What is economic development property tax abatement?

Minnesota law authorizes political subdivisions to grant property tax abatements for economic development (e.g., to encourage a business to locate or expand at a location or to redevelop an area).  Minn. Stat. §§ 469.1813-469.1816.  Abatements may be either permanent forgiveness or temporary deferral of property tax.  Abatements can serve similar purposes to tax increment financing (TIF), a widely used development tool.  The legislature enacted the abatement law in 1997 to provide an alternative to TIF and to supplement it.

These economic development tax abatements should be distinguished from property tax abatements that are granted by the county board primarily to correct errors (e.g., to reduce the assessor’s market value or to change the classification).  Minn. Stat. § 375.192.

For what purposes may abatements be used?

The law allows abatements to be used for a broad range of projects and purposes, if the political subdivision finds that public benefits exceed the costs.  Permitted uses of abatements include the following:

• General economic development, such as increasing the tax base or the number of jobs in the area
• Construction of public facilities or infrastructure (e.g., streets and roads)
• Redevelopment of blighted areas
• Providing access to services for residents (e.g., housing or retail would be common examples)
• Deferring or phasing in a large (over 50 percent) property tax increase
• Stabilizing the tax base resulting from the updated utility valuation administrative rules
• Providing relief for businesses with estimated market value of $250,000 or less who have disrupted access due to public transportation projects

Which local governments can grant abatements?

Counties, cities, towns, and school districts may grant abatements of the taxes they impose.  The governing body grants an abatement by resolution.  For towns, action at the town meeting is not required.  Taxes imposed by special taxing districts (e.g., watersheds or regional agencies) cannot be abated.  Similarly, the state general property tax (on commercial/industrial and seasonal-recreational properties) cannot be abated.  In the Twin Cities metropolitan area and on the Iron Range, the fiscal disparities tax cannot be explicitly abated.  However, a political subdivision may increase its abatement amount to reflect the amount of the tax imposed under fiscal disparities.  The abatement does not directly enter into the fiscal disparities calculations.

How long does an abatement apply?

The political subdivision sets the length of the abatement.  State law limits the duration to 15 years.  The maximum term is extended to 20 years if only two of the three political subdivisions (city/town, county, and school district) grant an abatement.

What is the limitation on abatements?

The total amount of property taxes abated may not exceed (1) 10 percent of the net tax capacity of the political subdivision or (2) $200,000, whichever is greater.

How do the mechanics of abatement work?

The abatement resolution, approved by the political subdivision, specifies the duration and the amount of property taxes that will be abated.  The political subdivision has considerable flexibility in setting the terms of the abatement; for example, it may set the abatement as a percentage of tax payable, a dollar amount, tax attributable to a portion of the parcel’s market value, or something else.  The local government adds the abatement to its property tax levy for the year.  (The abatement levy is not subject to levy limits.)  The owner pays property tax on a parcel and the political subdivision uses the payments as provided by the abatement resolution.  For example, the abatement may be used to pay bonds or be given back to the property owner.

May abatements be used to pay bonds?

The abatement law authorizes the issuance of bonds to be paid back with the abatements.  For example, bonds could be issued to construct public improvements or to pay for a site for a business.  As the property owners pay the abated taxes, they are directed to pay off the bonds.  These bonds can be general obligation bonds or revenue bonds.  The abatement bond provisions parallel those in the TIF law:  the abatement bonds are not subject to referendum approval and are excluded from debt limits.

How do abatements compare with TIF?

The legislature designed the abatement law to provide an alternative to and as a supplement to TIF.  The two programs can be used for similar purposes and both rely upon property tax funding.  Both programs have very similar bonding powers.  However, abatement and TIF differ in many important respects.  Some of these differences include the following:

• TIF can be used for longer durations (up to 25 years in some cases) than abatements (typically 15 years)
• TIF requires approval only by the municipality (usually the city) to capture all local property taxes, while abatement requires each city/town, county, and school to approve to capture its taxes
• TIF use is subject to many more legal restrictions than abatement.  These include a blight test for redevelopment districts, but-for findings, limits on what increments may be spent on, and so forth.  Abatement is more flexible.

How widely has abatement been used?

The abatement law does not require reporting of abatements to the state.  Property tax levy data reported to the Department of Revenue for property taxes payable in 2009 shows 60 cities provided abatements of $6.7 million of taxes and 29 counties provided $2.5 million in abatements.  These amounts do not include abatements by cities with populations under 2,500 and school districts.