MINNEAPOLIS-In the aftermath of property tax reform enacted earlier this summer by the Minnesota Legislature, net tax revenue for Tax Increment Financing districts, which totaled $304.9 million statewide last year, could drop by as much as 40% next year, according to a new report from the Citizens League, a Minneapolis-based public interest group. That means fewer dollars to work with on promoting development, and that will affect local decision-making, says Joel Michael, an analyst for the state’s House of Representatives research department.

For instance, it will make it more difficult for cities to fund redevelopment projects and cleanup contaminated brownfields, says Craig Waldron, chairman of the League of Minnesota Cities TIF task force. The tax code changes are also likely to reduce the number of new TIF districts created — a downward trend mayhave already begun, Waldron says.

The Legislature’s actions included two major changes to the state tax code, the compression of tax rates — particularly for commercial and industrial property — and the state takeover of K-12 general education funding. They are expected to sharply reduce the amount of net tax revenue captured by tax increment districts. As part of its tax package, the Legislature reduced property tax rates for commercial and industrial lands, which make up the largest percentage of property and TIF districts, from 2.4% and 3.4% to 1.5% and 2% respectively.

TIF is a somewhat controversial development tool used by cities and counties to finance certain types of development costs, such as acquiring land or buildings, demolishing substandard buildings, installing utilities or road improvements or building low- or moderate-income housing. The program, created by the Legislature in 1979, allows a city or county to create a tax increment financing district and “capture” the increase in net tax capacity that results from new development within the district, in essence taking that tax revenue off of the tax base and paying it directly to the TIF district. The TIF authority uses increased tax revenue, referred to as the tax increment, to pay for certain approved development costs.

Districts are supposed to apply a “but for” test to each TIF financed project to determine whether the development would take place if no tax subsidy was available.

Proponents of TIF say it helps promote economic development, the redevelopment of blighted areas and contaminated sites, and the creation of housing. Critics charge municipalities abuse the program, using public subsidies to lure development from other, often neighboring, communities. They also argue the program has allowed municipalities to pass along the cost of local development to taxpayers across the state. Up until now, TIF districts have also benefited from the state financing formula for school aid. In what amounted to a state matching grant, TIF districts were able to capture local school tax revenues and the state would in essence hold the school districts harmless by making up the difference in lost tax revenue with increased school aid. Beginning in 2002,the state will pay K-12 education costs directly through aid, eliminating the local school tax levy.

That means TIF districts will no longer be able to capture that portion of tax revenue and state taxpayers will no longer be subsidizing TIF districts.

Because the changes could create a hardship for many existing TIF districts, the Legislature appropriated more than $200 million in state grants to make up any shortfall. While that will help, Waldron says, it may not be enough in the long run to make TIF an effective development tool in the future.

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