Among the alphabet soup acronyms of government-speak is one that represents a tool many communities have come to rely on to create economic development. It’s called TIF, short for tax increment financing.
Hoping to jumpstart the state’s construction industry, the so-called omnibus jobs law expands the use of TIF so that local projects, languishing on the shelf because of the poor economy, can get going by July 1, 2011.
Another provision of the new law may be more high profile – establishment of an angel investment tax credit – but some House Taxes Committee members think the TIF expansion, and help to retain the St. Paul Ford Motor Company plant, could have a long-term greater impact on job retention and creation.
“As I see it, the real job production is the expansive emergency use of TIF that will help the building trades … and the CARZ zone … those are the ones that, I think, will produce the jobs out of this,” said Rep. Joe Mullery (DFL-Mpls).
A TIF primer
For those unfamiliar with TIF, a quick primer may be in order.
Using TIF, a local government can create a specific district in which property tax values are essentially frozen. Based on the physical condition of the site and the type of construction to occur, TIF districts can be classified for redevelopment, economic development, housing, renewal and renovation, or soils reclamation. However, most TIF districts need to address some sort of blight. The type of district created dictates the timeline until it sunsets and when the tax advantage goes away.
Taxes generated by the increase in property value over the frozen amount, known as the increment, are put toward economic development, usually improvements directly beneficial to the project such as land acquisition, streets, sewer, water or parking facilities. In essence, the local authority is betting that if a piece of property is redeveloped, its value will increase and in turn, so will the property taxes generated from the improvements.
According to the nonpartisan House Research Department, one of three financing techniques is used by local authorities to fund these upfront costs:
• bonds are issued and the increment is used to pay the bonds back;
• interfund loans are used, where the authority advances money from its own funds and the increments are used to reimburse the borrowed money; or
• the developer pays the upfront costs and the increments are used to reimburse the developer.
Although TIF districts are established locally, any deviation from state law regarding how it is used must get legislative approval. That’s because redirected property tax revenue directly impacts the other local taxing authorities – namely the county and local school district.
TIF expansion
The new law, with various effective dates, makes several changes to TIF usage, most notably for the City of Bloomington to coax a phased-in expansion of the Mall of America, which is in the district represented by Rep. Ann Lenczewski (DFL-Bloomington), chairwoman of the House Taxes Committee, and sponsor of the law along with Sen. Tom Bakk (DFL-Cook).
But don’t read too much into her support of TIF in this legislation. Generally, Lenczewski isn’t a fan of the tool.
“It’s been a bill with a lot of compromise,” she said during the April 1 law signing. “My goal was to get a bill that the governor would sign, an early bill to get people back to work and no conference committee.”
Lenczewski said there are about 2,200 TIF districts across the state, and that it is a form of property tax that lacks transparency.
“That’s the core of the problem of TIF for me,” she said. “We don’t see these property tax subsidies that are going to things.”
She said TIF is a “good deal” for cities because they get a “discounted new amenity paid for not only by the city tax base, but the county tax base.” Her bottom line question is, “Should we be doing more things to basically subsidize private development as opposed to public development?”
Besides Bloomington, the new law addresses TIF district modifications for Oakdale, North Mankato and Cohasset.
But they are not alone with their requests. Each session a string of cities comes forward asking for TIF changes. Seven communities were before the House Taxes Committee April 7 with their requests.
Under the new law, the need for a legislative OK won’t change, but municipalities will see more opportunities to use TIF, especially for projects that will create new jobs and those that might help with “Main Street” redevelopment.
A new type of district is authorized in the law – compact development TIF districts.
Under the new definition, 70 percent of the area in the district must be occupied by structures classed as 3a commercial-industrial, and the planned redevelopment must at least triple the square footage of class 3a buildings. The blight condition does not necessarily apply, but the project should be transit-friendly. The authority for creating this type of district ends June 30, 2012. Increments from these districts may be used to pay administrative expenses, land acquisition costs, demolition and preparation costs, and public improvement costs.
Additionally, several provisions for economic development TIF districts are modified in the law. Tax increments from economic development districts may be used to provide assistance to projects deemed to create or retain jobs. Construction must begin no later than July 1, 2011. Equity investments may also be made in corporations, partnerships or limited liability companies. Municipal approval is required. Authority to spend increments under this provision expires Dec. 31, 2011.
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