The Scarborough Town Council is reviewing the impacts of a component of Tax Increment Financing (TIF) Districts known as the “tax shift” or “shelter benefit.” As part of this review, the Council wants to ensure that they are using this benefit strategically in both the Haigis Parkway TIF and the Downtown Omnibus TIF.

TIF districts are a flexible tool used by municipalities to leverage new property taxes generated by a specific project or projects in a defined geographic area. Any portion of the new taxes may be used to pay for investment in the district for up to 30 years. The purpose of the tool is to encourage and foster economic development.

The “tax shift” or “shelter benefit” refers to the ability of a community to defer the additional value created by new development within a TIF district in the calculation of the annual State Valuation for a community. A community essentially “shelters” the new value created by development. By delaying the addition of new value to the Town’s State Valuation, the Town receives a benefit in the form of reduced County taxes, increased State Revenue Sharing and increased State Aid for Education. In other words, if we shelter valuation, we receive more aid from the State. This sheltering effect happens for the life of the TIF District. Within any TIF district, the community determines the percentage of new value to shelter. Currently, the estimated benefit in Scarborough TIF Districts suggests that for every dollar we shelter, we receive 57.6 cents back in benefits.

So, you are thinking, “What does this mean and why do we care?”

State Valuation

Let’s start with the State Valuation. The State Valuation process is a method the State of Maine uses to certify the full equalized value of all real and personal property which is subject to taxation under the laws of Maine. The report of State Valuation just issued for 2022 relies on submissions by municipalities from April 1, 2020. The whole point of this exercise is to equalize the information reported from each community so that when valuations are compared, they are an “apples to apples” comparison.

As a fun fact, Scarborough’s 2022 State Valuation (based on data from 2020) is just under $5 billion. We make up 8.8 percent of Cumberland County’s total State Valuation and 2.4 percent of the total State Valuation. Only Portland, South Portland and York have higher State Valuation totals for 2022.

The State uses this equalized valuation in various formulas to determine how much aid a community will receive. A community’s State Valuation has an inverse relationship to State aid in these formulas. The higher the valuation, the lower the State aid will be, with the theory that wealthy communities need less help from the State. Please note that State Valuation is often only one component of any funding formula. High valuations can be tempered by a large resident population.

At the community level, an increase in valuation has a direct relationship with property taxes. More value drives more revenue.

Getting back to the point of sheltering, the State specifically and intentionally allows communities to keep this new value in a TIF district out of the State Valuation but keep the new value for local taxation. New value in a district is taxed just like every other property in the community, but that new value stays out of the State’s calculations. The State allows this sheltering to encourage economic development.

Impact on State Resources to a Community

Now let’s look at how sheltering the new value from State level calculations affects revenues. There are three areas where sheltering value from State Valuation impacts a community’s bottom line.

The first area is the County Tax. Since State Valuation affects the amount of tax assessed to communities by Cumberland County, the county tax is less. The estimated savings in avoided County tax is approximately 3.9 percent.

For State Revenue Sharing, a lower State Valuation results in a higher level of payment to a community from the State. Revenue Sharing is aptly named. The payment to communities is the mechanism by which the State shares the taxes that they collect such as income tax and sales tax. In Maine, municipalities are not allowed to levy a local income tax or a local sales tax. Since municipalities do not have that power of taxation, the State shares some of its revenues from these sources. Those revenues are not shared according to where the income and sales taxes are produced. They are shared according to a formula that looks at population and value. The higher your State Valuation, the lower your share of the State’s Revenue Sharing pool. For Scarborough TIF Districts, every dollar of value sheltered results in 4.8 percent of that dollar being returned to the community through Revenue Sharing

School funding to municipalities is a complex formula which looks at many variables, one of which is a community’s ability to pay for education. A factor in determining a community’s ability to pay is the State Valuation. The current estimate of the impact of sheltering new valuation results in a return of 48.9 percent of every dollar sheltered.

The total impact of this sheltering effect is that for every dollar that is sheltered through a TIF district, Scarborough receives 57.6 cents back in financial benefits, either in avoidance of County taxes or increased in State aid.

Strategic Use of Sheltering

As the Council reviews amendments to existing TIF districts, their aim is to ensure that the tax shift benefit is maximized whenever possible. Strategic use of the TIF shelter benefits drops to the Town’s bottom line.