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TAX INCREMENT FINANCING
Tax Increment Financing (TIF) is an economic development
mechanism available to local governments in Ohio to finance
public infrastructure improvements and, in certain circumstances,
residential rehabilitation. A TIF works by locking in the
taxable worth of real property at the value it holds at the
time the authorizing legislation was approved. Payments derived
from the increased assessed value of any improvement to real
property beyond that amount are directed towards a separate
fund to finance the construction of public infrastructure
defined within the TIF legislation. Local governments may
authorize TIFs to fund a number of infrastructure needs including
public roads and highways, water and sewer lines, remediation,
land acquisition, demolition, the provision of gas, electric,
and communications service facilities, and the enhancement
of public waterways.
The value of real property improvements are exempted from
taxes through local TIF authorizing legislation enacted by
the municipality, township, or county. A taxpayer whose operations
are located within a TIF continues to make payments to the
jurisdiction in an amount equal to the real property tax liability
that otherwise would have been due had the property not been
exempted. These payments in lieu of taxes, or Service Payments,
are collected by the county treasurer in the same manner as
real property taxes, but are deposited into separate public
improvement tax increment equivalent funds.
ELIGIBILITY
A TIF is legislatively created upon a declaration by a municipality,
township, or county that private improvements to one or more
parcels of real property within their respective jurisdictions
serve a public purpose. Private improvements may include the
construction, expansion, and demolition of buildings, remediation,
or other forms of site development. Residential projects are
generally not eligible for TIF unless located within a blighted
area of an impacted city. A private improvement under construction
that has not yet been assessed for the purposes of real property
taxation may be eligible. The local jurisdiction should examine
the relevant provisions of the Ohio Revised Code (O.R.C.)
prior to making a determination (see §§ 5709.40-5709.43 of
the O.R.C. for municipalities; §§ 5709.77-5709.81 for counties;
and §§ 5709.73-5709.74 for townships). Some tax redirection
capability also exists within Chapter 725 of the O.R.C. (Urban
Renewal) and Chapter 1728 (Impacted Cities). Note that the
scope of a project's eligibility may be expanded for municipalities
utilizing TIF authority granted under 5709.41.
A TIF may be comprised of specific parcels or an "Incentive
District." An Incentive District is defined as (a) an aggregation
of individual parcels of real property comprising an area
no larger than 300 contiguous acres and (b) exhibits one or
more characteristics of economic distress, as listed in §
5709.40(A)(5) of the O.R.C. Municipalities, townships, or
counties may establish these Incentive Districts. The Service
Payments collected through an Incentive District TIF can be
used to fund public infrastructure improvements anywhere within
the district, even if the public infrastructure does not directly
benefit every parcel within the district. Along with public
infrastructure improvements previously noted, Service Payments
generated from private improvements in an Incentive District
may be used to fund residential housing renovation projects
as long as the TIF includes a public infrastructure component.
TAX BENEFIT
A local political jurisdiction may exempt from real property
taxes the value of private improvements up to 75 percent for
a term of up to 10 years. Local governmental bodies seeking
to offer greater amounts of assistance under the TIP must
first obtain the concurrence of the affected board(s) of education.
With the concurrence of its school board(s), a local political
jurisdiction may exempt the value of improvements up to 100
percent for a term of up to 30 years. The TIF authorizing
legislation enacted by the municipality, township, or county
must specify the rate and term of real property tax exemptions.
SCHOOL BOARD INVOLVEMENT
Exemptions granted through TIFs limit the amount of revenues
available to school boards of education. State law therefore
requires that local political jurisdictions notify, and in
some cases obtain the concurrence of, affected school boards
prior to enacting TIF authorizing legislation. Municipalities,
townships, and counties are required to notify all affected
boards of education at least 14 calendar days prior to their
formal consideration of proposed TIF legislation. If the TIF
proposes an exemption greater than 75 percent or a term in
excess of 10 years, local governmental entities must provide
notice specifically to the affected city, village, and exempted
school boards at least 45 business days prior to their formal
consideration. State law provides that the school board notification
include the specific parcels or Incentive District boundaries
comprising the TIF, the estimated value of the real property
improvements, and the exemption benefit levels.
