A TIF Policy
(from Maine Townsman, January 1997)
Michael Starn, editor

Tax increment financing (TIF) is one tax incentive program for economic development that is available to all Maine local governments. TIF uses property tax dollars that are generated by new development and applies some or all of those dollars to the project.

Like any tax incentive program, a TIF when properly used can be a real catalyst to local economic development. Used improperly, or perhaps unwisely, a TIF can turn around and bite the hand that feeds it.

While Maine has not experienced any of the "tax break" nightmares that other states have encountered, any tax incentive program can be a double-edged sword. Consider the Michigan city that gave a hugh tax break to General Motors only to have GM move its plant to Texas after the tax benefits had been exhausted. Or, how about the deal that Alabama gave Mercedes Benz to locate a manufacturing plant in Tuscaloosa? Some economists have estimated that deal would cost the state about $40,000 for every job created.

A public frenzy often accompanies news about proposed economic development. People want and need jobs so news or even rumors about economic development attracts their attention. However, proposed economic development projects inevitably have a lot of "what ifs" connected to them. Unfortunately, key players in these projects sometimes overstate the benefits - jobs, improved retail activity, other businesses locating in the area, etc.

Given the high level of public interest in proposed economic development projects and considering the increased media attention given to these projects and any "tax breaks" associated with them, it is easy to see how the situation can quickly get out of control.

TIF policies provide a mechanism for municipal officials to keep these types of economic development projects under control. A TIF policy can help to provide clarity and understanding about how a TIF program works in a particular community. Businesses which are potential TIF applicants can get a preview of the the application process, get a better understanding of how their business needs match up to the program, and have a clearer picture of any parameters that the community may have set for the program. After a brief discussion of State law relating to tax increment financing, this article looks at the purpose, common elements, and the need for flexibility in a municipal TIF policy.

History of TIF In Maine

Tax increment financing has existed in Maine law since 1977 although municipalities showed little interest in the program until the mid-1980’s. The original intent of tax increment financing was to promote economic development through improvements to public infrastructure financed by the additional property tax revenues generated by the project.

The mechanics of a TIF program have remained the same since its legislative adoption. Basically, a municipality designates a Municipal Development District (intended for blighted areas or sections of a community in need of redevelopment) where development will occur and tax increment financing will be used to assist that development. Property values within the "district" are frozen. When improvement are made within the district and value increases, the difference between the frozen value and the new value is called the "captured value". Property taxes generated by that captured value are used to support the development project.

Two major changes have occurred to the TIF program that have increased municipal interest in it. One change, in the mid-1980’s, excluded the "captured value" from state valuation, thereby sheltering the municipality from reduced state aid in programs such as General Purpose Aid to Education and State-Municipal Revenue Sharing. The second change was an amendment to the TIF statute in 1993 allowing credit enhancement agreements (CEAs).

Credit enhancement agreements permit the "captured" property tax dollars to be channeled directly to the business doing the development. The money must be used for the project but the business is given considerable latitude in its use of these funds, unless stipulated otherwise by the municipality.

CEAs have infused new life into the tax increment financing program. Since the CEA change, TIF activity has skyrocketed. Over the past two years, according to Alan Brigham at the Maine Department of Economic and Community Development, there have been 33 approved projects, most of them using credit enhancement agreements.

Businesses appear to like the flexibility that a CEA has in directly reducing their development costs. Communities without infrastructure needs are able to offer a tax incentive to potential developers. Municipalities also like CEAs because they carry less risk - they are performance based. Unlike infrastructure investments that involve long-term payments which continue whether or not the project is successful, CEAs are paid out each year based on what development has actually occurred .

State Guidelines for TIF

State law does provide minimum guidelines for all TIF programs. A few specific requirements are that the total area of a single development district may not exceed 2% of the total acreage of the municipality; that all development districts may not exceed 5% of the municipality’s total acreage; that the property value of the district may not exceed 5% of the municipality’s state valuation; and that the aggregate value of indebtedness of TIF districts within a county may not exceed $50 million.

A change was made this past legislative session to allow waiving of the 5% valuation limit if the multiple TIF districts are on one contiguous piece of property. This amendment was intended to primarily benefit paper mill towns.

