Montana Embraces TIF

By Janet Cornish and Lanette Windemaker, AICP

Warren Buffett once said that "someone's sitting in the shade today because someone planted a tree long ago." The adage applies to community investment, too — specifically, the value that can be created by tax increment financing.

TIF is a state-authorized, locally driven funding mechanism that enables local governments to direct tax dollars that accrue from new development within a specifically designated district to community and economic development activities there. First authorized in California in 1952, TIF has since been adopted in the District of Columbia and in every state except Arizona.

Programs vary from state to state. While the most common form of tax increment financing is based on increasing property values, some states, such as Wyoming, also measure increases in municipal sales tax revenues. Funds may be used on a range of efforts, from urban renewal to industrial infrastructure development.

Detractors say that TIF programs funnel revenues away from the taxing districts — particularly schools and local governments — that must provide services in those now more robust districts, but more on that later.

In Montana, TIF districts are provided for in the state's urban renewal law and are typically characterized by blight 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 can be directed to redevelopment and economic revitalization activities within the area in which they are generated.

Montana TIFs don't affect the amount that district taxpayers pay, compared to property owners outside the district; they only affect the way the taxes are distributed. Taxes that are derived from base-year taxable values (based on a percentage of the state-appraised value) continue to go to the various taxing jurisdictions: local and state government entities and school districts. Taxes derived from the incremental increase in taxable value — those increases are largely driven by private investment — are placed in a special fund for purposes listed for the TIF program in the specific district.

Following TIF's authorization for urban renewal activities in 1974, according to downtownbillings.com, Billings was one of the first Montana communities to use it in 1976 — to facilitate construction of a downtown parking garage in support of a new 22-story hotel, now the second tallest building in the state.

In 2013, the Montana legislature authorized the use of TIF in targeted economic development districts. TEDDs foster the location and retention of value-adding industries in infrastructure deficient areas. The definition of value adding not only includes manufacturing and processing, but also encompasses those businesses that, "through the employment of knowledge or labor, add value to a product, process, or export service resulting in the creation of new wealth." TEDDs can be established in counties, in addition to cities and towns, which are the only jurisdictions where urban renewal districts are allowed.

TIF at work

In Montana, each district must meet statutory requirements, including an evaluation of the proposed TIF district with respect to local land-use policy as presented in the comprehensive plan or growth policy and associated zoning regulations.

While it often takes time to realize a substantial increment, even small increases can be used to leverage grants, promote and market the district, and make loans to property owners. Districts are authorized for a period of 15 years but can be extended for another 25 years in order to service the debt on a TIF revenue bond. Since the tax increment provision was authorized by state law, more than 60 districts have been created. By 2013, 10 districts had sunsetted, adding about $15.3 million to Montana's statewide taxable value, representing hundreds of millions of dollars in private investment.

TIF has been used to finance both public and private activities, including construction of transportation infrastructure and parking facilities, improvements to water and sewer systems, streetscape and park upgrades, improvements to public buildings, housing development, historic preservation, and facilitation of arts and cultural activities.

TIF's successes in larger communities, such as Butte-Silver Bow, Missoula, Billings, and Bozeman, have leveraged millions of dollars of private investment. But smaller communities can claim remarkable projects as well.

Fort Benton (pop. 1,490) established an urban renewal TIF district in 1998. Its first increment came from improvements to the Grand Union Hotel. With a very small TIF budget over the years, the town has improved curbs, gutters, and sidewalks; established a revolving loan fund to help local business with facade restoration; and made the city hall ADA accessible. In 2013, a year before its sunset, the TIF district had an incremental taxable value of $33,808 with total revenue of $26,619. In early 2014, Fort Benton Mayor Rick Morris indicated that a TIF bond would be issued to improve downtown streets.

In 2009, one of the biggest employers in Stevensville (pop. 1,900) — a steel fabricator with 120 workers — was considering leaving for lack of wastewater services. Another nearby manufacturer that employed nine people had no access to potable water or wastewater services; workers used outhouses.

The town created a TIF industrial district with a base year of 2011. It helped leverage federal financing to build the critical infrastructure — a nearly $1 million wastewater infrastructure project that was completed in June 2014. The Stevensville TIFID had a 2013 incremental taxable value of $14,656 with total revenue of $8,117.

The impacts have been remarkable. The smaller of the two original companies grew big enough to have to seek larger space outside the district. The steel fabricator has since added 22 positions. A new company intends to create up to 40 jobs in two years, and two other small manufacturing companies have located in the district, according to Julie Foster, executive director of the Ravalli County Economic Development Authority.

The town of Whitehall (pop. 1,079) recently established an urban renewal district. Its creation followed a March 2009 fire in its historic downtown that destroyed five buildings and affected nine businesses. Two businesses adjacent to the fire site later closed.

The creation of the TIF district in 2013 coincided with efforts to stabilize and restore the historic Borden's Hotel on Whitehall's main commercial street. The building is now home to shops, offices, and the Jefferson Local Development Corporation and County Extension Office. Residential and vacation rental units occupy its upper floors. Future increment derived from this project will be used to make streetscape improvements, upgrades to the rodeo grounds, and wayfinding for visitors.

Some concerns

While TIF has bolstered local community development efforts across the state, it has drawn criticism from the public, state legislators, and at times, from those taxing jurisdictions (school districts and local governments) whose incremental tax dollars are delayed until the district sunsets — sometimes as long as 40 years. Some have argued that while TIF doesn't impose new taxes on property owners, it places a greater burden on the entities responsible for providing services in the TIF district, without providing them additional revenue.

