Tax break reform plan could 'cripple' downtown Fargo growth, officials say
FARGO — A plan to build a new 18-story high rise tower in Fargo, and several other construction projects in the city's booming downtown, could be hurt if tax break reforms adopted last week by the state House become law, city officials say.
"It will cripple us," Mayor Tim Mahoney said of House Bill 1182's elimination of income-tax breaks for new businesses and residents in the Renaissance Zone.
Mahoney and City Commissioner Dave Piepkorn warned in a letter to Republican House leaders the day before the vote Thursday, Feb. 16, that buildings are being constructed in Fargo with the assumption that, when completed, developers would attract tenants with income-tax breaks.
"I think this thing will impact businesses' decisions to be in downtown Fargo," said Mike Allmendinger, general manager of Kilbourne Group, the most active downtown developer and a firm founded by Gov. Doug Burgum—who could veto the bill if it passed the Senate.
The group and its partners have plans to start construction this spring on the $98 million Block 9 high rise. The firm is already building the Roberts Commons, a new mixed-use building and parking ramp downtown a block away from where Block 9 would rise.
City Planner Jim Gilmour said other projects could be affected, such as an office space Enclave Development is renovating on the second floor of 508½ Broadway and an apartment and condo building planned for the lot where the old Howard Johnson's hotel used to stand.
The House voted 48-41, with five abstentions, to pass the bill, with many seeing it as a way to improve the state's dire fiscal situation, though the amount of revenue raised would be relatively small. City leaders say they hope the Senate will undo some of the changes made by the House.
Though no one has spoken yet of Burgum's role, he does wield veto power. Kilbourne Group is behind many Renaissance Zone projects in Fargo, though as governor he's no longer in direct control of the firm. The first-term governor, who took office in December, has long been an advocate of the incentives.
Asked by The Forum, Burgum's office said he prefers the Renaissance Zone law "in its current form." State law forbids governors from threatening vetos—they could lose their job—so he won't say what his response would be if the Senate goes along with the House on HB 1182.
Feel the pain
State lawmakers in 1999 authorized cities to create Renaissance Zones to encourage investment in slum and blight areas. Investors would be eligible for five years of property- and income-tax exemptions, with a cap of $10,000 in personal income and $500,000 in business income.
Nearly 60 North Dakota cities have Renaissance Zones, including 17 of the state's 20 most populous cities.
HB 1182 would leave the property-tax breaks alone while eliminating the income-tax breaks at the end of this year.
Rep. Rick Becker, R-Bismarck, the bill's prime sponsor, told colleagues Thursday this makes sense because while the tax breaks are given out by some cities the entire state has to make up for the lost revenue. He has less of a problem with the property-tax breaks, he said, because that's revenue collected by local governments and local property owners would make up for the lost revenue.
"Everybody is feeling the pain, especially the neediest people who rely most on North Dakota services, which we can't fund right now," Rep. Christopher D. Olson, R-West Fargo, said during the floor debate. "If we think we need to be pouring incentives to exempt from income tax people that want to go rent high-priced real estate downtown, I think that's a mixed-up priority."
The Tax Commissioner's Office estimated Renaissance Zone investors saved $1.6 million to $4.9 million a year from 2010 to 2015. That's an average of $3.1 million a year or 0.05 percent of the governor's proposed biennial budget of $13.3 billion.
Mahoney argued that business activities generated by Renaissance Zone projects will give the state more revenue in different ways, such as sales taxes.
Opponents of HB 1182 argue the Renaissance Zone is a well-balanced mechanism that has proven effective at attracting investments.
"With all due respect, it ain't broken, don't fix it," Rep. Patrick Hatlestad, R-Williston, admonished his colleagues.
In a December report anticipating legislative scrutiny of the program, Fargo's Planning Department found that property values did increase significantly since the Renaissance Zone went into effect here. Of the 176 projects that have received incentives, 146 are now paying full taxes. Their values have increased 225 percent. Of the remaining 30 projects, their values have increased 103 percent.
Rep. Thomas Beadle, R-Fargo, said property-tax breaks are aimed at property owners but income-tax breaks are aimed at tenants such as businesses. "They work in concert with each other. We don't want to restrict one in this area," he said.
Most House members from Fargo opposed HB 1182. Of 14 from here, 10 voted against the bill and four for. Of four members from West Fargo, three voted for and one against.
It's one of a handful of bills the Legislature is considering that would change state tax incentive policies. Senate Bill 2166, for instance, would prevent projects from benefiting from both the Renaissance Zone program and tax-increment financing, another way municipalities can spur development that's often used in Fargo.
Allmendinger said downtown needs incentives because it's just more expensive to build and do business there compared to starting fresh on new land.
City Commissioner Tony Grindberg, who co-sponsored the bill that authorized Renaissance Zones when he was in the Senate, said despite the "amazing transformation" seen on Broadway there's still a lot of revitalization to be done, especially on the still underdeveloped western edge of downtown.
Mahoney and Piepkorn's more immediate concern was how HB 1182 would sunset income-tax breaks by Dec. 31, meaning no business or person could apply for them after that date. Several downtown projects that have gotten renaissance incentives from the city within the last few years or so will not be ready for tenants until after the deadline.
Grindberg said he's hopeful new revenue forecasts in March would bring good news for the state, potentially giving the Senate a reason to preserve the Renaissance Zone law as is.
"The Legislature is doing what it has to do to balance the budget. Hopefully it'll have a little uptick on the back half of the session and maybe restore some of these programs that have proven worthy," he said.