With at least two current development proposals (Gladstone Tourist Cabin site and the Gethsemane Lutheran/Presbyterian Homes senior and affordable housing proposal, Tax Increment Financing (TIF) decisions are playing a central role in the regulatory process. As residents, we need to understand TIF in order to participate.
Maplewood Voices will use this article to work on expanding our understanding of TIF. Starting with these basics and a list of resources, we will flesh out the article as the debate develops.
Stephan, 2/15/07
What is Tax Increment Financing (TIF)?
Let's say your house generates $1000 per year of property tax. If you remodelled and the house was reassessed, you learn the property tax bill will go up to $1600 per year. If you could talk the city into giving you a 20 year TIF deal to do this, every year for the next 20 years you would keep the extra $600 that you would have paid in increased property taxes. You then use this money to make payments on the second mortgage you will need to take out to finance the remodelling.
Why would a city do this?
In our example, the city wants the $600 starting in the 21st year. Even more important, your home improvements might raise the values of all the homes around you, along with their property taxes. The city gets those increased property taxes right away, along with the other benefits of having a nicer neighborhood. You might wonder whether all of your neighbors will welcome this tax increase.
Two general reasons
A city might want more of a particular kind of development, say affordable housing, somewhere in its boundaries. In this case it might use TIF to induce or assist a developer to carry out a project even though the actual site of the project may not need any special attention.
In other cases, a city might predict that the future of a particular site within its boundaries might be bleak unless something is done to alter the conditions at that particular site. Whatever is required to alter the site, say handling storm water, may be too expensive for a developer to accomplish and still have a project make financial sense. In this case, TIF might be used to alleviate that cost so that the entire area (and city) benefits from development on the questionable site.
Looking at some particular site available for development, there are three possible futures:
When TIF is used, the city is essentially assessing the future and betting the city will be best off if the publicly assisted project occurs. 'Best off' would mean some desired mixture of tax revenues, property values in the developed area, property values surrounding the developed area, and quality of life in the city.
Is TIF a subsidy?
Public money is used to finance private development. But at least in theory it is public money that would not exist in the absence of the financed development.
An important aspect is the specific and one-time nature of the TIF public expenditure. With some public subsidies, say bus service, the amount of the subsidy is more or less infinite and partially outside the control of the financing agency. Every time a rider gets on a bus, the amount spent on the subsidy goes up.
In contrast, a specific amount of TIF money is granted once to a specific developer for a specific project for a specific purpose. So, the amount of the TIF subsidy is entirely controlled by the granting agency. In addition, with pay-as-you-go TIF, the risk that the projected tax increment actually comes about is born by the developer, not the financing agency.
The devil is in the details
In practice TIF is fairly complicated. Since it 'captures' all of the property tax increase, the other governing bodies that rely on property taxes - the county and the school district(s) - are affected but have less to say in the matter than does the municipality. The state not only has the authorizing legislation for the whole idea, but carefully watches and regulates its use through the State Auditor. The uses to which TIF money can be put are tightly restricted. The actual authorization relies on meeting the 'but-for' test, which in essence says this development cannot happen 'but for' the use of public money. There are a variety of paths the actual money might follow, including bonding, pay as you go, and others with different effects on the city's risk, as well as the developers. We will try to work out these details and more as we go along.
Resources
This is a starting list of resources we can use to learn more about TIF as we need to.
HOUSE RESEARCH:Short Subjects: Tax Increment Financing (small PDF)
Tax increment financing (TIF) uses the increased property taxes that a new real estate development generates to finance costs of the development. In Minnesota, TIF is used for two basic purposes:
- To induce or cause a development or redevelopment that otherwise would not occur—e.g., to convince a developer to build an office building, retail, industrial, or housing development that otherwise would not be constructed. To do so, the increased property taxes are used to pay for costs (e.g., land acquisition or site preparation) that the developer would normally pay.
- To finance public infrastructure (streets, sewer, water, or parking facilities) that are related to the development. In some cases, the developer would be required to pay for this infrastructure through special assessments or other charges. In other cases, all taxpayers would pay through general city taxes.
Mn State House of Representatives - House Research - Main web page on Tax Increment Financing
State Auditor's TIF Report Index page
State Auditor's 2005 Tax Increment Financing Legislative Report