3.0. HRSR 02-05-2001 - Laserfiche WebLink

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Market Value Taxes A city, county, school district or special taxing district may choose to finance certain types of levies through the • referendum process. If a referendum passes,the taxes and tax rates are based on the market value of the property instead of the tax capacity of the property. However,not all property values are based on the straight market value. Any of the property classifications that are at the .40 percent class rate for tax capacity will be at 40 percent of the market value, thus giving some properties a lower market value tax base than others. What effect does this have on the tax increment financing districts? The market value referendum portion of the property taxes is not included in the tax capacity rate, which is applied to captured value, and therefore generates no increment for the district. With the trend of(primarily)school districts to move from tax capacity based to market value based ad valorem taxes, the current tax capacity rates may start decreasing as the market value referendum rates increase. TIF Example Through TIF,a municipality or development agency is able to utilize the property taxes of a new development that result from increased market values. These increased property taxes can be used to pay for the public costs related to that development. The mechanics of tax increment financing are best described through the use of an example,as follows: Within Authority A, Minnesota,there is a development project area known as Development District No. 1. Within Development District No. 1 is a tax increment financing district called Tax Increment Financing District 1-1 that includes a parcel of property known as Parcel X. A developer is proposing to demolish an old structure(a warehouse) and build a new office building on Parcel X and has asked for tax increment financing assistance from the Authority. The local assessor has determined that the current market value(including land and buildings)of Parcel X is$25,000. The market value of the property is multiplied times the class rate to arrive at a tax capacity(somewhat analogous to • the old system of assessed value).The class rate for commercial property for the first$150,000 of market value is 2.40% and the class rate for the remaining market value is 3.40%. To arrive at a tax bill,the tax capacity is multiplied by the local tax rate(or the old mill rate)which is 1.30 (or 130%)for the Authority. The taxes on the existing buildings and the land are calculated as follows: Sample Calculation of Current Tax Capacity and Taxes Current Market Value of Land and Buildings: $25,000 To calculate Tax Capacity, apply Class Rates to Market Value: 2.4 percent portion of Tax Capacity(First $150,000): $25,000 x 0.24 = $600 3.4 percent portion of Tax Capacity(Over $150,000: $0 x 3.4 percent = $0 Total Tax Capacity: $600 plus $0 =$600 To calculate Taxes paid, apply Tax Rates to Tax Capacity: Sample Tax Rate for Taxes Payable in 2001: 1.3000 Total Taxes Paid Annually: $600 * 1.3000 = $780 • Ehlers and Associates- How to Calculate TIF