscal year, the statewide limit may be increased as follows:

in the fiscal year beginning July 1, 2021, the statewide limit must be increased by the same percentage as the percentage increase in the assessed value of all taxable property within the state from calendar year 2018 through calendar year 2019;
in the fiscal year beginning July 1, 2022, the statewide limit must be increased by the same percentage as the percentage increase in the assessed value of all taxable property within this state from calendar year 2018 through calendar year 2020; and
in the fiscal year beginning July 1, 2023, and for each subsequent fiscal year, the statewide limit must be increased by the same percentage increase in the assessed value of all taxable property within the state from calendar year 2018 through calendar year 2021.

Staff Summary of Public Testimony: PRO: A similar program was an economic boon for the Tri-Cities, and it would be great to bring it back. This previous success, occurring under local revitalization financing (LRF), brought in $493 million in private sector investment in Richland and enabled the creation and support of nearly 5000 family wage jobs. LRF also provided educational opportunities, with the establishment of the Washington State University Wine Science Center. Without this type of program, there are not a lot of tools to help communities in this regard.

When municipalities are given resources to develop and grow, it comes with apprenticeship opportunities for young folks to gain the skills and experience to break into middle-class lifestyles. These types of programs are critical for installing broadband infrastructure as well. Finally, it is a low risk tool for the state. LRF generated roughly $360 million in state reported benefits in 2016 alone.