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TIFs = Higher Taxes without Representation or Growth to show for it

This is the conclusion from “Tax Increment Financing Growth in Iowa” by Dave Swenson and Liesl Eathington, Department of Economics, Iowa State University, April, 2006.

Tax Increment Finance districts are a large and rapidly growing component of Iowa’s economic development infrastructure and its property tax base. This report shows that the amount of valuation contained within TIF districts is, in the current fiscal year, nearly $6 billion dollars and yielded over $191 million in property taxes that were used in the name of promoting economic growth and redevelopment among Iowa’s cities and counties.

More than a quarter of the state’s recent real tax base growth has been sequestered in TIF districts. Of that TIF growth, three-quarters have
accumulated to the state’s metropolitan counties, with the remaining 25 percent of TIF value growth shared among the 79 other counties. TIF success, as in realizing robust gains in area increments, is highly localized in and around the state’s metropolitan counties, with much more meager, and in some cases negative, outcomes posted among most of Iowa’s more rural and remote areas.

It is very hard to demonstrate that TIF usage has, on the whole, benefited the state of Iowa in any uniform manner. Our data show that three-quarters of all of the valuation gains in TIF districts in Iowa are concentrated in just 31 cities (and half of the growth in a mere 11 cities). Among those top 31 cities, some are enjoying booming job and population growth, but some are not. Some of are expanding their total tax bases, and some of them are contracting despite their aggressive use of TIFs. For some it is enhancing fortunes, and in others it is not reversing long and pervasive patterns of business and population decline. None of our data can sort out what growth would have occurred in growing areas regardless of the use of TIF incentives, nor can it tell us what growth would have left had TIF resources not been utilized.

Many of Iowa’s small to medium sized cities and, lately, counties have aggressively deployed TIF authority, yet the return on their effort is small compared to the much more lucrative use of TIF authority in metropolitan areas.

Here is a common scenario about TIF usage in Iowa’s smaller cities: Usually, TIF authority is applied to areas of communities that are near the edge of town or aligned with other growth areas of the community, say along a major state highway — their economic development zones or districts. Frequently, much if not all of the incremental growth in these communities is a relocation of growth from deteriorating main-street areas out to the benefited zones. As a consequence, the TIF district gains, the general tax base shrinks, and the relocating firm gets a tax break. The cities claim they retained the businesses and count this as an economic development success, but city, school, and county general fund tax rates go up to cover costs no longer borne by the re-located firm. Regionally there has been no job or income growth as a result.

From conversations with county auditors and others privy to city and county government activities regarding TIF usage, there are also increasing reports that TIF revenues in Iowa are a lucrative revenue stream for cities that they are loathe to cede back to other local governments. There are also reports that TIF revenues, according to the Iowa Code, supposed to be collected and used specifically for economic development or urban renewal debt payments and infrastructure enhancements are being used to pay for fire stations, libraries, parks and recreation facilities, general road repair and maintenance, and hosts of other general or traditional government uses.

Whether these uses are abuses or the legitimate exercise of TIF authority is the province of the Iowa General Assembly and the state auditors who monitor local government spending. It is also the province of citizens. But as the profile of our two cities demonstrated, it is not easy to figure out from a city’s annual report precisely how much TIF revenue they may have collected, how they were used, and whether those uses, in and of themselves, were proper uses.

In the next fiscal year more than $200 million will be collected in Iowa TIF districts. According to our tables, the average Iowa city using TIF revenues for economic development purposes will give up $1 in potential general fund receipts for every $2 in TIF receipts that it gets from other local governments as a result. And that, our research suggests, is the only consistent return on investment most of Iowa’s cities are realizing from TIF. The net returns to the economy, to the state’s taxpayers, and to good government are yet to be determined.