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March 2012 Policy Study, Number 12-4

   

Tax Increment Financing: Magical Tool or Moral Hazard?

    Current Actions and Potential Changes
   

 

A public meeting in Coralville in January 2012 on TIFs drew a standing-room-only crowd of concerned citizens and calls for significant changes to the TIF law. Follow-up meetings attracted crowds that were just as large. Ideas suggested by the attendees 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.

 

The IPP study suggested ending “perpetual” TIFs and supports using only “project” TIFs. In this situation, the TIF would end once the original project costs had been paid – for example, after the sewers or new roads were built and the bonds paid off.

 

Other suggestions included limiting the value amount and area of property that is included in the TIF and limiting the debt share. Cities such as Coralville have circumvented the current state debt limits by classifying TIF debt basically off-the-books. Fisher also recommends strengthening the anti-piracy provisions of the TIF law, in order to prevent a Von Maur incident from happening again.

 

The Iowa Legislature has held several Oversight Committee and Ways and Means Committee hearings on TIF this legislative session, in both the House and the Senate. House Study Bill (HSB) 450 has been introduced and calls for major TIF reform. It touches almost every part of the current statute.

 

As seen in the Coralville example, TIFs can negatively affect local school district funding significantly. A key change proposed in HSB 450 is “phasing out state backfill payments to school districts.”

 

Currently the amount paid is $5.40 per thousand dollars of TIF that is diverted from the schools.[46] This would be stopped. Instead, this amount would be unable to be TIF’ed and would go directly to the school districts through the normal property tax process.

 

Importantly, schools and counties would be given veto power over new TIFs. This would require the city proposing the TIF to allow significant, structured stakeholder input and approval.

 

Other proposals limit TIFs to either 10 years or 15 years and make them project-specific instead of general. Currently the city of Swisher in Johnson County is just letting the TIF money accumulate.[47] Though they anticipate using this money for major infrastructure work in the future, other funding options are available. Importantly the other funding options require specific taxpayer approval – increasing transparency and oversight for the project.

 

Funding of public buildings such as city halls, fire stations, swimming pools, and recreational buildings would be eliminated or require approval by the other taxing authorities impacted. HSB 450 would also prohibit the use of TIF money for residential development or retail projects and limit it to strictly commercial or industrial development. Under HSB 450, the TIF would also end once the specific project was completed.

 

Additionally, the amount of property tax valuation that could be allowed to be TIF’ed would be restricted to 25 percent or less and completely omit residential property from being in a TIF district. The geographical limits of the TIF would also be restricted. This would be a significant reduction from the current high numbers and extensive TIF districts in Johnson County.[48]

 

These changes would all potentially be beneficial and reflect the input of many small businesspeople, local developers, and homeowners.

 

   

 

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