Tax abatement is an economic development tool for communities that appears to be gaining in popularity in recent years. First authorized by the Minnesota Legislature in 1997 as an alternative to TIF, tax abatement allows a city, town, county, or school district to abate all or a portion of its property tax on a parcel of property for economic development purposes. Tax abatement is an extremely flexible tool that has been used by communities throughout the region to assist a variety of projects ranging from public recreation facilities to commercial retail and market rate rental housing.
How Does Tax Abatement Work?
The term tax abatement is somewhat of a misnomer because tax abatement does not actually reduce the amount of taxes paid on property that has been abated. Instead, taxes are paid as normal. After the taxes have been paid, the county auditor takes the portion that has been abated and refunds it back to the local governmental entity that granted the abatement. What happens next largely depends on the purpose of the abatement. If the abatement is intended to be refunded to the taxpayer, there will be a contract in place that outlines the conditions, in addition to paying taxes, which must first be satisfied in order to receive the money, such as meeting certain job creation and wage goals. Local government entities also have the ability to use tax abatement money to reimburse itself for public infrastructure costs incurred in relation to a project or to pay debt service on bonds if tax abatement bonds were issued. This flexibility gives local governmental entities the freedom to negotiate the specific criteria and form in which tax abatement will be granted and used.
Before initiating the process for granting an abatement, the local governmental entity should identify the terms of the proposed abatement, including the specific parcels of property being abated, the amount, and the reason for the abatement.
What is the Process for Granting Tax Abatement?
In order to grant an abatement, the local governmental entity must first hold a public hearing after publishing notice at least once in its official newspaper. After the hearing, the governing body may adopt a resolution granting the abatement if it finds that the benefits it receives from granting the proposed abatement are at least equal to the cost of the abatement and also finds that granting the abatement is in the public interest because it will accomplish one of the following:
- Increase or preserve the tax base
- Provide employment opportunities
- Provide or help acquire or construct public facilities or infrastructure (e.g., stoplights and roads)
- Help redevelop or renew blighted areas
- Provide access to services for residents (e.g., housing and commercial retail projects)
- Finance or provide public infrastructure
- Phase in a property tax increase
- Stabilize the tax base
The resolution granting the abatement must outline how the abatement meets the qualifications stated above and also specify the terms of the abatement, including the form, amount, method of determination of the abatement, duration limit, and effective date. Abatement is limited to 8 years if the resolution does not specify the duration.
If more than one governmental entity is planning on granting abatement, each one must separately complete this process.
Limitations on Abatement
A governmental entity can only grant abatement for a period of up to 15 years, although most abatements granted tend to be shorter. Since a governmental entity can only abate its portion of taxes, it is common for the governmental entity to request that the other local governmental entities where the property is located, such as the county and school district, also grant abatements. If at least one of the other local governmental entities declines or does not respond to the request, the duration limit for abatement is increased to 20 years for the parcels being proposed for abatement.
Tax abatement may not be granted to property located in a TIF district. However, governmental entities may enter into abatement agreements for parcels currently in a TIF district as long as the abatement does not commence until after the parcel is no longer in a TIF district. Once property has been abated, however, it cannot be granted a second abatement for at least 8 years. For example, this means that property subject to an abatement that expires with taxes payable in 2016 is not eligible for a second abatement until 2025.
Lastly, tax abatement is not unlimited. The total amount of abatement granted in any one year may not exceed the greater of 10% of the governmental entity’s net tax capacity for the year the abatement applies or $200,000.
Tax abatement is just one tool that local governmental entities have available to encourage and support economic development. Local governmental entities open to using tax abatement should have a formal application process in place and an economic development policy that outlines the types of projects that are eligible to be considered for tax abatement assistance.
Christopher J. Virta is an associate attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the area of municipal finance. He is a J.D. and M.B.A. graduate from the University of North Dakota. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.