by Janet Cornish and Lanette Windemaker, AICP, Montana
In 2013, the Montana Legislature passed Senate Bill 239, the Targeted Economic Development District (TEDD) Act, specifically authorizing the use of tax increment financing (TIF) in support of secondary, value adding businesses in both incorporated communities and counties. The Act, which has been incorporated into the Montana Urban Renewal Law, removes any reference to previously authorized non-urban renewal TIF districts, and delineates the steps that a local government must take in establishing a TEDD.
This legislation reflects the state’s desire to encourage the retention and recruitment of manufacturing and knowledge-based employment through the construction of infrastructure in support of value-adding economic activities. This is clearly stated in the preamble to the Act, which says:
- Infrastructure-deficient areas exist in the municipalities of the state and constitute a serious impediment to the development of infrastructure-intensive, value - adding economic development in Montana;
- Municipalities lack sufficient capital to rectify the infrastructure shortage in infrastructure-deficient areas, thus impeding their ability to achieve economic growth through the development of value-adding industries;
- The creation of infrastructure in support of value-adding economic development is a matter of state policy and state concern because the state and its local governments will continue to suffer economic dislocation due to the lack of value-adding industries; and
- The state’s tax increment financing laws should be used to encourage the creation of areas in which needed infrastructure for value-adding industries could be developed.
The Act, codified in §7-15-4279 Montana Codes Annotated (MCA), clearly defines secondary-value adding industries and products as follows:
Secondary value-added products or commodities are those that are manufactured, processed, produced or created by changing the form of raw materials or intermediate products into more valuable products or commodities that may be sold or traded in interstate commerce.
A secondary value adding industry means a business that produces secondary value-added products or commodities or a business or organization that is engaged in technology-based operations that through the employment of knowledge or labor adds value to a product, process or export service resulting in the creation of new wealth.
The adoption of this Act is of particular benefit to counties, which have few tools at their disposal to encourage economic development. And, unlike incorporated cities and towns, often do not have public infrastructure in place to support industrial development. As of 2014, three TEDD districts have been established in Montana, in Stevensville, Shelby and Bonner (Missoula County) and several other communities are evaluating the potential of using this valuable tool.
Tax Increment Financing
Tax increment financing is a state authorized, locally driven funding mechanism that allows cities and counties to direct property tax dollars that accrue from new development, within a specifically designated district, to community and economic development activities. In Montana, TIF districts are authorized in parts 7-15-4201 and 4301, et. Seq. Montana Code Annotated (MCA), the state’s Urban Renewal Law. TIF districts are typically characterized by blight and/or infrastructure deficiencies that have limited or prohibited new investment. A base year is established from which “incremental” increases in property values are measured. Virtually all of the resulting new property tax dollars (with the exception of the six mill state-wide university levy) can be directed to redevelopment and economic revitalization activities within the area in which they are generated.
Taxpayers located within a TIF district pay the same amount of taxes as they would if the property were located outside the district. TIF only affects the way that taxes, once collected, are distributed. Taxes that are derived from base year taxable values continue to be distributed to the various taxing jurisdictions – local and state government entities and school districts. (See Figure 1.1, above.) Taxes derived from the incremental increase in taxable value are placed in a special fund for purposes set forth in an urban renewal plan or a TEDD comprehensive development plan.
Districts are authorized for a period of 15 years but may potentially be extended up to an additional 25 years if all or part of TIF dollars have been pledged to the repayment of a bond. If sold in year 15, bonds may extend the life of a district up to a total of 40 years (15+25). The total life of the district, however, must be determined within the first 15 years. So for example, if a 25 year bond is sold in year 8 and no other bonds are issued in years 9-15, the district must sunset no later than its 33rd year.
This might seem like a long time, but it does take a substantial investment before significant tax increment revenues are realized. For example, in Montana, property with an assessed market value of $1 million only generates about $12,000 to $17,000 in property taxes annually, depending on the total number of mills levied within the TIF district. Often, TIF districts do not begin to experience new investment until several years after they are created.