Purpose of A Municipal Policy

A municipal policy or guidelines can provide structure and shape to the TIF program. A policy can help to take some of the uncertainty out of the program for potential applicants. A policy also provides valuable information about the program that lets applicants know beforehand what is required of them, how their application will be evaluated, who will review their application, and what criteria will be used to evaluate the application.

In Portland, TIF guidelines make it clear that the program is primarily for large scale economic development projects. The city council’s approved guidelines specify that projects must create significant new tax value equal to or greater than $2 million. A primary reason why TIF was targeted by the council for big projects was that the city already has a number of incentive programs available to smaller economic development projects.

Environmental projects are given priority for TIF funding in Westbrook. A few years ago the city recognized that it had a problem in some of its industrial zones where a few businesses had no means of utilizing their property without wetland mitigation. City Planner Jim Fisk did an inventory of 50 existing industrial lots in the city and found that 26 were non-expandable because of wetland issues. Several were receiving tax abatements due to their limitations, totaling about $30,000 a year, says Fisk.

The Wesbrook City Council established a non-profit corporation called the Westbrook Environmental Improvement Corporation, composed of business and municipal representatives, to address these environmental issues. Tax increment financing was one of the tools given to the corporation which has responsiblity for evaluating TIF applications before they go to the city council for approval. The WEIC also coordinates funding from other sources for environmental improvement activities in the city.

The Town of Unity decided it needed a TIF policy after Avian Farms, a large poultry breeding corporation, suggested that the town give them a 80% tax break for 10 years on five chicken barns the company was proposing to build there.

Recalling the Avian Farms proposal, Planning Board Member John Piotti says there was a lot of emotional response to it with "some people willing to give away the store." Piotti, the chief architect of the Unity TIF Policy, said, "It (the proposal) created a lot of confusion and a lot of questions among the townspeople."

Without any professional staff, town officials realized that if a number of these types of (TIF) proposals were to come before them, they would not be able to handle them. Town officials also wanted to be in a position to offer a more reasoned, less emotional response to TIF proposals.

The Unity TIF policy was adopted in January 1996. The town’s first, and to this point only,TIF was approved at last year’s annual town meeting in March. Ironically, the Avian Farms proposal never came together. The approved TIF was for a local business that was constructing an office building in the downtown area. The TIF revenues are being put into a downtown improvement fund that town officials are hoping will leverage other grant monies for infrastructure improvements.

Two objectives behind the policy, according to Piotti, were: (1) there can’t be any development that is inconsistent with local land use policies and ordinances; and (2) there has to be a shared benefit between the business and the town.

"With the TIF policy we wanted to let the business community know that the town was interested in economic development and that it was specifically interested in economic development that fit with the community," says Piotti.

Town officials in Sanford were interested in promoting economic development, but at the same time they didn’t want the expense of TIF developments, or even the applications, to be borne by the existing property taxpayers. The current policy, approved by the Board of Selectmen in September 1995, is being updated.

Sanford’s draft policy says that "to minimize the risk to the citizens of the Town of Sanford" TIF funding will be providing only through credit enhancement agreements. The policy further states that TIF agreements of five years or less are highly preferred.

Common Elements

Although the TIF policies reviewed for this article were quite different in their purpose and scope, some common elements could be gleaned so as to give guidance to other communities contemplating a TIF policy.

Review Process

All four policies had language that explained the review process for TIF applications. The reviewing authorities in each of the communities were different.

TIF applications are submitted to the City of Portland’s economic development department, then reviewed by the Community Development Committee before being submitted to the city council for approval.

In Sanford, TIF applications are considered by the Chamber of Commerce Economic Development Committee, and reviewed by the town treasurer, board of selectmen and warrant committee before being voted on by the (representative) town meeting.

In Unity, the budget committee and planning board screen applications before they are submitted to the town meeting.

Westbrook, as previously mentioned, has formed a non-profit corporation to coordinate environmental remediation activities in the city and oversee the creation of tax increment financing districts. The corporation members review TIF applications and forward them to the city council for approval.

