Economic development incentives for cities studied

Members of the Urban Affairs Committee assembled Sept. 3 for a hearing on the economic development incentives available to municipalities.

LR469, introduced last session by Omaha Sen. Heath Mello, directs the committee to conduct an interim study of existing incentives, those in development stages and incentives offered in other states.

At the hearing, Mello said most municipal economic development incentives fall under the umbrella of tax credits, financing tools and grants administered by the state Department of Economic Development. He reviewed two funding options: the Local Option Municipal Economic Development Act and Tax Increment Financing (TIF).

Incorporated into state law with the passage of LB840 in 1991, the Local Option Municipal Economic Development Act permits incorporated cities and villages, upon receiving voter approval, to use local sales tax and property tax revenues for certain economic development purposes.

Nebraska laws restrict the use of TIF to areas a local government designates as substandard and blighted. TIF bonds typically are issued to pay for public improvements to the area to attract private investment. The increase in property taxes resulting from the private investment is then used to service the bonds.

LaVista Mayor Douglas Kindig said the blighted and substandard requirement makes most of the property in his city ineligible for TIF.

“We understand there are issues with TIF if it is over utilized and we do not believe that TIF is always a good option,” he said. “We are, however, frustrated that there isn’t a greater ability to legally use this mechanism to foster certain types of projects and prevent areas of our communities from becoming substandard and blighted.”

Rick Cunningham, Omaha’s city planning director, said the city makes considerable use of TIF, adding that 10 recent projects could leverage an investment of $214 million. He did recommend, however, that the blighted and substandard terminology be changed to language more appealing to area real estate owners.

Cunningham also suggested that cities be given the option to extend the life of the increased property taxes used to repay TIF bonds or delay the start clock of a project until funds are available for it to proceed.

Current law requires property tax increases from redevelopment areas to revert to the local government taxing jurisdictions after 15 years.

Former state senator David Landis said TIF was initially promoted as a tool to attack poverty, but it also has been used for economic development. He said the blighted and substandard requirements are more important in larger communities than in smaller communities, where all growth is helpful and standards could be relaxed.

“Standards are important in a larger city to identify the areas of the city where the natural marketplace does not operate equally and where we want to encourage the marketplace to operate well,” he said.

Concerning the Local Option Municipal Economic Development Act, Kindig recommended that the appropriation limits in the act be raised. He said the construction of the LaVista Conference Center has exhausted the act’s $2 million maximum appropriation for first class cities until the facility’s debts are retired.

Rebates remitted under the Nebraska Advantage Act also were addressed by Kindig. The act offers sales tax refunds to businesses that meet certain investment and employment levels.

Kindig said these rebates can cause significant reductions in sales tax revenues that disrupt budgeting efforts. He suggested including municipalities in the agreements between the state and companies or capping the amount of sales tax revenue a city must remit to companies taking advantage of these incentives.

The state operates on a fiscal year beginning in July, while many municipalities operate on a calendar year, Cunningham said. He suggested that the state give municipalities 18 months’ notice to give localities ample time to budget for sales tax refunds.

Gary Krumland, representing the League of Nebraska Municipalities, provided two examples where sales tax rebates administered under business tax incentives have presented problems for municipalities. Tecumseh paid out rebates to a company that relocated to another Nebraska city, he said, and Sidney’s entire sales tax revenue has been remitted.

With regard to grants offered to municipalities, Cunningham said community development block grants are used selectively because of the requirements involved. He said their use is confined primarily to housing and community development projects.

The committee will release a report of its findings before the Legislature convenes in January.