1. Measuring the Tax Increment
Where’s the Money?
Tax Increment Workshop
Helena May 25, 2006

2. Tax Increment Financing Authorization
Authorization per MCA
The urban renewal plan, industrial or technology district ordinance may contain a provision or be amended to contain a provision for the segregation and application of tax increments.
Filing tax increment provision plan per MCA
Clerk of municipality files certified copy of the plan or ordinances or amendment with the Department of Revenue and with the clerk or appropriate officer of each of the affected taxing bodies. (e.g.school districts).

3. Tax Increment Determination
Determination and Reporting of Values
Upon receipt of the tax increment provision, the Department of Revenue (Assessors Office) is responsible for the annual calculation of the base (original), actual and incremental taxable values.
The Department of Revenue is responsible for reporting the values to the municipality and other affected taxing bodies.

4. Tax Increment Measurement Definitions
Base, Current and Incremental Taxable Values - Definitions
Base (Original) Taxable Values - The actual taxable value of all property within an urban renewal area, industrial, technology, aerospace transportation and technology district prior to the effective date of a tax increment financing provision. Establishes the ‘base year’ as of January 1.
Actual Taxable Values -The taxable value of all property in these districts for the current year calculated from the assessment roll last equalized.
Incremental Taxable Values – The amount by which the Actual Taxable Value at any time exceeds the Base Taxable Value.

5. Tax Increment Calculation
Calculation of Tax Increment – Whole area or district:
Actual (Current Year) Taxable Values
- Base Year (Original) Taxable Values
= Incremental Taxable Values
Increment Taxable Value
X Mill Rates (except University 6 mills)
= Tax Increment Receipts $ Due

6. Tax Increment Calculation - Example
Calculation of Tax Increment – Whole District Example:
5,000,000 (Current Year Taxable Value)
- 2,000,000 (Base Year Taxable Value)
= 3,000,000 (Incremental Taxable Value)
3,000,000 (Increment Taxable Value)
X (Mill Rates - except University 6 mills)
= $1,800,000 (Tax Increment Receipts $ Due)

7. Tax Increment Mill Rates Determined
Process for determining mill rates per (MCA ).
Mill rates of taxing bodies must be calculated on the basis of the sum of the taxable value of all taxable property located outside the renewal area or district and the base taxable value of all taxable property located within.
The mill rate determined must be levied against all property within as well as outside the area or district.

8. Mill Rates Determined - Example
15,000,000 Taxing Jurisdiction Taxable Value
5,000,000 Renewal Area or TI District Taxable Value
20,000,000 Total Taxable Value of Taxing Jurisdiction
2,000,000 Base Taxable Value of Area or District
17,000,000 Basis for Mill Rate Determination
600 Mills required to be levied
20,000,000 X = $12,000,000 Taxes
17,000,000 X = $10,200,000 Taxing Jurisdiction
3,000,000 X = $ 1,800,000 Renewal Area
$12,000,000 Taxes

9. T I Calculation – Specific To Property
The calculation of the tax increment is on ad valorem basis – for each property:
Property by property determination
Identify inclusive properties – Maps, GIS coordinates
Set a flag or status field to identify properties in district
Create file (database) with parcel identification # (PIN)
Track parcel by parcel valuations – market, taxable and base (original)
Retain historic base valuations for each parcel in case of future adjustments

10. T I Collections – Allocation
The collection of the tax increment is an allocation of the taxes receivable to the appropriate fund.
Property record system creates the tax statement with the special district
An interface program to the accounting system builds the taxes receivable files
Split of tax receipts by parcel with tax increment receipts segregated to special revenue fund
NOT a new or additional tax – just an internal allocation of funds

11. Special Revenue Fund
Tax Increment Receipts are segregated to a Special Revenue Fund
Operating and development fund for programs
Unspent revenues, cash balances, investments are carried over to next fiscal year
No ‘use-it-or-loss-it’ for budgeting purposes
Long term planning becomes more critical - particularly the identification of redevelopment projects requiring multi-year or debt financing (bonds or other instruments)

12. Special Revenue Fund
Funds continue to be segregated each year. Costs that may be paid by tax increment financing (MCA ):
Land acquisition, demolition and removal of structures and relocation of occupants.
The acquisition, construction and improvement, connection to or direct assistance for infrastructure (sewers, sidewalks, streets, parking lots, utility and telecommunication lines etc.).
Costs incurred in connection with redevelopment activities for urban renewal including programs for voluntary or compulsory repair and rehabilitation of buildings and improvements.
Administrative costs associated with the management of the urban renewal area or special districts.

13. End of Tax Increment Financing
Tax increment financing provision terminates on the later of:
The 15th year following it’s adoption
Payment in full discharge of all bonds for which the tax increment has been pledged and interest on the bonds. (Extends the provision to the final maturity date of the bond(s).
Funds remaining from loan programs established under an urban renewal plan and loan repayments received after the date of termination and
Funds related to a binding loan commitment, construction contract or development agreement and loan repayments received after the date of termination may be retained and used in accordance with the provision of the urban renewal plan.

