Who most waters the economy: Fargo grants greater share of property tax breaks than regional peers, but not as much as West Fargo or Moorhead
FARGO — Last year, businesses and homeowners in Fargo benefited from $1.35 million in property tax incentives from the city, according to data from the city's annual financial report and interviews with city officials. This was tax money that went uncollected by City Hall or was collected but could only be used for a specific commercial development.
Incentives have been hotly debated by city leaders in recent years, with some expressing discomfort with how much and how often tax breaks are given out. Others say Fargo's peer cities in the region and its metro-area neighbors use tax incentives, too, and the city has to stay competitive. By one measure, Fargo's metro neighbors use even more incentives.
"I compete with Sioux Falls. I compete with Grand Forks. I compete with Moorhead," Fargo Mayor Tim Mahoney said. "I think we have the right balance right now."
Officials in Moorhead and West Fargo say they also have the right balance.
According to Fargo's annual financial report, the $1.35 million is equivalent to 0.64 percent of all city revenue in 2016. That's much higher than the 0.39 percent average among regional peers such as Bismarck, Rochester and Sioux Falls, according to a Forum analysis of cities' financial reports and interviews with officials.
Compared to metro-area neighbors, though, Fargo's incentive use is smaller likely because the city has much greater sources of revenue to draw from than the others. Moorhead's tax breaks are equivalent to 0.94 percent of all revenue, and West Fargo's tax breaks are equivalent to 1.37 percent of all revenue.
The Forum didn't compare the incentives to property taxes because cities' reliance on those taxes differ so much. Fargo, for example, gets nearly twice as much revenue from sales tax as it does property tax. Moorhead doesn't collect any sales tax revenue.
Matthew Marshall, West Fargo's economic development director, said he still has a problem with this comparison because it doesn't capture all of the incentives that any community actually offers. Some states are much more involved in economic development than North Dakota, offering their own incentives, and some cities own properties that they can offer to businesses at subsidized rates, which West Fargo doesn't.
Cindy Graffeo, executive director of the Moorhead Economic Development Authority, said in an email that comparing the amount of tax breaks to a city's existing revenues doesn't tell anyone how successful the incentives are. Instead, the tax breaks should be compared to future revenues once the breaks expire, she said.
"If Moorhead were to get a $100 million project that created 1,000 well-paying jobs in our community, our ratio would go up," she said. "It should be viewed as a good development, but this ratio would lead you to believe it was a negative for the community simply because it's higher than other communities."
Until recently, comparing the use of incentives among cities was an overwhelming task because cities haven't had to report incentives in a standardized way. Last year was the first time accounting standards for government financial reports had such a requirement, called Statement No. 77.
The Forum attempted to use the reports but found cities weren't consistent in how they applied standards, requiring interviews with finance or economic development officials. Perhaps reflecting the scrutiny incentives in Fargo have been under, the city's report was the most forthcoming, including all incentives other than those it has no control over, such as tax breaks for homes owned by disabled vets. West Fargo didn't report Renaissance Zone incentives in its report. Minnesota cities didn't report JOBZ, a property-tax incentive program that's now ended, that the state administers but is requested by cities. Sioux Falls didn't include property tax exemptions and didn't have a tally when The Forum called.
Still, Statement No. 77 does offer a rough comparison, even if it's an imperfect one. Among six peer cities in the Upper Midwest — Bismarck, Duluth, Grand Forks, Rochester, St. Cloud and Sioux Falls — Fargo is at the top.
St. Cloud is the next highest with incentives equivalent to 0.57 percent of total revenue. With JOBZ, though, St. Cloud could be a lot closer. The next highest is Bismarck at 0.5 percent.
Duluth is the lowest at 0.17 percent, and Sioux Falls is the next lowest at 0.18 percent.
Tax increment financing, or TIF, is by far the most common incentive offered by cities. Unlike tax abatements, property owners still pay the full property tax when the land is built on. But the additional taxes from new construction don't go into city coffers. The money pays, instead, for streets, sewers and other development costs that normally are paid by the property owner.
Nearly half of Fargo's incentives are in the form of TIFs. For some cities, such as Rochester and St. Cloud, most of the incentives are TIFs.
Most other incentives take the form of tax abatements, meaning the property pays no property tax or only some tax for a certain number of years.
For Fargo, incentives have several goals besides just competing with other cities, according to Mayor Mahoney.
One goal is to expand the tax base, meaning increasing the value of individual properties and increasing the number of properties paying taxes, thereby reducing the tax burden for everyone. City Planner Jim Gilmour said recently that the growth of just downtown has decreased taxes for all property owners by 4 percent.
Marshall in West Fargo and Graffeo in Moorhead said their cities also use incentives to expand the tax base.
Mahoney added that the return on investment for the city with TIFs is something like 1-to-35 over the last decade, meaning the value of properties after incentives is 35 times as much as the taxes the city temporarily gives up.
West Fargo spokeswoman Melissa Richard said Renaissance Zone incentives denied the city $142,800 in taxes but resulted in property values increasing by $6.2 million.
Another goal is to reduce Fargo's reliance on taxes paid by homeowners. According to Finance Director Kent Costin, 53 percent of property tax revenue now comes from commercial properties versus 47 percent from residential. A decade ago, that balance was 49 percent to 51 percent.
Marshall, West Fargo's economic development chief, said his city is also trying to do that but residential growth has been so explosive it's always an uphill battle.
"It seems to me that when you discuss (incentives) you're only saying this is the amount of money that was spent, but no one ever talks about what was achieved. Ever. And then they always have the premise that this was coming anyway. And that's the part I take issue with."
He said some properties don't develop on their own and require city incentives, and that some may develop but not to their full tax-paying potential. As an example, he said, a piece of land the city thought had potential once was snapped up by the school district, which doesn't pay property taxes.
Comparing with others
But how do cities know if they're being too generous?
"We have a 'but for' test for incentives: But for the incentive given, the project would not proceed," said Graffeo, Moorhead's economic development chief.
Fargo and West Fargo both report using such tests, though not in every case. Typically a city would look at the return on investment that a developer could expect from a certain property. If the return is judged to be too low to offset the risk of developing the property, the city would agree to incentives.
"When you work in a blighted area, you don't know what you're going to get into," Mahoney said. For example, a developer might discover unexpected toxic waste underground that needs cleaning up, he said.
Graffeo said that, on average, Moorhead's incentives are about 10 to 15 percent of the new value of a property, that is, the expected value once the developer has built up the property. "This level is fairly typical in the industry," she said.
Marshall questioned those figures. To him, it's not possible to do a straight comparison when the variety of incentives available are so much greater than just city tax incentives. Some states offer businesses money for job training, he said. Some cities have quasi-governmental agencies that own and develop land for businesses, he said.
Mahoney said that at the turn of the millennium, Fargo wasn't able to offer any incentives and there was a lot of blight. Then after incentives were made possible by state lawmakers and the city made vigorous use of them, he said, it saw a lot of strong growth.