HRA Director explains Tax Increment Finance Districts to Grand Marais City Council

HRA Executive Director Jason Hale came before the Grand Marais council with information about forming a TIF, a tax increment financing district.

With the tremendous need for affordable housing in Cook County, this is one tool the county is looking at using to fill that gap, said Hale.

There are a lot of misconceptions and preconceived notions about what a TIF is and what it does, noted Hale.

Hale worked on 13 TIF projects while employed in Duluth, but he explained he’s not the “Oprah” of TIF; “I don’t think everyone should get a TIF,” he added.

Still, Hale pointed out that over six years, through TIF Districts he helped create 935 housing units that were new or were preserved in Duluth; three historic struc­tures that were saved, and $258 million in investments that were made with approximately $100 million of addi­tional tax base added to the economy.

When the TIF districts end, Hale said they would create an additional $2 million annual tax revenue for Duluth.

So, what does a TIF do?

It’s not a reduction in taxes; it just freezes taxes in time, he said. “The incremental increase of taxes over the life of the project goes to pay for the project. So TIF only works because you are increasing the value of the devel­opment,” he said.

To explain that concept further, Hale used an anal­ogy. Say a building is being taxed at $1,000 per year. If that building is upgraded, the taxes go up, but the taxing District will receive $1,000 per year for the life of the TIF. However, the increased taxes on the project go back to paying for the upgrades.

Before forming a TIF district, cities should look first at tax abatements Hale said. If that doesn’t work, then look at TIF. A tax abatement has a shorter term, with the maximum set at 20 years. However, TIF districts can be extended, 25 years, said Hale.

One preconceived notion is that a TIF district takes taxes away from schools. But Hale said that is false. Instead, the state has a way to make those funds back to the school district, he explained.

While TIF Districts can be established for various projects, Hale said over 90 percent are used for housing and redevelopment.

In the past, municipalities would issue revenue bonds and use TIF to pay the bonds back. “That almost never happens now. Now it’s PAYGO (pay as you go). The city doesn’t do anything; The city isn’t on the hook for devel­opment. If the developer doesn’t pay taxes, the developer loses the TIF,” said Hale.

TIF Districts can be formed for various purposes, including building new housing, removing blight, and correcting and cleaning up soil/contamination/ and a TIF can be used to increase the tax base. In addition, a TIF can be created as a secondary measure to help with job creation and financing public infrastructure improve­ments.

In describing the difference between a tax abatement (TAF) and TIF. Jason said a TAF is limited to 10 percent of a political subdivision’s annual net tax capacity, or $200,000, whichever is greater. Tax abatements typically run for 15 years or up to 20 years if one is taxing jurisdic­tion declines to participate. After that, each jurisdiction must approve the TAF to collect its share of taxes from the project.

TIF, said Hale, can be established by economic devel­opment authorities (EDAs), housing and redevelopment authorities, port authorities, cities, or rural development finance authorities.

He said that two types of TIF can help with develop­ing housing. One is to form a Housing TIF District that assists with developing low and moderate-housing units, and the second is intended to redevelop and improve blighted areas. Housing built in the second scenario can be either low-income or sold at market rate.

If a TIF District is granted, a developer has four years from the date of certification “of the original net tax capacity of the district” to begin development. Should none take place, the tax increment may be collected by the municipality from that parcel, and its increased value must be excluded from the net tax capacity. By year five, development must be finished in the TIF district to be certified for the District’s original tax capacity.

A TIF has some costs and benefits, Hales said. He pointed out that the value and local tax rates for a proj­ect are frozen for the life of the TIF. Therefore, a different project could have been put on the same property that would have generated far more taxes for the local munic­ipality than if a TIF district hadn’t been put in that place. Also, it takes plenty of staff time and money to assist in getting a TIF formed.

On the benefit side of things, a TIF can help a com­munity meet its goals and needs by building new housing or removing a blighted area., said Hale. Projects are built that can’t otherwise be made. After the District is com­plete, the new scheme creates more significant property tax revenue via higher property value than the original value by a large margin.

Hale said if a TIF is paid off early, the municipality can receive an administration fee (up to 10 percent) through­out the District.

Once a TIF District is formed, it would have to go before a government body to be expanded.

Before deciding to make a TIF, Hale said the project has to pass the “but for” test. If a TIF can be used to create housing when few if any other options are avenue are available, then it passes the “but for” test.

To create a tax incremental financing district, a devel­oper must be found, numbers must be crunched to make sure the project is viable, consultants must be engaged to help with the plan; and once the plan is submitted and okayed by the state, the District can be certified by the state.