Grand Forks is dishing out tax incentives to developers. Will they work?

Earlier this month, the Grand Forks Herald reported that,

Months after the Grand Forks School Board and Grand Forks County Commission sent a proposed tax incentive for a major apartment development back to the drawing board, the Grand Forks City Council voted to move forward an updated proposal Tuesday night.

The Reserve, a proposed $37 million development by Northridge Construction located at 4551 S. 17th St. near the Sanford Clinic, would bring approximately 155 market-rate apartments to Grand Forks by 2027. In the newest version of developers’ application for a tax incentive, they requested a five-year, 100% Payment In Lieu of Taxes.

Initially, the development asked for a 20-year property tax exemption, which would have needed approval from the city council, county commission and school board. Instead, the City Council approved a much narrower, 5-year exemption—well within its own authority to grant.

The Reserve is not the only project getting tax incentives. Several other projects in Grand Forks are under consideration for multimillion-dollar tax exemptions, and numerous others are underway. In 2022, for instance, Grand Forks authorized a 90 percent 20-year exemption for a Memorial Village Development Project and a 15-year tax incentive for the Olive Ann boutique hotel. In 2023, Grand Forks also authorized a 95 percent 20-year exemption for a second Memorial Village development project.

Driving this trend is the idea that these developments would not occur without incentives. But is that true?

Here is what the research says about development incentives.

The problematic ‘but-for’ test

Lawmakers use a ‘but-for’ test to analyze the necessity of public funding for development projects. At its core, a ‘but-for’ test asks whether the development would take place without public funding.

While seemingly scientific, ‘but-for’ tests are not very reliable. A study by the Upjohn Institute found, for instance, that public funding rarely sways business decisions. This means that these incentives often go to projects that do not need them. Other research has also found that tax-incentivized development merely replaces other privately funded development.

In the case of the North Ridge development, Baker Tilly conducted a ‘but-for’ test, which recommended a 15-year exemption. This is far above what Grand Forks approved for the project, since it “miraculously” got additional private funding. It is likely then that this project, and potentially many others, could have gone forward without public funding.

Unnecessary, wasteful, and unfair

Since public funding often goes to projects that would have happened anyway, it is a waste of resources. To the extent that projects meet a ‘but-for’ test, research evidence has found that the benefits — such as increased property values and economic development —  are often small or non-existent.

By shifting the tax burden to other existing businesses, tax incentives give an undue advantage to benefiting businesses. Not to mention, residential taxpayers also lose as they are forced to bear more than their share of (often rising) property taxes. As cities face declining commercial property values, these incentives will further erode the tax base, likely putting Grand Forks in a shaky fiscal position.

The Grand Forks City Council needs to rethink these incentives. Instead of diverting tax revenues necessary to fund public services, they should focus on removing red tape that hinders development.