Tax Increment Financing

Tax Increment Financing (TIF) is a public finance tool available to municipalities in the state of Minnesota. TIF use is governed by state law.  It is a tool that can level the economic playing field for redevelopment that could be (i) a replacement for a tired property in a built-out location, or (ii)  a greenfield development at the edge of a metropolitan area. TIF is complicated and easy to misunderstand, as are many aspects of city financing.

I believe TIF can be a valuable financing tool and has been proven to work when used correctly. I also think it is a tool that should be used only in particular situations and should not be overused.  The City has used TIF for several decades, and I believe its use has been judicious. Previous projects that used TIF financing have resulted in more significant growth than in other projects without the use of  TIF.

TIF works by effectively freezing the tax collected (by all taxing bodies) on a particular parcel for a period.  The same amount of tax is collected during the term of the TIF as was collected at the time of its creation. There is no reduction in tax revenue collected on that parcel for the school district or any other taxing body. Without the TIF there may be a reduction in tax on that parcel as the property deteriorates and declines in value.  Any increase in tax revenue resulting from redevelopment of the property is placed in the TIF fund to effectively repay the money borrowed by the original TIF financing program.

One test of whether TIF use is appropriate is to assess whether this redevelopment would not have happened “but for” the use of the TIF financing.  TIF financing is then used for public improvements, including roads, utilities, public places, and parking, all of which benefit the entire community.

A TIF investment should be a catalyst for more private investment in the area where TIF is implemented.  Higher property values result in the TIF area, which benefits the entire tax base.  It is common for a TIF investment to expand the tax base overall, even during the time that the TIF district is frozen.  Furthermore, the TIF district properties are still subject to payments on initiatives such as school tax referendums. Once the TIF period is expired, all taxing bodies receive their full share of tax revenue from the properties in the TIF district.