What is the tax abatement?

Published 8:12 am Friday, September 13, 2019

The city of Austin uses many tools to encourage growth. One tool is tax abatement.

Tax abatement allows a person who owns an undeveloped piece of land—for example, an empty lot—to pay lower property taxes on that land for a few years after improving the land.

Consider an empty lot in a residential neighborhood. Ms. Empty Lot pays low taxes because it has a low value. For example, let’s say that Ms. Empty Lot pays $100 per year for property taxes.

When Ms. Empty Lot decides to build a house, the value of the property goes up and the property taxes go up.

Let’s say Ms. Empty Lot builds a house worth $100,000. Now that same property will pay, for example, $1,200 per year for property taxes.

That means all the other property owners now have Ms. Empty Lot paying an additional $1,100 per year. So that extra revenue can either add city services or reduce the amount paid by all the other taxpayers.

Because her project met all the requirements, Ms. Empty Lot gets a pass to pay the lower property tax rate of $100 per year for five years after building the house.

Ms. Empty Lot is still paying the taxes that she paid before building the house. She doesn’t stop paying so it doesn’t put a bigger burden on the other taxpayers.

It’s true that people now living in Ms. Empty Lot’s house use city services like the library, park, police and fire services, but the actual dollar amount is pretty minimal—far less than $1 per property taxpayer per year.The city was already plowing the street and removing the storm water. The residents pay for waste water through fees, not property taxes.

After five years, Ms. Empty Lot starts paying the higher rate of $1,200 per year. Now the other tax payers get the benefit of Ms. Empty Lot paying a larger share of property taxes.

To encourage new housing in Austin, the City of Austin, Mower County and the Austin Public School District have been offering tax abatements. Since 2016, 37 homes in the community have been built with the five-year tax abatement.

Tax abatement is offered to commercial property, too.

Consider an empty lot in a business district. Ms. Business Investor pays low taxes because it has a low value. For example, let’s say Ms. Business Investor pays $1,000 per year for property taxes.

When Ms. Business Investor decides to build a business, the value of the property goes up and the property taxes go up.

Let’s say Ms. Business Investor builds a business worth $5,000,000 on the empty lot. Now that same property will pay, for example, $60,000 per year for property taxes.

That means all the other property owners now have Ms. Business Investor paying an additional $59,000 per year in taxes. So that extra revenue can either add city services or reduce the amount paid by all the other taxpayers.

If Ms. Business Investor shows how her business will benefit the community to elected officials, she gets a pass to pay the lower property tax rate of $1,000 per year for five years after building the business.

Ms. Business Investor is still paying the taxes that she paid before building the business. She doesn’t stop paying so it doesn’t put a bigger burden on the other taxpayers.

It’s true that the business uses city services like police and fire services but that amount is pretty minimal—between $1-$2 per property taxpayer per year. The city was already plowing the street and removing the storm water. The business pays for waste water through fees, not property taxes.

After five years, Ms. Business Investor starts paying the higher rate of $60,000 per year. Now the other taxpayers get the benefit of Ms. Business Investor paying a larger share of property taxes. In addition, the business owned by Ms. Business Investor employs people and adds to the local economy.

To encourage businesses to build in Austin, the city of Austin, Mower County and the Austin Public Schools District consider requests for tax abatement on a project-by-project basis.

The actual mechanism for calculating the tax is to assess and levy for the new property value and then rebate the difference.

To learn more about available incentives for new housing or business growth, contact Craig Clark, Austin City Administrator at 507-437-9941 or craigc@ci.austin.mn.us.