Criteria for Judging Applications

Essential to any TIF policy is the criteria upon which applications will be judged.

Westbrook’s environmental priorities include land, water, air and solid waste improvements. Wetlands mitigation, elimination of straight pipe discharge into water bodies, mitigating sulfur emissions at the paper mill, and solid waste incineration (due to a landfill closing need) are listed as environmental improvements that would receive high priority.

The Town of Unity lists both company and community benefits as standards to be reviewed. Favorable ranking is given to applications that propose activities consistent with the town’s comprehensive plan; those that minimize traffic impacts and do not contribute to commercial sprawl; and non-agricultural activities that do not result in a net loss of productive farmland.

Portland’s policy contains guidelines that must be met and some that merely help to prioritize applications. An example of a mandatory guideline is that the applicant must demonstrate that the city’s participation is economically necessary and involvement by the city is needed in order for the project to be undertaken. Prioritizing guidelines include such criteria as level of employment created; if the project improves a blighted area; if public infrastructure improvements are made that have application beyond the particular project; and if the project supports other community projects or creates public benefits.

Limitations

Two policies - Sanford and Portland - limit participation in the TIF program to credit enhancement agreements only.

Sanford and Unity, albeit with different language, forbid "double dipping". A basic provision of the Sanford policy states: "The applicant is obligated to apply for any State reimbursement programs for personal property and/or real estate taxes. The proceeds from this application will be returned to the Town and placed in the 'Public Improvement' Account."

Unity’s policy states, "In no instance may the direct benefit provided to a company be so high that - when combined with other governmental benefits for which it is eligible - the company is eligible to be refunded more than 100% of its tax burden in any given year."

The Portland policy sets a limit of 75% on the incremental taxes (from the captured value) that can be returned to the company in the form of a credit enhancement agreement.

Unity’s policy states that no more than 50% of the financial benefit from the "captured value" may go directly to the company.

Need for Flexibility

By their very nature, TIF policies restrict or contrain a community’s negotiating position. Policies need to be flexible. In most cases, they do not carry the same legal weight as an ordinance. The legal force of a policy depends on how it was adopted, by whom and for whom.

The TIF policy in Portland was adopted by the council for the council. It can be changed at any time by the council, which also must approve TIF applications. Sanford’s TIF policy was adopted by the board of selectmen for themselves and therefore can be changed by the board. In Unity, however, the town meeting adopted the TIF policy. Unless the town meeting changes that policy, those committees and boards reviewing TIF applications must abide by it.

All of those interviewed for this article say it is important to keep flexibility in TIF policies. Sanford Treasurer Elizabeth Thayer says that the board of selectmen were very sensitive to the wording in the policy "so as not to knock Sanford out of its competitive position for TIF projects." Thayer says the policy is a work in progress and continues to be refined.

Portland’s Economic Development Director Kathleen Brown says the city’s guidelines are so flexible that the city council and developer can negotiate any deal they wish. For example, a recent project in the city didn’t meet the mandatory $2 million taxable value guideline because part of the project included exempt property. The city council negotiated a separate PILOT (payment in lieu of taxes) for the exempt portion of the project.

Conclusion

While any policy ties your hands to some degree, municipal TIF policies can make dealing with TIF applications a lot simpler. A policy can help make it clearer to the prospective TIF customer how the proposed project fits into the municipal economic development scheme.

Because of the media publicity surrounding TIFs, a number of business people are approaching municipalities with preconceived ideas about what the community can do for them via a TIF. Some view the TIF program as a "tax break" entitlement. Business people who are interested in the bottom line want to be sure that they take advantage of any tax break available to them.

Some of the miscommunication is due to an information gap that exists between corporate finance officers and municipal officials, according to Roland Miller, Auburn’s CD Director and a key person in the development of Maine’s TIF program. "They are not familar with the way we operate and we aren’t that familar with how they operate," says Miller.

Having a better understanding of the position of each side entering the TIF application process will make the program work better. A municipal TIF policy should articulate the position of the community. "With a policy," says Miller, "you won’t be making things up as you go along in the process. [The process] won’t boil down to ‘let’s make a deal’."