Abstract
Tax increment financing (TIF) is one of public financing practices in which future tax revenues of the designated district or any license is sold or assigned to a third party, in exchange for a cash payment. TIF is mostly used by local governments/municipalities to combat fiscal constraints and upgrade urban settings and local infrastructures. Various TIF methods have been used around the world, particularly in the USA for over 60 years. Similar but different version of alternative instruments have been employed as a traditional public financing/banking method, namely esham and iltizam systems, by the Ottoman Empire. In this study, we develop a benchmark model for P-TIF model by combining TIF and participation based financing method. This model offers a participative contract between lender and borrower. In return for reduced interest rate, P-TIF promises lenders to a part of excess payoff from tax earnings. P- TIF can also be applied within the Islamic finance thanks to the model it is based on. Finally, implications and fields of application are explored with a discussion of challenges.
Highlights
In the current world, after the start of the modern era, the transformations led by industrialization have had some significant effects on various phenomena in the economy
Concluding remarks tax increment financing (TIF) is a public finance instrument in which future tax revenues of the renovated district are sold or assigned to a third party in exchange for a cash payment to cover the cost of designation
Various modern implications of TIF practices have been widely observed in developed countries such as the USA and Canada, its different versions have been used as a traditional borrowing method by the Ottoman Empire and in many European countries as well
Summary
After the start of the modern era, the transformations led by industrialization have had some significant effects on various phenomena in the economy. TIF is one of public finance practices for economic development used by local governments and municipalities to finance new development and renovation projects in tax increment districts (TIDs). This study proposes participation-based tax increment financing (P-TIF) as a viable solution for local governments to cater for the needs of community development in both emerging and Muslim countries. Under the P-TIF financing method, a benchmark model is established with the benefit of stochastic modelling This model offers a participation-based contract between the lender and the borrower in a given TID. In relation to alternative financing methods for local development projects, Hummel and Goud (2017) investigated the esham-ijarah structure (a revenue-sharing arrangement based on the esham structure combined with ijarah sÁukūk), a type of Islamic borrowing product, in the USA.
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