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What's an Abatement and Why Does Everybody Want One? Local governments in Minnesota have had to deal with abatements for many years. Under the traditional meaning of this term, an abatement occurs when a property owner successfully appeals for a reduction in the estimated market value used for tax purposes on their property. This leads to a reduction in the taxes due on the property, often for several years. Over the past three years, a new meaning of abatement has emerged. State law now allows local governments to voluntarily grant "abatements" as an economic development incentive. A New Concept The law authorizing this new form of abatements (Minnesota Statutes, Sections 469.1812 to 469.1815) was first adopted in 1997 and has been amended each year since. This law grew out of concerns by legislators about some aspects of Tax Increment Financing (TIF) , the most commonly used economic development tool in Minnesota. Concerns included: the lack of control that counties and school districts had over TIF, the cost to the state (through additional school aids) ofTIF, and the complexities of and restrictions associated with TIE The term "abatement" is somewhat of a misnomer in terms of how the new law works. Taxes are not reduced, as in the traditional meaning of abatements. For the typical abatement, the owner of the property pays property taxes in the same manner and amount as if there were no abatement. However, all or a part of the property taxes collected on the property may be paid back to the owner or diverted for another use, as determined by the abatement agreement(s). The abatement statutes also allow for the deferral of taxes. TIF V5. Abatement Abatements are often presented as an alternative to TIF as a tool for economic development. There are several key differences: . Approving Entities. TIF districts may be created by cities and various forms of development authorities or agencies. School districts and counties (without an HRA or EDA) , however, have no authority to create TIF districts or to prevent their creation, even though creation of a TIF district will affect school district and county taxes. With abatements, each taxing jurisdiction (school district, county, city or township) must individually approve the abatement of their portion of property taxes. · Required Findings. Before creating a TIF district, a municipality must recognize a variety of "findings" including the famous "but for" test (that the development would not occur but for tax increment assistance). The findings required to grant an abatement are generally less complex and restrictive. In some cases, an abatement may fall within the definition of a "business subsidy" under state law. In these cases, the use of tax abatement may also require the adoption of "criteria" for granting business subsidies and the adoption of a business subsidy agreement with the recipient of the assistance. . Approval Process. The process of documenting and approving an abatement agreement is generally less cumbersome and detailed than the process for a TIF district. The catch is that, in order to receive an abatement of substantially all property taxes, three government entities must approve separate abatement agreements. A public hearing must be held prior to approving the abatement. . Uses of Proceeds. While tax increment proceeds are subject to numerous restrictions on use, there are no restrictions on how or where abatement proceeds are used. . Time Limits. The time limits on the use of TIF vary according to the type of TIF district. If one of the political subdivisions declines to abate taxes, then the abatement may occur for up to 15 years. Otherwise, the maximum time limit is 10 years. . Amount of Abatement. The revenue from abatement differs from TIF in two important ways. (1) Tax increment comes from the value of new development, while Tax abatement may apply to both new and existing value. (2)There is no financial limit on a city's total tax increment. On the other hand, the total amount of abatement in any year for each jurisdiction is capped at the greater of 5% of the current levy or $100,000. . Bonds. Both TIF and abatement statutes authorize the issuance of general obligation bonds without an election and which are not subject to the debt limit. The maximum principal for abatement bonds cannot exceed the estimated sum of the abatements. For TIF bonds, not less than 20% of the debt service must be paid by tax increments. . Reporting Requirements. For TIF districts, the granting authority must submit detailed annual reports to the Office of the State Auditor. There are no required annual reports on abatements. · School District Taxes. Neither TIF nor an abatement will affect a school district's total revenue. However, most of the tax revenue that a school district "loses" to a TIF 2 ..