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March 2012 Policy Study, Number 12-4

   

Tax Increment Financing: Magical Tool or Moral Hazard?

    Iowa TIF Law
   

 

The Iowa TIF law, first enacted in 1969 (Chapter 403, Code of Iowa), is considered “one of the most indulgent” in the United States because of the lack of “effective state or local oversight mechanisms.”[16] 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.”[17] Elected officials and managers of Iowa 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.[18]

 

An additional question is whether or not it is appropriate for money earmarked for private-sector economic development to be instead used for government development, under the guise of “infrastructure” needs.

 

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.”[19]

 

In the 2008 PII study 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 such as counties and school districts.

 

Some changes to the original law have been made. As of FY2009 funds are tracked separately from other tax revenue.[20] 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. These funds have been used primarily at the intersection of Interstate 80 and First Avenue in Coralville, to completely rebuild the entrance to the city, including building a major hotel and convention center. Legislation, House Study Bill 450, has been introduced in the Iowa Legislature in an attempt to further reform TIF procedures.

 

   

 

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