What Is TIF?

What is TIF? Recently I presented information to the City Council about using TIF for the old elementary school demolition project and the follow on development.  The acronym TIF stands for Tax Increment Financing.  TIF is an economic development tool that was put in place by the State to give local governments assistance in developing business and housing.

The concept is pretty simple.  You use the taxes off the new businesses and houses to help pay for the things needed to build the new businesses and houses.  Without doing this, they wouldn’t be built.  This can be done in two ways.  The City can borrow the money and repay the debt when the new taxes come in, or the owner of the new business or house can pay the costs and then is reimbursed by the City from the money they pay in taxes.  This leads to the first misconception.  The property owners do pay taxes.  The taxes get paid in to the County and then get passed back to the City and then the City reimburses the business owner for eligible expenses.  But not all of it goes back to them, in some cases.  That is where the term Increment comes in.

The value of the increment is actually determined by the amount of taxes that are levied by the City, County and School District.  Their tax rates are used to calculate the overall taxes on the property and the original amount of taxes prior to the new development is subtracted to get the Increment.

In some cases, properties are expanded.  In some cases, the property is cleared of the old things and then room is made for the new things.  A good example would be the property that Willie’s Supervalu sits on.  Anyone who grew up in Morris knows there used to be some old businesses on that property.  They were purchased, cleared and then the new building was put up.  The value and taxes generated by the old property is then compared to the value and taxes on the new property and an Increment is determined.  The owner gets to use the Increment to pay for things needed to make the new project possible.  Typically, they are reimbursed for those eligible costs.

Types of things that are eligible for reimbursement include things like land/property acquisition, site clearing, site preparation, new utilities, parking lots, and sidewalks.  The new building itself is not an eligible use of Increment.  The old school property needs over $1 million to clear the site.  However, any new developments on the property may want to use their own Increment to pay for the things mentioned above.  Where will the Increment come to pay for the school demolition then?

Well, the Minnesota Legislature has determined that the use of Increment from projects outside the current project area may be a very good use as a tool to help cities grow.  They have authorized this use in State Statute.  In the case of Morris, we have several projects that have reimbursed the required costs, but are still generating Increments.  Why, because the life of a TIF District is about 15-25 years depending upon the rules and regulations that are set up locally and not all of that time is needed to meet the reimbursement requirements.  We are going to ask that these Increments get shifted to the elementary school project for the rest of the District’s life.

The City has taken the position to reimburse the property owner for their investment instead of borrowing the money for them.  This is much cleaner and does not put us at risk in case something happens to the Increment.  A few years back the State took over funding for the schools and all the Increments generated by the School tax rate were lost.  That money was paid to the State instead of being returned to the City.  A number of cities had to use taxpayer money to pay back the bonds that were now under funded.

Once the Increment isn’t needed any more, then the City, County and School District will get them for their use.  The split is based upon the tax rate for each entity because that is how the Increment was generated in the first place.

Again, keep in mind, the basis for use of TIF is that the development won’t take place without TIF, so nobody is losing something they were already getting