Submitted by Sharon Hanson, Marshall City Administrator
Tax Increment Financing (TIF) is one of the few public finance tools available to cities in the State of Minnesota. The use of TIF has been governed by State Law since the late 1970s. The City of Marshall has used TIF as an economic development tool for several decades.
What is TIF?
TIF is a funding technique that takes advantage of the increases in tax capacity and property taxes from development or redevelopment to pay upfront public development or redevelopment costs. The difference in the tax capacity and the tax revenues the property generates after new construction has occurred, compared with the tax capacity and tax revenues it generated before the construction, is the captured value.
The TIF District creates a funding source for the project because the increase in property tax values from the new construction and improvements result in an increase in property taxes paid. The amount of the increase to property taxes paid is referred to as the “tax increment” and is dedicated and paid to the governmental unit each year for a period of years along with general property tax payments.
The governmental unit then uses the tax increment to pay qualifying costs such as land acquisition, site preparation and public infrastructure that it has incurred for the project. The result of a TIF project is an increased tax base that will benefit all local taxing jurisdictions. Additionally, TIF districts usually spur economic development and redevelopment through creating jobs, removing blight, and providing more affordable housing.
TIF involves only the increased property taxes generated within the district. It does not change the amount of property taxes currently derived from the redevelopment area, nor does it directly affect the amount or rate of general ad valorem taxes the city levies.
A developer might approach the applicable governmental unit and request the creation of a new TIF district. Or, a City or EDA may offer TIF to a developer to attract the new development. If the project appears to be a good fit for use of TIF, the governmental unit will undertake the process to create the TIF district pursuant to Minnesota Statutes.
TIF Districts are located within larger geographic areas referred to as development districts or project areas, which have been separately designated by the governmental authority.
Generally when a project is constructed, the costs to acquire land, prepare the site and construct infrastructure are incurred at the onset, whereas the “tax increment” is collected at a later time (annually upon payment of property taxes for the life of the TIF District which can range from 8-25 years).
Does the governmental unit or the developer incur the upfront costs? One option is for the developer to finance the costs up front with its own funds and the tax increment is used to reimburse the developer as the tax increment is collected (“pay-as-you-go” financing).
A governmental unit may also issue bonds to pay the development costs and use the tax increment to pay the bonds back. Often, the governmental unit will prefer pay-as-you-go financing because it transfers to the developer the risk of the tax increment being insufficient to repay debt or of a legislative change that may affect TIF.
TIF Districts are established based on the authority, limitations and provisions contained in Minnesota State Law. New TIF Districts are considered by the City of Marshall when they can help achieve community goals. Each TIF District is evaluated on its own merits.