As published in the Feb. 5, 2012, Des Moines Register
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The case for reform of Iowa’s most expensive economic development program — tax increment financing, or TIF — is compelling. Unfortunately, The Des Moines Register’s Jan. 29 editorial, “Don’t Kill Tax Tool That’s Key to Growth,” misses the boat, and by a wide margin.
Abuses of TIF are not minor exceptions; they are common and often egregious. Furthermore, we can rein them in while leaving the TIF tool intact for all legitimate development purposes. No one is trying to kill it.
The editorial describes well how TIF should work. A city invests in a blighted area, or provides incentives for new development. School, city and county taxes on the new valuation are diverted to pay for the city’s costs. “When the city’s investment is paid off, all of the new tax revenue flows to local governments.”
The Register apparently believes this is how TIF works in practice, and that reforms would somehow prevent it from doing so. In fact, the point of reforms is simple: Make sure TIF does operate as described. Too often it does not.
There are several ways tax increment financing can go wrong. Most importantly, nothing prevents a city from diverting tax revenue from school districts and the county long after the city’s investment is paid off. Continuing the diversion changes TIF into a cash cow. Thus, the most important reform is simply to prohibit the diversion of revenue beyond the repayment of project costs. For a new project, the TIF “increment” would reflect an updated base year.
Second, nothing requires the TIF diversion to create the new tax base that the Register expects. A city can use the financing on new subdivisions and use the revenue to build a recreation center, which will never pay property taxes, and the subdivisions were not provided any incentives through TIF and would have been there anyway. This shifts the cost of the recreation center to school and county taxpayers who may live outside the city and see no benefit to offset their higher taxes. The solution: Demand that TIF projects expand the tax base, and/or limit the percent of the city or the tax base that can be “tiffed.”
The third problem is when a TIF district covers parts of more than one school district. One of the largest TIF areas in Iowa, the Coral Ridge Mall TIF, is split in two by school boundaries. As a result, millions in TIF revenue every year are diverted from the Clear Creek-Amana school district and used to develop property in the Iowa City school district. Clear Creek-Amana gives up the revenue but will see no return. An easy fix: Allow no TIF area to span a school district border. If the project spills into a second district, set up two TIF areas.
The fourth way is when TIF incentives are provided to a project that would have proceeded anyway, without incentives. Middle- and upper-income residential subdivisions and shopping malls on farmland do not need incentives and should not get them. The solution: Allow TIF for retail and residential property only in blighted areas, or prevent their use on greenfield sites. Alternatively, require a determination that the project could not proceed but for the incentives.
Finally, TIF goes wrong when it is used to pirate tax base from neighboring communities. This is not economic development. To dismiss the example of Coralville using $18 million of TIF revenue to lure Von Maur from Iowa City as “bad judgment” misses the point. Coralville had the money to provide such exorbitant incentives only because the mall TIF had become a cash cow — see problem No. 1. As it is, because of the use of TIF, Iowa City residents are paying part of the cost of stealing their own tax base. The solution: Eliminate the loopholes in the current anti-piracy statute.
Those five simple reforms would limit five clear abuses of TIF. Not one of these reforms, and not all five together, would have interfered with or changed any of the beneficial uses of TIF. Let’s get on with reform to set limits and standards for this $280 million-a-year program so seriously lacking in accountability and transparency. Taxpayers deserve better.
CASE STUDY: Peter Fisher’s report, “Tax-Increment Financing: A Case Study of Johnson County,” is available at http://www.iowafiscal.org/2011docs/111121-TIF-JC.pdf.
MAPS AND MORE: For more about TIF, including maps that illustrate the reach of TIF districts in communities discussed in the Johnson County report, go to: http://www.iowafiscal.org/TIF.html.
FISCAL REPORT: Reports from the Iowa Fiscal Partnership about TIF and other fiscal issues facing Iowa are at www.iowafiscal.org.