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City of Mounds View Staff Report August 29, 2018 Page 2 M:\MasterFiles\1999 thru 2010\2000\City Council\Work Session Packets\10-02-00\Item 05--Tax Abatement Policy--Aaron Parrish.doc However, abatement can also be used for public infrastructure and facilities. Therefore, abatement may be one of the finance options for the anticipated improvements to Highway 10, or other public infrastructure projects. While the term of the TIF assistance varies with the type of district, abatements have a duration limit of 10 years if combined with another taxing jurisdiction, or 15 years if just one jurisdiction is involved " (Minnesota Statutes §469.1813 subd. 6). Finally, "In any year, the total amount of property taxes abated by a political subdivision under this section may not exceed (1) five percent of the current levy, or (2) $100,000, whichever is greater" " (Minnesota Statutes §469.1813 subd. 9). Tax Abatement and Tax Increment Finance: A Comparison There are both and advantages and disadvantages associated with the use of tax abatement and tax increment finance. There are several reasons a development authority would consider granting a tax abatement as opposed to TIF assistance. First, granting an abatement is less time and resource intensive. Second, there are less restrictions on how and when a development authority can use abatement proceeds. Third, there are no specific reporting requirements associated with abatement. Conversely, a considerable amount of time is spent responding to information requests from the Office of the State Auditor and completing "TIF Authority" and "TIF Municipality" reports for each TIF district. Fourth, abatements are less costly to establish compared to tax increment (Bubul et al 13). Finally, tax abatements are not geographically restricted to districts like its TIF counterpart. In most instances, an abatement can be granted anywhere within the political subdivision's jurisdiction. In sum, abatement's flexibility allows taxing jurisdictions to better address smaller development and particularly redevelopment concerns that TIF may not be considered for. When contrasted with abatement, there are also some obvious advantages to the use of tax increment finance. While abatement is left to the respective taxing jurisdictions, TIF allows a development authority to capture the tax base of each political subdivision. As a result, in most instances TIF will result in greater funding potential than abatement. However, it is possible to obtain greater funding with abatement if all taxing jurisdictions participate. Unfortunately, there are some structural disincentives for a school district to not grant tax abatements. Financial Considerations There are several financial issues that must be considered when using tax abatement. Like TIF, abatement revenue can be paid to a developer or business owner in either a pay-as-you-go arrangement or with up-front financing through the use of bonds. Pay-as-you-go financing is paid to the recipient on a semi-annual basis usually three months after taxes have been collected. In most arrangements, the political subdivision will pay the recipient a percentage of the captured abatement minus an agreed upon percentage for administration. For example, a typical agreement would be structured in the following manner: 95% of property taxes paid would be disbursed to the recipient while 5% would be retained by the taxing jurisdiction for administrative purposes (Bubul et al 11). Since property taxes collected at the municipal level are typically the smallest of the three primary taxing jurisdictions, the ability to generate revenue based simply on a municipal abatement is rather limited. The following calculations are illustrative: