March 2012 Policy Study, Number 12-4
Tax Increment Financing: Magical Tool or Moral Hazard?
Greg LeRoy, author of the book The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, has taken a hard-line against TIFs and other government cronyism. In his analysis, TIFs are not “magical tools” and are a definite “moral hazard.” They are one of the forms of government favoritism to which the Occupy Wall Street protestors were objecting.
As he said, “What is even more ridiculous is cities thinking that tax breaks are the primary reason businesses relocate or expand. … There are so many other factors at play – transportation costs, good employment available, housing costs and quality of life for executives – that tax breaks like TIFs aren’t very high up on their priority list.
“But these corporations are asking for them – and getting them – because everyone is giving them out. TIFs have become the standard handout, and the businesses have learned how to play one city off against the other. Businesses would be stupid for not asking for them every time.”
Whether or not any action is actually taken this year by the Legislature remains to be seen. As a “study” bill, the House proposal will not be acted on. In the Senate a “holding” bill has been passed out of committee, but whether or not language will be inserted and voted on also remains to be seen.
The opinions of Legislators, as offered in hearings and quoted in the newspapers, vary widely. State Senator Matt McCoy (D-Des Moines) said he is concerned about “unintended consequences” of making changes and was dismissive of association claims of improper TIF use.
Senator Herman Quirmbach (D-Ames) said that while Legislators don’t want to “throw the baby out with the bath water,” the bath water should be cleaned up. At one meeting Representative Dave Jacoby (D-Iowa City) expressed support for the aggressive efforts of Coralville in recruiting businesses to their city.
Those one might expect to be strongly on the side of “fairness” to all taxpayers appear instead to be siding with the city governments and their crony businesses. They appear to believe in the “magical tool” nature of TIFs and reject the idea of “moral hazard.”
Key reforms should include a better and stricter definition of a “blighted” area. The use of the TIF money needs to be more tightly restricted and should only include core infrastructure development such as roads and sewers.
The TIF district should be ended when specific projects funded are paid off. School districts and county governments should have veto authority over the establishment of a TIF district, as they are most directly impacted through the diversion of property taxes. Though current law has (weak) provisions against piracy, these are not strong enough and should be tightened.
Though a litany of other revisions have been discussed, it is clear that the FY2009 reporting changes have resulted in significantly increased transparency and awareness of the TIF impacts. This is a good thing and has led directly to the questions being raised in 2012. Taxpayers and elected officials alike have become aware of the potential “moral hazards” occurring.
In the current economic and political climate, taxpayers who believe they have not been treated “fairly” by their government and have not been the beneficiaries of special deals and “too big to fail” bailouts, are increasingly speaking out and objecting to this treatment.
Therefore, it is an appropriate time for the Iowa Legislature to take a hard, serious look at tax increment financing and make sure that the “moral hazard” aspect is addressed.
It is also appropriate for individual businesses and taxpayers to insist that their local government officials act in a way that reflects well upon them and their management.
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