Tax increment financing. Even the name sounds complicated. Most people’s eyes start to glaze over if it’s mentioned at a meeting.
Tax increment financing – or TIF – is often described as a “tax break” but there’s more to it than that. And yes, it gets a bit complicated. It’s important, however, for people to understand exactly what it is and why it’s used.
In 2018, there were 412 development authorities in Minnesota actively using TIF, according to a report issued last week by the Minnesota Auditor’s Office. Of those, 311 were located in Greater Minnesota and 101 were located in the seven-county metropolitan area. The city of Alexandria has 25 active TIF districts, according to Nicole Fernholz, director of the Alexandria Area Economic Development Commission. Nineteen of them are currently collecting increments.
The report offered some good information about what TIF is – and what it isn’t. It’s well worth knowing while reading stories about TIF or when the topic is brought up at public meetings. Here’s the information, straight from the auditor’s office:
What TIF is
Tax increment financing is a financing tool established by the Legislature to support local economic development, redevelopment, and housing development. As its name suggests, TIF enables development authorities to finance development activities using the incremental property taxes, or “tax increments,” generated by the increased taxable value of the new development.
What TIF is not
TIF is not a tax reduction; taxes are paid on the full taxable value. The original taxable value continues to be part of the tax base that supports the tax levies of the city, county, school district, and other taxing jurisdictions.
How TIF works
The new value from development activity is “captured” from the tax base, and the taxes paid on the captured value are tax increments reserved for financing qualifying costs that make the new development possible.
The capture of tax increments occurs within TIF districts comprised of the parcels on which development activity occurs. In order for a municipality to finance development with TIF, it must find that the development would not otherwise be expected to occur without the use of TIF.
The expenditures that qualify to be paid from this tax increment depend on the type of development activity taking place, the type of TIF district created, and the year in which the TIF district was created.
Examples of TIF
Examples of qualifying costs include: land and building acquisition, demolition of structurally substandard buildings, removal of hazardous substances, site preparation, installation of utilities, and road improvements.
A TIF district is created by a development authority and subject to the approval of the municipality if the authority is not the municipality. An authority can be a city, an entity created by a city, or an entity created by a county.
How TIF ends
TIF districts are terminated, or decertified, when they reach the earliest of the following times: (1) the applicable maximum duration limit provided in the TIF Act for each type of TIF district; (2) a shorter duration limit established by the authority in the TIF plan; (3) upon defeasing, paying, or setting aside sufficient increment to pay all in-district obligations; (4) upon written request by the authority to the county auditor to decertify the district.
Decertification ends the collection of increment, but many districts remain active and continue to report until all remaining tax increment revenues have been expended or returned to the county auditor.