The affected boards of education must either approve, conditionally
approve, or reject any proposed exemptions in excess of the
statutory rate and term limits. Approval by the affected school
board(s) is not required for a municipal TIF in the event
the local jurisdiction secures a commitment from the taxpayer
to remit Service Payments directly to the affected school
board(s) in an amount equal to what would have been paid if
the improvements had not been exempted. Note that State law
allows a board of education to (a) waive their rights to approve
proposed TIF exemptions, or (b) grant local governmental entities
the ability to provide notice in fewer than 45 business days
in applicable circumstances. After the appropriate notice
to the affected board(s) of education, the local jurisdiction
must formally approve the TIF legislation in an open public
meeting.
In those municipalities that levy their own income taxes,
if the respective project receiving assistance generates annual
payroll for new employees of $1,000,000 or more, legislatively
authorized TIFs must be accompanied by revenue sharing agreements
with the affected city, village, and/or exempted school board(s).
If a municipality and its above mentioned school board(s)
fail to execute an acceptable compensation agreement within
six months following the passage of the TIF legislation, State
law mandates that the municipal income tax revenues generated
from the new employees be divided on a 50/50 basis between
the two parties. This arrangement must occur in each year
that the TIF is in effect and the statutory payroll threshold
is satisfied. Given the requirement that income tax revenues
are shared with the affected board(s) of education, municipalities
must collect employment and payroll information regarding
the project prior to enacting the TIF legislation and annually
monitor such project data.
SUGGESTED IMPLEMENTATION:
Municipalities, townships, and counties seeking to establish
a TIF must enact legislation that (a) designates the parcel(s)
or Incentive District to be exempted from taxation, (b) declares
improvements to private property within the specified area
as serving a public purpose, (c) delineates the public infrastructure
improvements to be made that will directly benefit the parcel
or Incentive District, (d) identifies those parcels within
a tax incentive district eligible for housing renovation,
and (e) specifies the equivalent funds to be created for those
redirected monies. Only those public infrastructure improvements
directly serving the increased demand arising from the real
property improvements to the parcel(s) or an Incentive District
are eligible for TIF financing.
A proposed TIF should be evaluated by the local political
jurisdiction prior to enactment to determine the following:
- The market value of the proposed real property improvements.
The ODOD suggests that the local community engage with the
county auditor to obtain this information;
- The taxable value of the real property improvements.
This can be computed by multiplying the projected market
value of improvements by the standard 35 percent assessment
rate;
- The local jurisdiction's real property tax rate. This
information will assist in determining the projected revenues
available to finance public infrastructure improvements
by multiplying the local rate by the taxable value of the
private improvements (i.e. 35 percent of market value);
- The public infrastructure costs associated with the project;
- The value of the proposed exemptions. The local community
must ensure that the proposed exemptions will generate the
revenue necessary to finance public infrastructure improvements
within the TIF; and
- The extent of notification required by the level of proposed
exemptions under the TIF.
Unless otherwise specified in the legislation authorizing
the TIF, the parcel owner's obligation to remit Service Payments
must be reflected in a contract with the local governmental
entity. The ODOD strongly urges local political subdivisions
to obtain legal counsel in drafting the proposed legislation
and Service Payment contract. Note that the agreement should
contain guarantees from the parcel owner that sufficient funds
will be available to the political subdivision to retire the
debt incurred from the specified public infrastructure improvements.
The county treasurer is charged with the responsibility of
creating tax equivalent funds for the redirected Service Payments.
The TIF exemption begins the first year the taxpayer is required
to pay property taxes on the real property improvements. In
each year of the TIF exemption period, the municipality, township,
or county must submit an annual report to the ODOD by March
31st detailing the progress of the project in the prior calendar
year, including a summary of (a) receipts from Service Payments,
(b) expenditures made from the equivalent funds, and (c) descriptions
of the public infrastructure improvements made within the
TIF.
Copies of the TIF and its respective Service Payment contract
must be filed with the ODOD within 15 days of enactment. The
exemptions provided by the municipality, township, or county
are subject to review by the Ohio Department of Taxation.
State authorization may be finalized approximately six months
after the respective county auditor files the TIF exemption
documents with the Tax Equalization Division.
For additional information, contact the Office of Tax Incentives
at (614) 466-2317.
Revised: January 31, 2002
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