Consultant explains tax-increment financing, 25-year tax-incentive districts for data centers

Nathan Ellis, of Publix Finance Law Group, PLLC, told the Yukon City Council on Sept. 9 that tax increment financing and tax incentive districts are legal tools cities use to encourage development by capturing or reducing taxes generated by new projects. “When I say TIF and, I mean tax increment financing,” Ellis said at the start of his presentation. He described TIF as a mechanism that “captures some or all of that new revenue” created by development while leaving the existing revenue baseline untouched.

Ellis said a tax-incentive district (TID) differs from a TIF by operating as a tax abatement: rather than capturing new revenue, a TID allows developers to be relieved of tax obligations for a defined period. He noted a statutory change in recent years that allows a TID tied to the NAICS classification for data centers to last up to 25 years. “For the specific NAICS class classification code that is a data center, you could actually create a tax incentive district or a TID that could last up to 25 years,” he said.

Why it matters: both tools can move projects forward by improving project pro formas, but they change who receives revenue and when. Ellis explained tradeoffs the council should weigh: which taxes are captured (sales, property/ad valorem, hotel), whether existing businesses will be harmed by sales-tax “cannibalization,” and how school funding and bond capacity are affected.

Key process points and limits

Ellis summarized the usual steps to create a TIF or TID: adopt a resolution of intent, prepare a project plan, convene a statutory TIF review committee that includes affected taxing entities, get planning-commission review, hold two public hearings and then adopt an ordinance. A city may adopt a TIF ordinance by a simple majority if advisory bodies recommend approval; if advisory bodies oppose, adoption requires a two-thirds council majority. He said a TID requires the formal consent of each affected taxing entity in order to abate taxes.

Ellis covered statutory constraints the council must consider: a municipality may not place in TIF districts more than 25% of its land area in the aggregate; net-assessed-value limits vary by population (he said jurisdictions under 50,000 population have a higher cap than larger cities); and a school district cannot have more than 25% of its net assessed value inside TIF districts once aggregated across municipalities the district serves.

State involvement and financing

Ellis described the state-level “Leverage Act” mechanism that can provide state matching for some projects after Commerce calculates a net benefit to the state. He also described how payment‑in‑lieu‑of‑tax (PILOT) arrangements are used when Economic Development Authorities (EDAs) own buildings: the occupant or lessee will often make a PILOT equivalent to the tax that would have been paid if the property were on the rolls.

On TIDs for data centers, he offered a numerical example: a building worth about $30 million and roughly $970 million in taxed equipment could generate about $10 million in annual property taxes. Under a TID the company could pay a negotiated, fixed PILOT (for example, $1.5 million annually) instead of variable property taxes, which helps both the company’s predictability and the taxing entities’ budgeting.

Funding upfront infrastructure and risk

Ellis warned the council that the biggest practical challenge is paying for infrastructure that must be in place before new tax revenues begin. He described typical financing approaches: the developer fronting costs and being reimbursed from future TIF revenues; the city borrowing against utility or general-revenue streams; or third-party financing secured by expected TIF revenues once a proven revenue history exists. He said lenders typically require revenue history or leased tenants before underwriting to reduce risk.

School funding and public concerns

Ellis explained how TIF revenue directed back to a school district is treated under state aid formulas, noting the increment returned to schools is commonly treated as “other revenue” rather than local tax revenue that reduces state aid, which can leave districts with additional local funds for capital or operations. He acknowledged public concerns that TIFs divert money from schools and said those concerns are common at hearings and should be addressed through careful project-plan design and outreach.

Public participation and legal notes

Ellis reviewed reporting and transparency requirements: annual reports to the tax commission and a Commerce portal filing, and that the statutory review committee is subject to the Open Meeting Act and must post agendas and allow public attendance. He also noted the referendum process: after an ordinance is adopted a referendum may be used to challenge it if petition requirements are met; he referenced ongoing litigation in Norman over referendum language tied to a specific arena/TIF dispute.

Questions from council members

When a council member asked, “The TID still requires the consent or cooperation of the other taxing authorities within that area. Correct?” Ellis replied, “It does specifically require their consent. Yes.” Amy (first name only in the record) asked for a numerical example of how a data center might be treated; Ellis ran through the example above and described the relative predictability of a fixed PILOT compared with variable annual property-tax bills on depreciating equipment.

What the council did: informational only

The presentation was for information and discussion. No ordinance, resolution or other binding action on a TIF or TID was taken at the Sept. 9 meeting.

Ending: next steps and public outreach

Ellis recommended careful drafting of any project plan, active engagement of the statutory review committee and planning commission, and early public outreach. He emphasized that many TIFs are developer‑driven and that the “but-for” question—whether the project will not occur without the incentive—should be documented in the project plan if the city moves forward.