One of Montana's easternmost counties wants to create a special tax district to help boost its economy -- but the Schweitzer administration is saying no.

Tiny Fallon County, home to one of Montana's oil-drilling booms, says it merely wants to create a money source to build roads, water systems and other infrastructure that could bring some business offices or other projects to town.

"We'd like to reverse the perception of Fallon County as a frontier community," says Fallon County Attorney Rich Batterman of Baker.

Fallon County has a population of about 3,000.

Yet the Schweitzer administration has fought the proposed tax district now for nearly two years, saying it's a misuse of tax districts that would drain money away from the state.

State Revenue Director Dan Bucks has even called Fallon County's proposal a "watershed event," and suggested the county essentially wants to "fiscally secede" from its paying its fair share into statewide school funds.

Bucks said Thursday that Fallon County's proposal doesn't follow state law, so his agency won't approve it.

"All we want them to do is follow the law," he said.

In response, Fallon County has sued the state, attempting to force the Revenue Department to take the initial step setting up the tax district. The year-old case is before District Judge Joe Hegel of Forsyth, who may rule after evidentiary issues get resolved.

The battle is over an obscure item known as a tax-increment financing district, or TIF district, which can be used to fund urban renewal and something called "industrial districts."

Once a TIF district is created, the taxes on any increase in property values can be spent only on projects within the district. None of that additional tax goes to the state, school districts or local governments that would otherwise receive it.

Fallon County wants to create an unusually large district that includes the county's oil field, and proposes to use revenue to build up a section of Baker to entice oil-field service companies and perhaps other businesses -- or even an oil-processing plant -- in the future.

Right now, the oil-service firms are in Glendive or Miles City and their employees commute to Baker and then go home, Batterman says.

"Those are wages that are being paid here, but then they migrate out of our county," he says.

Yet the Revenue Department refused in July 2006 to certify the value of the district, saying it doesn't meet requirements for an industrial district.

Bucks says the law states that an industrial district must encourage growth of "secondary, value-added industries," which are manufacturing rather than service businesses.

Evan Barrett, Gov. Brian Schweitzer's chief economic-development officer, said his office has offered to help Fallon County find other sources of money to accomplish its goals.

He said he's worried that Fallon County is "stretching the boundaries of the (TIF) law," and could generate a move within the Legislature to get rid of TIF districts, which are valuable economic-development tools, he said.

"It's important that these practices of tax-increment financing are appropriately used," Barrett said. "If one county is allowed to manipulate the process, then you have no reason to deny any other county that wants to manipulate the process."

Yet Fallon County says the Revenue Department has no legal authority to make such judgments at this point in the process. The county says the district must be certified by the state, and questions of meeting legal requirements can be addressed at another time.

"We think we've done it correctly," Batterman says. "I'm not sure the (Revenue) Department has the authority to do what they're doing, but they're doing it nonetheless.

"The scope of our district is larger than they're accustomed to dealing with. But that reflects the reality of industrial development in eastern Montana. We don't have industrial blocks that are really industrial in nature."