Tax-free zones could encourage economic growth

Concept approved by Legislature

By KURT NESBITT

Journal Staff Writer

ST. PETER -- The idea of establishing tax-free zones in order to stimulate economic growth in rural Minnesota is one most officials like, but it might be a while before one materializes in the area.

Representatives from area counties and cities were in St. Peter Wednesday afternoon for an informational meeting on those zones, which recently became law.

The idea of having tax-free zones in economically struggling areas isn't new. Michigan and Pennsylvania have also tried similar plans. The idea was one of Gov. Tim Pawlenty's top economic development priorities for the past legislative session. The plan creates 10 tax-free zones for businesses and five for agricultural processing facilities throughout the whole state. It was passed with bipartisan support during the special session.

The idea behind the plan is aimed at greater Minnesota and will give businesses within those zones tax breaks for up to 12 years. Cities, counties and towns can apply and the Minnesota Department of Employment and Economic Development (DEED) is encouraging those governments to make joint applications for those zones. The department will consider factors like the poverty rate, average household income and underused or deteriorating property when considering an application. Any government body applying for a zone has to submit a development plan outlining the details of the proposed zone.

Louis Jambois, director of community development for DEED, said local governments will be in charge of making the decisions on which businesses will be in the zones.

Springfield City Manager Mack Tilberg said, "Any economic development tool to put in the toolbox is a good thing."

He emphasized that tax-free zones aren't a "fix-all" and said many officials still have questions on how to put one into place. He said many in the area have thought about a corridor along U.S. Highway 14.

Tilberg said local officials are going to meet within the month with local economic development authorities and administrators to talk about what would best benefit Brown County.

Tilberg said he doesn't see any drawbacks to tax-free zones at this point but said officials could find them later. One possibility is the loss of property tax revenue, which goes to fund city services and facilities.

Brown County Administrator Chuck Enter said Jambois' presentation gave good insight on the tax bill. He said area officials now must look at forming partnerships with each other, , which each jurisdiction -- counties, schools and cities -- must agree on in order to establish a zone.

"We've got a lot of work to do with this option and a lot of counties and communities are doing the same thing," said Enter.

Corporate income taxes, sales taxes on business purchases, capital gains taxes, property taxes and employment tax credits for high-paying jobs are the tax exemptions provided in the plan.

Commercial and industrial property are generally the only types of property that qualify for tax-free zones. Property that is subject to local general obligation bond debt, school operating levy referendums, land and vacant buildings aren't eligible for tax exemptions under the law.

Businesses in the zone at the time of designation, expansions to the zone, startups in the zone, relocations from other states and other parts of Minnesota are the only types of business that qualify for the breaks.

Tax-free zones can have up to 5,000 acres of such property. Businesses in those zones will still be required to file tax returns. The Minnesota Department of Revenue will have some oversight into the process to ensure against fraud.

Applications are due by Oct. 15. The DEED will likely makes its decision on where to put the zones by Dec. 31 and the zones would go into effect in early 2004. Any government entity that is granted a tax-free zone must make annual progress reports to the state.

Agricultural site zones can include a production facility, a companion site and reasonable expansion space. Large feedlots won't qualify for the zones, Jambois said.

He said southwestern Minnesota is going to be a tough area to develop because some parts are doing better than others.

"There's nothing similar to the 169 corridor, yet parts of this area aren't doing well," he said.

Jambois said the counties and cities that comprise the seven-county Twin Cities metro area are excluded by law from applying for the zones. Larger cities like Mankato and Rochester are technically eligible to apply, but Jambois said those cities might not meet the criteria for a tax-free zone.