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March 2012 Policy Study, Number 12-4

   

Tax Increment Financing: Magical Tool or Moral Hazard?

    Recent TIF Questions
   

 

One of the most well known TIF districts in the state is located in Johnson County, in the city of Coralville. The original TIF work resulted in the development of the Coralridge Mall – the largest mall in the state at that time.

 

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.[32]

 

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 Iowa taxpayers have little familiarity with the intricacies of TIF. Recent actions by the city of Coralville have changed that.

 

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. At a minimum, the deal includes $9.4 million in incentives and another $1.5 million for the land.[33] The story made the front page of the Iowa City Press-Citizen, amid shouts of success by the Coralville Mayor, City Council, and economic development staff.[34] In retrospect, they probably wish they had kept their mouths shut.

 

The Von Maur store is the central anchor at Sycamore Mall. Originally, there was talk that the Sycamore Mall store would not close, a new store would simply open in Coralville.

 

As of February 27, the official announcement was made that the Sycamore Mall store will close as of June 2013.[35] As a result, the city of Coralville will make a $650,000 payment to Sycamore Mall because the store will break its lease when it moves.

 

Though Sycamore Mall was renovated in 2001 and again in 2004, several major specialty stores such as Talbots and the Hallmark Card shop have recently closed. A local toy store, tuxedo shop, travel agency, and sporting goods stores have also closed recently. The 2004 renovation was done through an Iowa City TIF and facilitated a Panera Bread store and expanded the movie theater.[36] Those businesses seem to be doing well.

 

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 businesspeople and developers, who have struggled throughout the recession and have not been offered a $16 million deal to benefit their bottom line, as Von Maur was.

 

According to the Iowa Policy Project (IPP) study issued last November, 15 percent of the total taxable property ($759 million total) in Johnson County is now in a TIF district, either Coralville or another district.

 

“Four cities now have over a third of their tax base in a TIF increment: Coralville (39.7 percent), Oxford (50.7 percent), Shueyville (55.4 percent), and Tiffin (56.7 percent).”[37] The implications of having this much property in a TIF district becomes apparent when you consider that Iowa City, which has 56 percent of the total urban value in Johnson County, only has 3.3 percent of the TIF value.[38] Though many in Johnson County argue that this is because Iowa City has the University of Iowa as their main economic draw and therefore is not interested in private-sector economic development, the amount of real property which is TIF’ed in these four cities is significant.

 

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 is losing $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 revenues that could be used by one of the fastest growing districts in the state.[39]

 

The IPP study shows that in Coralville alone almost $13 million is diverted from the other taxing districts into the city TIF fund. Clear Creek Amana (CCA) and Iowa City Community School (ICCSD) Districts are losing $5 million. Johnson County loses $2.7 million, and the city itself loses $4.7 million.[40] This money would normally go into the Coralville general fund, to be spent on services for the entire city, not just the TIF area.

 

Iowa state government backfills the loss to the school districts to some extent. The CCA and ICCSD districts are reimbursed for 44 percent of this money, or about $2.2 million.

 

Coralville businesses and homeowners not in the TIF district make up the rest of this money by paying higher taxes. The IPP study shows that the CCA property tax levy is $2.83 per $1,000 of taxable value higher, and ICCSD is $0.56 higher because of the TIF tax diversion.

 

In real terms, this means that a homeowner in the CCA district pays an extra $319 per year in property taxes. A homeowner in the Iowa City district pays an extra $80. A small business property owner would pay $254 extra per year.[41]

 

The rural taxpayers, businesses, farmers, and homeowners alike in the CCA school district part of Johnson County are even more negatively affected by the city TIFs. A rural small business pays a minimum of $1,000 in extra property taxes, a farmer would pay $2,500 more, and a homeowner would pay about $375 more – on an annual basis – for the life of the TIF.[42]

 

Amazingly, the TIF diverted revenues exceed regular property tax money in Shueyville, Tiffin, Oxford, Swisher, and Coralville. The projects funded with this money and businesses lured with crony deals can be done simply on the decision of a small number of individuals. There is no taxpayer oversight of the bonding or approval of the TIF projects. Magic money? Or moral hazard?

 

In his report, 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.”[43] Maybe the cash cow is also magical?

 

Other cities that are running into questions about their use of TIF are LeClaire, which is using it for new residential development, and Davenport, where a “prime undeveloped parcel fronting Interstate 74” is being TIF’ed to attract a hotel and commercial/retail development.[44]

 

Officials in the city of Bettendorf are also facing questions about their use of TIF for an industrial development alongside Interstate 74 and for a senior housing project. In the case of the housing project, a $650,000 ten-year tax rebate was offered to the developer.[45] And in most taxpayers’ opinion, real estate along heavily traveled I-74 would not be considered “blighted.”

 

   

 

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