14. Special Revenue Fund – Tax Receipts
Tax Increment Receipts are segregated to a Special Revenue Fund. However, at the time of adoption or at any time thereafter:
Governing body of the municipality may provide that a portion of the tax increment be released from segregation if the remaining increment is sufficient to meet bond obligations (MCA ).
The municipality may enter into agreements with other affected taxing bodies to remit any portion of the increment not used for current payment of costs incurred for redevelopment activities or pledged for bond obligations (MCA ).

15. Base Adjustments – Release increment
Current Montana Code (MCA ) provides for the release the tax increment from segregation at any time:
By an adjustment of the base taxable provided that:
All principal and interest then due on bonds has been fully paid
The resulting smaller tax increment is determined to be sufficient to pay all principal and interest due later on bonds
Adjusted base value shall be reported to the officers and taxing bodies to which the increment provision is reported
The adjusted base value is used in determining the mill rates thereafter. If insufficient the base value must be reduced to the original amount or higher amount sufficient to pay principal and interest on bonds.

16. Base Adjustments – Prior to 2001
Previous language for base adjustment procedure per MCA :
Changes in tax rates
Changes in tax exempt status of property
Changes to statutory, administrative or judicial methods of appraisal of property
Corrections of conditions that existed in the base year

17. Base Adjustments - Issue
Issue: Comparing Apples to Apples
The original language allowed a broader adjustment process that afforded protection of the tax increment taxable value due to changes such as:
Tax rate reductions or
Changes in methods of appraising property.
Allowing the base taxable value to be re-calculated as if the change of law (e.g. tax rates) had been in effect on the original date of determination, the measurement of the increment taxable value could be consistently applied.

18. Base Adjustments – Historic
For some tax increment districts – particularly those with small valuations - changes in tax rates or methods of appraising property can have significant impact.
Some historical changes to rates and methods include:
Elimination of class 6 (inventory) business property – 1983.
Change in real property tax rates from 8.55 % to 3.86%
Reclassification of business equipment (personal property) to class 8 and simultaneous reduction of class 8 tax rate from 11% to 9% (Gradually reduced - currently taxed at 3%.)
Reduction in telecommunications property tax rate from 12% to 6%

19. Base Adjustments – Example 1
Example 1: Business property exemption limit
Personal (business) property exemption of $20,000 (2006)
Overall taxable value for business personal property decreases.
Businesses are dropped off the rolls due to exemption limit.
Measuring increment against a ‘fixed’ base – no base adjustment for the change in method of appraising
Tracking the base for exempt businesses is an issue.
Closed businesses that existed in base year and have base taxable value must also continue to be tracked.

20. Base Adjustments – Example 2
Example 2 – Telecommunications property
Telecommunications property tax rates were reduced from 12% to 6% in a 50% reduction.
Uptown Butte TID – US West:
1999 Taxable Value = 733,000
Base Taxable Value = 522,000
Incremental Taxable Value = 211,000
2000 Taxable Value = 454, ,000
Base Taxable Value = 522, ,000 (522,000 X .50%)
Incremental Taxable Value = , ,000

21. Base Adjustments – Issues Summary
Retaining a ‘fixed’ base (after 2001) presents issues with:
Impact of significant changes to tax rates or methods of appraising property.
Tracking base values due to businesses that close or drop off the tax rolls.
Continued reduction in the real property tax rates slowly erodes the increment taxable values. Class four property rates declining from 3.86% in For 2005, tax rate is 3.22%. For 2006, tax rate is 3.14%. For 2007 and after, tax rate is 3.01%.

22. Major Taxpayer Issue
When there is a major taxpayer in a tax increment district as of the base year, any changes of the taxpayer can be significant.
Changes in current taxable values due to internal or structural re-organization, changes in business purpose, sale, liquidation, and bankruptcy will have considerable impact.
Loss of a major taxpayer produces ‘double whammy’ effect because base taxable value cannot be adjusted. Result is ‘double blow’ to incremental values.
Best if district can be established in anticipation of major taxpayer locating in district.

23. Major Taxpayer - continued
Example: NorthWestern Impact in Butte
Real Property URA TID NW w/o NW
Taxable Values ,000,000 2,500,000 1,500,000
Base Values 1,500, ,000 1,500,000
Incremental Values 2,500,000 1,750,
NorthWestern currently represents over 70% of the incremental taxable value and the resulting tax receipts.

24. Business Retention
With a major taxpayer included in base year valuations, business retention becomes critical due to:
High percentage of the incremental values and tax receipts.
Base taxable values are permanent.
Stabilization of tax increment requires business retention.
Bonding capacity could be affected.