Tax Increment Finance (TIF) is a public subsidy tool that cities can use to stimulate economic development projects. Here’s how it works. A city estimates the amount of new taxes that a potential new business will pay if it decides to locate in that city. The city then multiplies this new annual tax revenue by a certain number of years (10, 15, and 20 year TIFs are not uncommon) and then does one of two things with the resulting big number: A) Gives/loans the cash back to the company as an “incentive” to make the desired decision; or, B) Spends the money on a public project (such as a street or a traffics signal) that pleases the company so much that the company goes through with making the desired decision.
TIF is used around the country, in various forms and fashions. State laws regarding the use of TIF cover a wide range of the political continuum. When I worked in an Iowa city in the early 1990’s, state laws concerning the use of TIF there were very loose. By comparison, current state law on the use of TIF by cities in Minnesota is very restrictive.
Each year the Minnesota Citizen’s League researches the use of TIF by Minnesota’s cities and publishes a report of its findings. They published their 2003-2004 data in their September 2004 edition of the Minnesota Journal.
Reasonable people will disagree on the prudence of using TIF as a tool to stimulate economic development in a community. Personally, I don’t like it. I never have. But, I’ve also supported its use on occasions where losing an economic development opportunity was worse for my community than using TIF to make it happen.
What distinguishes communities in their use of TIF, however, is how frequently they use it and what percentage of their tax base is tied up by TIF. In the Citizen’s League report, I am proud to say that Eden Prairie shows the lowest level of TIF as a percentage of our Net Tax Capacity (NTC) of any community in Hennepin County. This is the measure of how much of a community’s tax base is tied up in TIF. The larger this percentage, the more vulnerable the local tax base is to a single subsidized tax project. Also, a high percentage of the NTC that is tied up in TIF means that a lower percentage of the tax base that is producing tax revenue to support local government services in the community.
Eden Prairie’s percentage in 2004 is 1.9%. Bloomington: 5.9%. Edina: 8.3%. Minneapolis: 15.9%. Chaska and Chanhassen are at 19.&% and 15.3%, respectively. The state leader is the small town of Dundas, right outside Northfield, where 34.2% of their tax base is tied up in TIF. That’s a lot, by any reasonable standard.
How one feels about public subsidy for economic development is often confused with how one feels about “business”. These two subjects are not necessarily related. Just remember that if a TIF “goes bad” and the community has to pick up the tax bill for the economic development project that didn’t pan out, the business community pays the majority of that bill too.
