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Auditor’s report says use of tax increment financing down, but revenue up

The TIF tool moves in mysterious ways. Tax increment financing is a means of funding local development projects in Minnesota that’s being used less often but generating more revenue. Most of the projects are in Greater Minnesota – yet the bulk of revenue they generate is in the metro area.

These were among the paradoxes presented by Assistant State Auditor Jason Nord to the House Property Tax Division Wednesday. He offered an overview of the Office of the State Auditor’s Tax Increment Financing Legislative Report, which was released last Thursday.

The underlying message was that the TIF program the state initiated in 1979 seems successful in fulfilling its original purpose: To make development possible in the state’s municipalities without those cities taking on a lot of risk or extra tax burden.

Report on tax increment financing presented to House Property Tax Division 02/17/21

With TIF, the cost of a development project is paid for with the increased property taxes that it’s expected to create. While the upfront cost of a development can be covered by bonds, loans or pay-as-you-go financing, if the city declares the development area to be a TIF district, property taxes for that area are funneled exclusively to the repayment of those upfront costs.

Under the state’s TIF rules, a city has to start knocking down buildings within four years and start spending money on development activity within five. The idea is that the property can’t be off the tax rolls for too long. It also has to be property that’s been determined to be “blighted.”

According to the state auditor’s report, Minnesota had 1,648 active tax increment financing districts in 2019, 63% of them in Greater Minnesota.

Yet the metro-area TIF districts produce more money, with 85% of the revenue generated by the state’s TIF districts in 2019 coming from the metro area ($206.8 million of the state’s $243.2 million total). That’s a 6% increase in statewide TIF revenue from 2018, exceeding the totals from each of the last seven years.

“Valuations are higher in the metro and projects tend to be larger in scope,” Nord said.

Yet the total number of projects is decreasing. The number of TIF districts in the state hit its peak around 2004 at over 2,200 districts and has been declining since.

Developers and owners bear most of the risk for TIF-based developments. They hold 64% of the TIF-related debt in the state, usually covering the upfront costs and being reimbursed in a “pay as you go” manner. By comparison, municipalities hold 16% of the risk through general obligation bonds.

The presentation proved a good introduction for the first bill of the session about establishing a new TIF district. HF618, sponsored by Rep. Kaela Berg (DFL-Burnsville), would authorize special rules for Burnsville to create redevelopment TIF districts within the area of the Burnsville Center mall and adjacent roads.

Mayor Elizabeth Kautz explained that what was once a thriving commercial hub now has significant vacancies.

“We are looking to transform this into a mixed-use development,” she said. “We want it to be a vibrant neighborhood full of vitality.”

The bill was laid over for possible inclusion in a division report to the House Taxes Committee. Its companion, SF564, sponsored by Sen. Lindsey Port (DFL-Burnsville), awaits action by the Senate Taxes Committee.

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