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TIF update.

BY PASSING ACT 2231 DURING its 2005 regular session, the Arkansas General Assembly made significant changes to Arkansas' tax increment financing law and the use of tax increment financing ("TIF") districts. Since the state adopted a Constitutional amendment in 2000 providing for TIF districts, various questions have arisen regarding their use in Arkansas. Act 2231 was adopted in response to many of these questions. Below is a summary of tax increment financing, along with some of the key changes brought about by Act 2231.

Tax increment financing is a method of financing that allows cities and counties to undertake redevelopment projects that encourage private enterprise and investment in some undeveloped, underdeveloped, deteriorating or "blighted" areas. A city or county may identify a blighted area, create a redevelopment project plan to counter that blight and create a TIF district to implement the plan and complete the project.

The tax increment financing concept may be summarized as follows: (1) the TIF district undertakes the project; (2) the project increases the assessed value of the taxable real property within the TIF district; (3) the increase in the taxable real property value results in an increase in the amount of ad valorem taxes collected within the TIF district; and (4) a portion of this increase in ad valorem taxes, or "tax increment," is pledged to finance the project.

Some key changes to tax increment financing law brought about by Act 2231 may be generally described as follows: (1) the definition of "total ad valorem rate" was amended to include the total millage rate of state property taxes levied on taxable property within a TIF district in a year, subject to certain exclusions; (2) before approving an ordinance creating a TIF district, a local governing body must determine the presence of certain factors within the blighted area; and (3) each plan must include an economic analysis projecting the aggregate tax impact of a TIF district on taxing units.

By amending the definition of total ad valorem rate, the General Assembly clarified its intent to allow TIF districts to benefit not only from some locally levied millage rates, but tO benefit from some millage rates levied by the state as well--including some millage rates levied for the benefit of schools. This change should make TIF districts more attractive to cities and counties by providing them additional capital with which to complete projects. Prior to this amendment, questions existed as to whether certain millage rates had been levied locally, and whether property taxes collected in connection therewith could be redirected to TIF districts.

Along with the benefit of this additional capital, the General Assembly gave local governing bodies the responsibility of determining the presence of specific factors within a blighted area before approving an ordinance creating a TIF district. Of these factors, three apply to improved property within a proposed TIF district, and one applies to unimproved property within a proposed TIF district. With regard to improved property, the local governing body must generally find that the property (1) is dilapidated or structurally deficient so that improvements are necessary to make it functional, (2) contains structures that have been vacant for more than three years, or (3) has structures functionally obsolete and ill-suited for their original purpose. With regard to unimproved property, the local governing body must generally find that the property is in an area predominantly developed, and is substantially impairing the growth of the city or county.

Finally, the General Assembly required that each plan include a third-party economic analysis. The analysis must generally compare (1) the projected ad valorem tax revenue to be diverted from taxing units as a result of the TIF district, to (2) the projected sales, income and ad valorem tax revenue to be received by taxing units as a result of the TIF district. This comparison should provide a better understanding of the potential economic impact a TIF district will have, and result in an educated decision on whether its creation would be beneficial.

Although several legal questions remain unanswered with regard to tax increment financing, the above-described changes provide promise that TIF districts will remain an exciting and useful financing tool in Arkansas, and will continue to reduce the number of blighted areas in our state.

Chad M. Avery is an attorney with the firm of Gill Elrod Ragon Owen & Sherman in Little Rock. E-mail him at
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Title Annotation:Tax increment financing law
Author:Avery, Chad
Publication:Arkansas Business
Article Type:Column
Geographic Code:1U7AR
Date:Jul 4, 2005
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