February 2012 Brief: Volume 19, Number 5
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Tax Increment Financing: Piracy and Cows
by Deborah D. Thornton
When a city approves the use of a Tax Increment Financing (TIF) zone, the property taxes collected from the designated area are not divided between the city, county, and school districts. Instead the increased (increment) revenue is all diverted to only the city which established the TIF. This can be done for a variety of time periods, including as long as 20 years. It was thought that by allowing the city to first develop infrastructure such as roads, water, and sewer systems in “blighted” areas, private-sector businesses would be more willing to build and develop the property. The TIF funds were to be used to pay the bonds taken out to build the infrastructure, as the local match required to receive other state or federal tax money. Funds could also simply be returned to the property owners as tax rebates, direct grants, or business loans.
The Iowa TIF law is considered “one of the most indulgent” in the United States because of this lack of “effective state or local oversight mechanisms.” There is no method for negotiation of revenue sharing and no oversight body. There is no prevention of “rollovers” which keep the area in the TIF district long after the original work. There are no required performance guarantees, such as a certain number of jobs over a certain length of time, required of the developer taking advantage of a TIF.
Importantly, there is “no prohibition on the use of TIF funds to create structures which are themselves tax-exempt.” Cities have taken advantage of this to build community buildings, parks, and fire stations. While these facilities are important, there are other funding methods available. However, the bonds required to fund these projects must be passed by a 60 percent majority vote. Often cities have decided that a TIF was easier than convincing 60 percent of taxpayers to pay new taxes. Because the law allows TIF to be used for these projects, it is.
In 2008, the Public Interest Institute (PII) issued a Policy Study titled “Tax Increment Financing: Getting it Right.” This study questioned the proper and improper use of TIF by cities for infrastructure development in economically “blighted” areas and for general economic and residential development.
PII researcher Jonathan Miltimore noted that one of the problems with TIFs was that the criteria was so general and undefined that cities began to use them for a wide variety of projects. Additionally, he noted that prior to FY2009 the TIF revenue had been “lumped together with an assortment of funds – federal grants, road use taxes” and others, and labeled as special revenue funds. Therefore it was impossible to track the amount or use of TIF taxes by a city. Other concerns included the lack of input and oversight by citizens and affected jurisdictions.
Some changes to the original law have been made. As of FY2009, funds are tracked separately from other tax revenue. This transparency has resulted in more questions about TIFs and the impact on both county governments and school districts. The most significant questions about TIFs have been raised in Johnson County, where the city of Coralville diverts millions of dollars from the county and school districts.
The Iowa Policy Project recently documented the impact of the Coralville TIF. Currently, over $5 million in property taxes per year are being diverted from the Clear Creek Amana and Iowa City school districts, and $2.7 million from Johnson County government. The original Coralville TIF was put in place for development of Coralridge Mall in 1998. In has been in place for 14 years – with 14 years of tax diversions and expansions, though the infrastructure for the mall has long been paid for.
Most taxpayers have little familiarity with the intricacies of TIF. However, in September 2011, Coralville used TIF financing to “lure” the Von Maur department store from Sycamore Mall in Iowa City – less than five miles away – to the new Iowa River Landing site. The estimates of the amount of tax money being offered are as high as $16 million. The deal includes not only $9.4 million in incentives and another $1.5 million for the land, but $650,000 as a payment to Sycamore Mall because the store will break its lease when it moves.
The Von Maur store is the central anchor at Sycamore Mall. Though Sycamore was renovated in 2001 and again in 2004, several major specialty stores such as Talbots have recently closed. A tuxedo shop, Hallmark card store, travel agency, and children's toy store have also closed. The 2004 renovation was done through an Iowa City TIF, and facilitated a Panera Bread restaurant and expanded the movie theaters. In a similar fashion, both J.C. Penney and Sears left Iowa City for Coralridge Mall when it opened in 1998. So there is a long history of retail “piracy” between the two towns, as well as questionable use of the TIF process. This most recent action has caused significant pushback from private-sector business people and developers, who have struggled throughout the recession, and have not been offered a $16 million deal.
Officials with Johnson County government and the Clear Creek Amana and Iowa City school districts are also concerned about the impact on their budgets. A report by the Iowa Association of School Boards states that Clear Creek Amana will lose $2,974 per pupil in property tax revenue in FY2012 because of the Coralville TIF. This totals about $4.4 million per year in tax revenue that could be used by one of the fastest growing districts in the state.
A public meeting in Coralville on TIFs drew a standing-room only crowd of concerned citizens and calls for significant changes to the TIF law. Ideas suggested were time-frame limits, individual-project limits, a prohibition on piracy offers, a percent of property limit, a better definition of allowable projects, and joint approval and review processes.
As far back as 2002 researchers in the Economics Department at Iowa State University stated that TIFs have now “become a de facto entitlement for new industry and housing development…with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice.”
Peter Fisher of the Iowa Policy Project said, “many cities view a TIF area as a perpetual cash cow to finance city operations that have nothing to do with economic development.” While most Iowans like cows, this “cash cow” is in need of significant reform.
Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.
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