Tax Increment Financing (TIFs)

Episode 1 

Fact & Fiction

Ohio authorizes a variety of tax incentives, aka “exemptions” to local governments to essentially lure new development to their region.  Below is a quick description of the more commonly used tools as well as their tax consequences. 

FACT:

1. Exemptions that truly EXEMPT the property owner from paying tax
   1. Abatements:  by definition, an abatement, “abates” or stops the tax from being assessed.  In some cases, the abatement is for the full property’s value; in other cases, it’s only applied to a portion of the property's value, usually its increase in value during a certain time period.  This term is always stipulated in the abatement agreement as well as the kinds of improvements that are exempted from tax.
   2. CRA’s, Community Reinvestment Areas, are examples of this.  These are used by municipalities in Ohio.  They are always for a certain time period, and the abated value is limited by its true ability to increase the property’s market value.  For example, replacing the roof doesn’t qualify as an enhancement to a property.  Appraisal principles call that “maintenance”.
   3. CAUV:  this it the “farm” exemption.  Recall that property tax is calculated by multiplying the property value X tax rate(millage).  This program simply lowers the tax liability for the property by lowering its taxable value = valuing it by the “income-producing ability” of the soils in the farmland, which is always significantly lower than what the property would sell for.  Property owners of land in this program absolutely pay tax – they just pay tax on a lower value, as determined by the State of Ohio.  Ohio recognizes the impact to our food supply by our awesome farm community.   Most of the 50 states have some sort of agricultural program such as this.

1. Exemptions that DO NOT eliminate the tax; rather they RE-DIRECT THE TAX revenue 
   1. Tax Increment Financing – TIFs
      1. These seem easy to understand, but they are a challenge to implement as they require my office to keep track of the parcel value in the tax year prior to the enactment of the TIF, (called the BASE value), and all of the increase in value since the enactment, (the TIF’d value).  
      2. In 2007, after the City of Marysville approved the vast majority of the TIFs in the City, my office felt that the best way to track the changes in TIF value (while making sure the BASE value remains constant as required), was to create a second parcel number for each of the affected parcels.  So all of the TIFs in Union County have 2 parcel numbers – one ending in “0”, the BASE, and one ending in “9”, the TIF parcel.  That way we can track the change in value due to new construction and reappraisal which changes the TIF’d value.   Then when taxes are calculated, the tax bill is sent to the property owner, as usual.   
      3. The tax due is based on the total value of the property, just like with all other parcels.  But we settle/distribute the paid tax based on how much tax was generated by the BASE value and the amount of tax generated by the TIF value.   
      4. The BASE value tax revenue is distributed to all of the enforce levies for that tax district.   The TIF value tax revenue is distributed to the TIF fund for the entity that created the TIF.  
      5. There are other variations to TIFs, but they all do the same thing – divert the paid tax revenue to the TIF fund and away from the voted levies in that tax district.

FICTION:

1. Rental properties don’t pay property tax, FALSE!
   1. Rental property owners absolutely pay property tax, whether there is a TIF in place or not.   While the tenants may not be paying the property tax, their property owners do pay taxes.  Usually commercial enterprises, they simply increase the rents in order to cover any increase in property value (and the subsequent property tax) as assessed by my office.  And those value increases occur either when the value is increased due to new construction or as a result of our 3 or 6 year county-wide updates.  
2. TIF revenue can be used for anything.  FALSE!   
   1. Other things I’ve seen alleged are that the City or Township that created the TIF can use the revenue for pretty much any expense.  Not true - the ways in which TIF revenues can be spent are governed by Ohio law, as spelled out in the TIF agreement. These agreements are very specific in how those revenues can be spent.

There is a lot more than can be discussed about these programs.  Look for Episode 2 in the weeks to come.