While TIF does direct revenue derived from new property taxes to a specific area for a period of time, ultimately the entire community benefits as Figure 1.2 shows:
TIF is authorized by Montana statute and regulated by the Department of Revenue. The decision to create a TIF district is made at the local level, but its formation must follow a public process that reflects local community planning and public policy. Community and economic development programs that can benefit from the use of TIF should be identified in comprehensive planning documents that provide an overall vision for the community. In particular, the use of TIF must be identified as an implementation strategy in the growth policy for the jurisdiction and the district must be zoned for uses in accordance with the area growth policy.
The use of TIF results in the suspension of receipt of new property tax revenue generated in the district to other taxing jurisdictions (city, county and state governments and school districts) for a period of 15 to 40 years. While there are no direct costs to the taxpayer as a result of TIF, the other taxing jurisdictions must continue to provide services, even as new development occurs and demands on these services may increase. However, the entire community benefits over time from the investment of these incremental tax dollars in public improvements that, in turn, attracts new business, creates jobs and provides for overall community health and well-being. When the district sunsets, the tax increment becomes part of the “base,” potentially lowering the tax burden for all of the property owners in the city or county.
The local governing body may, during the life of a district, elect to return a certain portion of the funds to the other taxing jurisdictions in proportion to the number of mills levied by each. This can be achieved permanently through adjustments to the base year value or annually through remittance agreements.
TIF is not tax abatement, whereby the taxes abated are never paid and therefore not available to any of the taxing jurisdictions for education, public safety, infrastructure, or services. TIF does redirect all of the taxes received on new investment for a period of time, but the property owners must still pay their taxes and support the development of critical infrastructure and the elimination of blight in the area in which they locate. Taking the long view, this is a win-win for everyone!
As of 2014, Montana had approximately 50 TIFs, of which three are TEDDs. The total incremental taxable value of these districts is about $45.2 million, less than 2 percent of the state’s total taxable value.
The History of Tax Increment Financing in Montana
TIF is authorized in a number of states. In Montana, TIF districts were first authorized in 1974 for use in urban renewal programs (7-15-4282, MCA). Since that time, TIF has been used for a variety of community revitalization and redevelopment programs, financing both public and private activities. Projects have included:
- Construction of transportation infrastructure including parking facilities
- Improvements to sewer and water systems
- Parks and urban trails development
- Historic building restoration
- Streetscape improvements
- Improvements to public buildings
- Housing development
- Infill construction
- Land development
- Public art and theater programs
Beginning in 1989, the use of TIF was expanded to include industrial districts and subsequently technology districts, and aerospace transportation and technology districts were added. The newest version of the law, as amended in 2013, identifies only two types of districts that can use TIF as a financing tool – urban renewal districts and TEDDs. While the primary criteria for the creation of an urban renewal district has been “blight,” per 7-15-4206 MCA, TEDDs must be infrastructure deficient and have, as their primary purpose, to support the development and maintenance of “secondary value-adding industries.” While urban renewal districts may only be created in cities or towns, TEDDs may be created in cities, towns or counties.
Allowable TIF Expenditures in Targeted Economic Development Districts
TIF dollars may be used to fund a variety of public infrastructure projects in support of value-added industries including the following:
- Land and Infrastructure Development: Roads; Pedestrian Facilities; Rail Services; Sewer, Water and Stormwater Drainage; Utilities; Land improvements and Site Preparation; Connecting to Services Outside the District
- Business and Technical Assistance Programs: Marketing Studies; Revolving Loan Funds
TIF is one of the few tools available to Montana’s local governments in addressing critical infrastructureneeds. In authorizing the use of TIF in support of manufacturing and knowledge-based value-adding industries, the Montana Legislature has enhanced the ability of cities and counties to engage in long term, sustainable economic development.
Janet Cornish is the owner and principal of Community Development Services of Montana, and has more than 36 years of experience in public administration. Lanette G. Windemaker, AICP, has more than 28 years of experience in the planning field working on projects throughout Montana, as well as Wyoming, Alaska, Virginia, Kansas and Colorado.
For more information about Community Development Services of Montana, visit www.cdsofmontana.com.
Published in the December 2016/January 2017 Journal