Tax Increment Financing for Economic Development:The Incentive That (Helps) Level the Playing Field
Building a community’s economic base includes capital investment, new jobs, increased payroll and it is the goal line for most if not all economic development organizations. Public or private, economic development is: “The Creation of Wealth.”
So how does a small market compete with the big cities? Okmulgee County communities have economic development budgets, but compared to cities just twice our size, we do not have the cash on hand to really compete. Size does matter, especially when you’re talking about cash.
Think about this for just a moment. Most states have a “closing fund.” A big bag of cash they can use to put the finishing touches on a deal. The State of Oklahoma has a closing fund, but it is rarely funded. And even when it is funded, it’s not really competitive. There are seven cities in the State of Texas that have closing funds with more money than the entire State of Oklahoma has in its fund. So how do counties and small towns close the gap.
First a city or county must be prepared. Infrastructure, tax policy, housing, labor attraction, labor training and the list goes on. But the main incentive we can use to play against the big guys? Tax Increment Financing. The original intent of a TIF program is to stimulate private investment within a blighted area that has been designated to be in need of economic revitalization.
What exactly is a Tax Increment Financing (TIF) ?
The simplest way to describe it is: TIF is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects. In general terms, it is the return of a set percentage of the taxes paid by a company in cash. The cash is for a specific project, a set length of time or or set amount of money. Once the time limit or the funding limit has been reached, the TIF District is closed.
The City of Okmulgee currently has Okmulgee TIF District #1 which includes both the Okmulgee Business Complex and the Okmulgee Regional Airport Industrial Park. It was established shortly after the old refinery was cleaned up and the industrial park was announced. To date, the taxes the TIF District has generated have paid for the sewer line, water line and the short street behind the motel. It is now accumulating cash in a designated City account (not the general fund). Those accumulating funds can only be used to improve the OBC and the Okmulgee Airport.
Okmulgee County established a TIF District to aid CP Kelco in the expansion of their Okmulgee facility. That TIF District is contained entirely within the fences of the CP Kelco plant.
There are exceptions: the taxing jurisdiction may also return the taxes paid by the company, to the company as an incentive to create their economic development project and create new jobs. Remember at the beginning of this section I said: “In General Terms.” The devil’s in the details. The Oklahoma State Law establishing TIF Districts is well written and has many safeguards in place to keep cities/counties from abusing the law, and squandering tax dollars that have to go to previous taxing commitments.
So how does a TIF District allow Okmulgee County and it’s cities to compete against the big cities? Income for a TIF District can only be created by Ad-valorem taxes or sales taxes. Most cities and counties use both forms of taxation. So a TIF District can be a Sales Tax TIF, an Ad-valorem Tax TIF, or a combination of both. Since from top to bottom, there’s not that much difference in tax rates from town to town, an income from Ad-valorem taxes is about the same. Okmulgee’s Ad-valorem tax is lower compared to Tulsa or Oklahoma Counties, but the amount of cash available for return may be greater in Okmulgee because fewer organizations have their hands inside the budget. Currently the City of Okmulgee has no Ad-valorem tax. So the “increment” in Okmulgee would be greater than other cities. Obviously, sales tax TIFs are not so balanced. A general merchandise store in a major market is probably going to generate more sales tax than a small community store.
So the bottom line is simply, a new factory, or an expanded factory in Okmulgee County could generate an equal or even larger return for an incentive than a big city.
Frequently asked questions:
Can the TIF District raise the sales tax / Ad-valorem percentage inside the TIF District? NO
Can a City or County make their entire jurisdiction a TIF District? NO
Can a City or County make the TIF District last forever? NO (25 year max, plus other restrictions)
As soon as a TIF District is enacted, can the community raise my property taxes? NO
Is the TIF District a separate tax? NO It is either the Ad-valorem tax, sales tax or both.
Is the formation of a TIF District a public process? YES all meetings are open.
Is there a formal written contract between the Company and the TIF District sponsor? YES
Does a city or county have a way to stop paying the TIF proceeds if the company fails or is underperforming? YES
In summary, the Oklahoma State Legislature passed the Local Development Act back in the very late 1980s - which is the legislation behind TIF. It has been used many, many times and most of the time very successfully. The legislature has also been good about amending the law to keep it modern and current. While communities (like Okmulgee) do not have a cash fund to incentivize a company, we do have tools and the structure for incentives through the use of a TIF.
About the Author
Court Newkirk is the Executive Director of Okmulgee Area Development Corp (OADC). A native of Oklahoma, he has decades of community and economic development experience, some of which was in Okmulgee in the early 90s. Court is a big believer that Okmulgee can be anything it wants to be, if we all work together. Contact Court at Court@ChooseOkmulgee.com.