For years, Iowans have debated the merits of a local tax incentive program known as tax increment financing. But so far, those discussions have not yielded any meaningful reforms, even as we learn Iowa communities rely on TIF far more than in any other state.
TIF allows local governments to divert property tax revenue in specified areas and use it for targeted economic development activities which benefit both the community and the developer. The idea is that some government intervention is necessary to entice private investments to areas which might otherwise never be developed. Advocates argue municipalities have nothing to lose, since the earmarked revenues may not have been achieved without the TIF designation.
Free-market conservatives like myself are instantly opposed to these sorts of targeted tax cutouts, worrying about the unintended consequences of distorting property markets and the susceptibility to crony deal making. However, even for those who accept local government’s huge influence in property development, Iowa’s restrictions on TIF are lacking.
Several recent reports highlight the extent to which TIF has far outgrown its original purpose in Iowa. What was once a tightly focused development incentive has become a go-to tool for almost any large development in many cities
TIF has been widely used across the United States for decades, and is now in use in every state except Arizona. However, states widely vary in the protections they put in place to protect taxpayers, and Iowa has weaker laws than several of our neighbors.
A new national study published by the Lincoln Institute of Land Policy finds Iowa is the single biggest user of TIF, with 3,340 districts. That’s more than twice as many as the next state, Minnesota with 1,719.
The study found TIF districts do tend to serve their purpose in generating higher real estate values, and ultimately more property taxes to local government, than would have been produced without the designation. But researchers also found TIF “fails in both obvious and subtle ways” and makes a list of recommendations for properly governing the use of TIF.
TIF authority was first established in Iowa in 1969, strictly intended to spur development in slums or blighted areas. However, Iowa policymakers eased restrictions in 1985, clearing the way for local governments to use the tool unchecked for economic development in general, not necessarily to jump-start development in troubled neighborhoods, as originally intended.
Today, local governments are much more likely to employ TIF for economic development than to address blight. Only 6 percent of TIF districts statewide are imposed due to slum or blight, according to a report published this year by Iowa’s Legislative Services Agency, with another 10 percent classified as addressing both economic development as well as slum or blight. Easily the biggest portion, 64 percent, are only for economic development, and 20 percent had no designation on file.
One major problem I see with this complicated financing scheme is the public largely does not understand how it works or why it’s used. TIF implementation is overseen by several different state and local entities, making it difficult even for journalists and researchers to find and accurately interpret information about where and how the tool is being put to use.
A 2012 law provided some progress on that front. The Tax Increment Finance Reporting Act, signed by then-Gov. Terry Branstad, requires local governments to file regular reports with financial details about the TIF districts they have in place. Still, those reports amount to a bunch of data with little context. It is hard to see how citizens with even an average understanding of finance and accounting could meaningfully participate in their city councils’ economic development discussions.
Even more concerning, Iowa does not have a “but for” requirement, which would restrict TIF use only to projects which leaders can show would not be possible without tax incentives. According to the Lincoln Institute’s latest tally, 18 other states have such a requirement.
Another study published this year by the University of Iowa Public Policy Center examined the costs and benefits to Iowa school districts where taxing authority overlaps with other local governments’ TIF districts. Researchers ultimately concluded TIF projects generally are an economic boon for local government, providing more revenue in the long-term than jurisdictions would have collected without the TIF development. However, not all TIF districts perform equally.
That study confirmed projects aimed solely at economic development far outnumber the number of legitimate slum and blight zones. Unsurprisingly, the latter group tended to provide greater returns.
“The data bears out critics’ proposition that TIF is best used to address urban blight,” wrote Phuong Nguyen-Hoang, an associate professor at the UI Public Policy Center.
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TIF may have once served a valuable purpose in Iowa. But now — with more than 3,000 districts, overwhelmingly not in blighted areas — it’s time to rein in local governments’ wild economic development experiment.
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