The use of TIF also has raised concerns related to equity. As Craig L. Johnson and Joyce Y. Man noted in Tax Increment Financing and Economic Development, "the criterion of equity is commonly used to evaluate whether one group of taxpayers benefits from the TIF program at the expense of other groups or whether a government policy creates an inequitable tax treatment for some of the communities' residents or businesses."

Another argument against TIFs contends that they do not spur development but merely move economic development from one location to another. While this may occur in some areas of the country, in Montana's case, these concerns appear to be unfounded.

While tax increment revenues are directed to a special fund, the taxes derived from the base taxable value continue to be distributed to district taxing entities, so the affected jurisdictions don't lose any existing revenue. If there is a loss in the base taxable value, no increment will be realized until the base is "made whole."

TIF districts represent a very small portion of the total taxable property values in the state. In 2014, the taxable value of all property in the state was $2.5 billion, while the combined incremental taxable value of active TIF districts was $45 million, less than two percent of the total, according to the Montana Department of
Revenue.

According to the Bozeman School District, each TIF district in the city results in a slight property tax increase for the rest of the school district's taxpayers. A 2012 article in the Bozeman Chronicle noted that over 16 years, it has cost a total of $43 ($2.69 per year) for the owner of a $100,000 home in the elementary district, or $13 in the rural parts of the high school district.

Courts across the country have rejected claims from taxpayers outside a TIF district who assert that the shift of tax revenues results in a burden without benefit. In short, courts have found that redevelopment serves a public purpose.

In addition, TIF districts can directly support other taxing entities through connectivity to infrastructure and direct support for facilities. Across Montana, TIF funds have been used to help fund public services, including maintenance of public spaces, public safety programs, and street maintenance in the district, as well as capital improvements to district schools. If a TIF has excess funds in a given year, the TIF may remit funds to all of the other taxing entities, which may use those dollars to lower the number of mills levied. For example, TIF funds have been remitted to the other taxing jurisdictions in Silver Bow County, Anaconda-Deer Lodge County, and elsewhere.

Regarding the question of equity, investments in deteriorating central business districts and infrastructure-deficient industrial areas encourage growth in all areas of a community. Employees of district businesses purchase or rent homes, buy from local merchants, and enroll their children in local schools, increasing both the community's tax revenues and school funding allocations from the state.

Tax increment funds that offset the cost of providing services and infrastructure within the district can also benefit the larger community. TIF was used to fund the construction of a sewer line from the Butte-Silver Bow Metro Sewer Treatment Plant to the Montana Connections Business Development Park, an industrial TIF district in Ramsay. Property owners located along the route, but outside the district, did not have to bear the burden of this major capital investment but could take advantage of the new service by reimbursing the TIF district for their proportionate share of the cost.

Real growth?

It can be argued that without the public investment of increment dollars, new private investment might not have occurred at all, or to the same extent, or in a timely, thoughtful manner. That funding allows the community to guide the timing of infrastructure development, and private development reflecting local desires and needs through plan, budget, and regulatory approvals.

Many TIF opponents feel that the life of a TIF district, which can stretch to 40 years if bonds are issued, is simply too long for the affected taxing jurisdictions to defer receipt of these new tax dollars. But Julie Foster of the Ravalli County Economic Development Authority puts the discussion into broader context: Towns employing TIF have sometimes suffered decades of disinvestment. "The timber industry in Ravalli County has been declining for at least 40 years," she says. "It will take at least that much time to stabilize our economy and start experiencing meaningful growth."

Tax increment financing enables communities to invest in areas where it makes sense to do so. Older commercial areas and adjacent neighborhoods can take advantage of existing infrastructure, and traditional downtowns can bring live-work units to upper stories and make other improvements that support a community's character and sense of place. Further, fostering the development of new industries helps a community's economic base and adds better paying jobs.

In enabling the use of TIF, the Montana legislature established the importance of tying urban renewal and targeted economic development activities to sound planning. It is one of the few tools — and a pretty successful one — that Montana communities can use to achieve long-term, sustainable development in the face of the critical challenges that confront them.

Janet Cornish, owner and principal of Community Development Services of Montana, is the author of Tax Increment Financing in Montana, A Manual for Local Governments and Economic and Community Development Agencies. Lanette G. Windemaker is a consultant to local governments. As a planner, she has worked on projects throughout Montana and in Wyoming, Alaska, Virginia, Kansas, and Colorado. An earlier version of this story appeared in APA's Small Town and Rural Planning Division newsletter.

Resources

Images: Top — Lewistown, Montana, hopes its downtown buildings will get a new lease on life thanks to an urban renewal tax increment financing district established in 2014. Bottom — The new Northwest Energy Building in Butte, Montana, will anchor the Uptown Tax Increment Financing District, which the city established in 2014 to revitalize its historic central business district. Photos by Janet Cornish.

Janet Cornish: Tax Increment Financing in Montana, Governor's Office of Economic Development, 2014.

Craig L. Johnson and Joyce Y. Man: Tax Increment Financing and Economic Development: Uses, Structures, and Impact, 2001.

"Bozeman school board backs taxes for tech park, with limits," by G. Schontzler, Bozeman Chronicle, October 30, 2012.

Lanette Windemaker: "TIF in Montana: A Small Town and Rural Tool for Revitalization," Small Town and Rural Planning, Fall 2014.

Montana Department of Revenue, Biennial Report — July 1, 2012–June 30, 2014.