There has been a lot of discussion recently about Tax Increment Financing or TIF and whether it is something the city should use. The concept can be confusing, especially since not all TIFs are created equal.
TIFs are not new. Minnesota’s first occurred in 1969. When used properly, a TIF can create jobs, new investment in an area, affordable housing, and pay for city infrastructure (like roads and sewers) that would otherwise be paid by city taxpayers. Shakopee has used TIF since the 1970s for economic development, redevelopment, senior affordable housing and infrastructure costs.
TIFs are especially helpful in redevelopment, which has more costs associated with it than the development of a clean and unbuilt parcel, including environmental cleanup costs, costs associated with assembling parcels, demolition expenses, and site prep work. In a public/private partnership, developers invest in the real estate while the city acquires and assists with cleanup and infrastructure. This in turn adds value to the community through increased employment, greater amenities, and more recreation, dining and shopping opportunities.
At its most basic level, TIF sets aside a portion of future taxes (the increase in property taxes generated by a new development) and dedicates those funds to assist in either paying for some costs of development or public infrastructure associated with the development. The taxes are still paid. It is important to recognize that there is no direct impact to individual taxes as only the “new” tax – which would not exist absent the development – is reserved for this use. Your taxes do not go up because of a TIF.
Not all projects are eligible for TIF. For example, new development on clean undeveloped land (such as the new homes being built on the west end of Shakopee) can’t use TIF.
Individual states determine how a TIF operates which makes it very difficult to compare from state to state. In Minnesota, TIFs have two basic purposes: to move a development or redevelopment forward that would not otherwise occur; and/or to finance public infrastructure related to a development. Shakopee’s policy is more restrictive than state requirements in many respects, since we use TIF funds primarily for public infrastructure improvements.
For example, the Canterbury site is one of the largest underutilized sites in the city and has languished due to the lack of development. It is a major barrier to access in our community since public roads currently dead end into the property.
The last project to use TIF in the Canterbury area was Seagate facility which created 800+ jobs and a new building. It was an economic development TIF with a maximum 9-year duration that was used for site clearing and preparation, and street construction. Today, the TIF has expired and Seagate pays more than $821,000 in taxes annually. This increase in the tax base would not have occurred absent the TIF. Not much has happened at Canterbury since Seagate.
The current Canterbury redevelopment proposal is to use TIF funds for the construction of public infrastructure including roads, utilities and storm drainage. Funds will not be going to Canterbury directly but will be paid to reimburse infrastructure costs or used by the city to build the infrastructure.
Bottom line: Without using TIF, all city taxpayers would have to pay for these public infrastructure improvements. TIF puts those costs on the developer who must initially pay for the improvements. If the area’s tax capacity does not increase, the city loses nothing. If there is increased economic growth, the developer is reimbursed the amount invested in the public infrastructure up to the maximum amount of the TIF. All other costs are the responsibility of the developer. In the end, Canterbury will likely invest $300 million or more in the community — a tax base that currently does not exist — and build roads that will connect our community.
In the past TIFs have been used for projects like River City Centre, SanMar, All Saints Senior Living, and the reconstruction of Fourth Avenue and Shenandoah and County Road 83.
An economic development TIF was also recently used for the expansion of Rahr Malting which kept one of our most important industries here in the city, expanded employment and transformed the west end of downtown. If Rahr had relocated or reduced its facilities in Shakopee, the city, county and school district tax impacts would have been very significant and would have increased the tax burden on all our residents.
Another important issue to review is how TIF impacts a school district budget, either through the effect of tax dollars not going to the district from a TIF, and any increase in students that would result from a development. Clearly, economic development TIFs do not add students, but there is an argument that TIFs used for housing developments do.
Ultimately, whether the project will impact the school district’s tax receipts can be estimated. School districts have large fixed costs and are primarily funded through a state funding formula largely based upon the number of pupils. There will be minimal impact on school budgets unless there is a large increase in student population.
The reality is that the proposed projects do not bring a substantial increase in school-age population, so there should be minimal impact. The housing being discussed is not being marketed to young families. They are targeting young professionals and active older adults. There is certainly a much greater impact expected from the city’s expansion on the west end/Jackson Township area than can be expected from Canterbury Commons or the downtown projects.
As with any project, the city carefully weighs the use of TIF or any other incentive tools. In addition to our internal review of all projects, we have outside firms that review projects, costs and values to ensure these funds are properly used for their intended purposes. In addition, we have agreements and other protections in place to protect the taxpayer if a proposed development does not work out as planned.
TIF is not right for every project. Only a very small piece of the city’s growth can be connected to TIF or any other economic development incentive. However, when used properly a TIF can significantly move a community forward through improving housing stock, such as with All Saints Senior Living, and by adding jobs as both Seagate and Rahr have shown.