Tax incremental financing (TIF) is one of the pillars of Governor Ed Rendell's economic development package for Pennsylvania. The governor's proposed TIF Loan Guarantee Fund would enable communities to issue bonds through the Pennsylvania Economic Development Financing Agency for construction projects that re-use old sites and create new jobs. The communities would repay the bonds with the new tax revenues that the projects ultimately generate.

The fund would, first, provide communities with technical expertise to help with the complicated process of establishing TIF districts in which development can take place and, second, offer state loan guarantees of up to $5 million per project.

According to David Carver, executive director of the Harrisburg-based Pennsylvania Economic Development Association, tax incremental financing has been used effectively in up to 30 redevelopment projects in larger cities around the state since its introduction as a funding vehicle in 1996. "I can't think of a project that hasn't been effective in inducing further development," he says.

But despite that success, the extent to which TIF may be utilized in the future is still up in the air, due to a 2002 decision by the Pennsylvania Supreme Court.

In a case involving the use of tax incremental financing in connection with construction of a new office building for the Penn National Insurance Company in Harrisburg, the Supreme Court affirmed a Commonwealth Court ruling that such financing made the project a "public work" and thus required the payment of the prevailing wage under the state's Prevailing Wage Act. The litigation was initiated by the Pennsylvania State Building and Construction Trades Council, AFL-CIO, and the Central Pennsylvania Building Trades Council.

Carver says the decision left a "specter" hanging over the TIF approach to development. If tax incremental financing triggers the prevailing wage, he explains, the cost of a project can increase "substantially"-by as much as 20 to 30 percent. And if this is true for tax incremental financing, he adds, it's likely to hold true as well for financing through the PA Business in Our Sites Fund.

The best solution, Carver believes, is legislation to create a "firewall" so the involvement of public money doesn't trigger the application of the prevailing wage for the private-sector investment in a project. He contends this issue "has to be resolved if you're going to use TIFs" in Pennsylvania. Otherwise, he argues, "you're not going to have a lot of development" utilizing the TIF fund and Pennsylvania will wind up being "at a disadvantage" in trying to compete with other states. Carver says legislation is pending but has not yet been introduced.