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March 2012 Policy Study, Number 12-4

   

Tax Increment Financing: Magical Tool or Moral Hazard?

    Overview of TIF Use in Iowa
   

 

The Legislative Services Agency (LSA) functions as the government operations and analysis unit for the Iowa Legislature. They are a non-partisan agency and provide well-documented reports on a wide variety of issues. The most current report on TIFs was issued in January 2012.

 

As of FY2011 there were 2,125 “active” TIF areas, with 1,527 generating TIF-specific property tax revenue and 394 governments receiving the money. Within the 1,527, about one-fifth (309) had no property taxes being collected, or “base” value. Total taxes collected were $279.7 million.[21] The cities receive 93 percent, or the vast majority of TIF funds.[22]

 

A year earlier, in FY2010, there were 2,238 active TIFs in Iowa. Only 1,567 or about 70 percent generated increased tax revenue, or increment. These areas generated $283.2 million in property taxes, or about 6 percent of all property taxes statewide.

 

According to the LSA, there are 403 local governments receiving TIF revenues, “including 348 cities, 49 (of 99) counties, two community colleges, and four rural development zones.”[23] From FY2008-FY2010 a total of $725 million in TIF revenue was collected by the districts. The debt floated against this revenue increased by $453 million during this time. The table on the next page outlines these details.

 

In a similar report a year earlier, the LSA conducted a multi-year review of tax growth and distribution changes. According to its analysis, from FY2001 to FY2010 the TIF property tax revenue grew by $155.9 million – increasing from $116.1 million in FY2001 to $272 million in FY2010. It accounted for just over 10 percent of all growth in property taxes.[24]

 

When analyzing the rate of property tax revenue growth, TIF areas grew 5.7 percent, faster than counties (5.0 percent) and school districts (4.3 percent) on an overall basis during this time period. As a percent of total city revenues, TIF funds made up almost 30 percent (29.5 percent) of the growth in city taxes collected.[25]

 

The most important statement about TIF is at the very end of the 2010 LSA report:
“The growth of local option sales and income taxes as well as expanded use of TIF, have both contributed significantly to local government tax growth; the first by expanding the tax base and second by pushing up tax rates to fund economic development activities.”[26]

 

In FY 2010, and presumably earlier years, most of the incremental property taxes – if not diverted by the TIF – would have gone to the local school districts.

 

The FY2010 breakout by the LSA shows that 43 percent of TIF money came from the schools, 31 percent would have still gone to the city with the TIF, and 19 percent would have gone to counties. Small amounts would have normally gone to community colleges, the agriculture extension services, county assessors, townships, self-supporting municipal districts, and hospitals.[27]

 

 

Importantly, much of the money diverted from the local districts is backfilled by the state government in order to hold the school districts harmless. This amount has rapidly increased over the last 20 years. In FY1992 it was only $5 million. As of FY2011 the backfill money was over $45 million.[28]

 

The percent of property taxes diverted by TIFs has increased substantially as well, from less than a half percent (0.4 percent) in FY1992 to over 6.5 percent in FY2011.[29]

 

In the 32 cities in Iowa with the largest TIF revenue – theoretically the cities with the most and fastest economic development and economic growth over the last few years – some interesting things have happened.

 

The taxable value of property, in the entire city, has gone up substantially (91.8 percent from FY 2001 to FY2011) and the commercial taxable value has gone up even more substantially (107.4 percent).

 

This is faster than the overall state rates of 52.6 percent and 66.5 percent. Yet at the same time the average consolidated tax rate has also gone from 31.28 percent in FY2001 to 37.21 percent in FY2011, or by 19 percent versus the state average of 11.6 percent. So, yes these towns have grown.[30]

 

However, of the top 32 TIF cities, only 22 had taxable value growth above the state average. In terms of Homestead credit, 13 had growth below the state average and eight actually had declines.[31] Therefore, having a TIF district does not guarantee economic development success.

 

As these numbers show, property taxes collected from business and property owners in TIF districts go up – but the schools do not get the money. In order to replace the lost money the state allocates more money – collected from these same businesses, property owners, and individual income taxes.

 

A portion of the taxes is simply shifted from one group of businesses or developers to those who are not so favored. This from a financing mechanism that is supposed to be self-funding and not cause tax increases.

 

Others express concerns that TIF districts simply move economic development, which would have occurred anyway, from one part of a city or county to another. The businesses that move into a TIF district see the financial benefit to themselves – and take advantage of the offer.

 

   

 

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