The Iowa Picture: Tax-Increment Financing

Overdue for Reform After All These Years
Updated March 29, 2012

The Iowa Fiscal Partnership has produced several resources about the use and abuse of tax-increment financing. Our most recent reports are here:

Why We Need Serious TIF Reform
Backgrounder or download 2-pg PDF March 29, 2012

Tax Increment Financing in Polk County — By Peter Fisher and Michael Lipsman
Full report (15-pg PDF) March 15, 2012
News release or download 2-pg PDF

Tax Increment Financing: A Case Study of Johnson County — By Peter Fisher
Full report plus executive summary (15-pg PDF) November 21, 2011
Executive summary (2-pg PDF)
Appendix (Maps by community) (9-pg PDF)
News release or 2-pg PDF

Fixing TIF: Common-Sense Solutions for 2012
Backgrounder (2-pg PDF) February 8, 2012

Find links to other reports below this brief introduction to the issue.

What is TIF?

Originally a product of the push for urban renewal in the 1950s and ’60s, tax-increment financing (TIF) was designed to facilitate redevelopment of blighted areas in cities.

The idea was to help investors recoup the costs of rehabilitating properties in a neighborhood with depressed property values. To reverse the decline and make private development profitable, a worthy initiative could be financed by using future gains in tax revenues, instead of dipping into existing revenues. This would protect cities, counties, schools, community colleges and special taxing districts from a hit to funding for ongoing operations, while encouraging an expansion of the property tax base for the future.

This is the core idea of TIF: to spread the cost of a potentially risky project among all taxing districts that ultimately would benefit. By allowing the city or county creating the TIF to capture all new revenue from the increased property tax base to pay those costs, it could more quickly pay off the public investment and not hinder current services. Without the TIF, traditional funding of such a city or county project — which ultimately would help all taxing districts — would take longer.

Put another way: Before any jurisdiction could benefit from a city investment in a city-driven project using TIF, the city would first get to recover its costs.

This began to change in the 1980s, when Iowa cities were allowed to start using TIF for economic development, broadly defined. No longer did there need to be a finding of blight or decline to implement a TIF district. Rather, city officials could determine it was necessary for economic development. Even then, the presumption remained that a public subsidy of a project under TIF would only be used if a worthy development, carrying a public benefit, could not be expected to occur without it. It was to be a true incentive.

Loosely written law has permitted these standards to lapse. The use of TIF in Iowa has expanded well beyond its intended purposes, often going against the principles that are meant to justify it.

Cities can use TIF to take advantage of already-occurring investment and capture the benefits of private development at the expense of other jurisdictions. A city could designate an area around a new, completed facility as a TIF district, then use TIF to finance a program of street and sidewalk improvements. In such a case, the TIF subsidy would not have caused the investment; rather, the new investment would have caused the TIF, by definition making it unnecessary for the investment to occur.

Cities can turn a TIF district into a cash cow to finance a succession of projects beyond the original, legitimate purpose of the TIF. In such cases, using TIF means various jurisdictions could finance a city project that should be financed only by the city’s taxpayers.

With no limits on the size or contiguity of TIF districts, or a requirement that projects be related economically, a TIF district can end up using revenues from one school district to stimulate private development that will benefit the tax base in a different school district. (This is an issue in Johnson County, as explained in this report.)

TIF often is used to get around limits on Iowa’s tax abatement law. A city simply declares that it is creating an obligation to repay a private business for a portion of property taxes, and that this “obligation” is TIF debt.

TIF law allows cities and counties to circumvent referendum requirements because all TIF debt can be issued without voter approval, creating a lack of accountability and encouraging fiscal irresponsibility.

TIF can erode the capacity of other taxing districts to meet their obligations. If a project would have occurred anyway, and naturally caused growth of the tax base, then use of a TIF causes a raid on property-tax base that was unnecessary and can hinder the ability of affected jurisdictions to do their jobs.

Other IFP resources about tax-increment financing, including both property-tax and sales-tax TIF issues:

Guest opinion: Pirates are safe at Iowa River Landing
Read Peter Fisher’s guest opinion in the Iowa City Press-Citizen 10/5/11

Sales-Tax TIF for Cedar Rapids: Poor Solution to Big Need
Read policy brief or download 4-page PDF 3/30/11

Guest opinion: No tax relief until we see TIF reform
Download 2-page PDF 5/26/07

Tracking Tax Giveaways: Questions Need Answers on Proposed Earthpark Plan
Download 2-page PDF 4/24/07

Tax Increment Financing in Iowa: What Should Be Done?
Read the press release, executive summary and full report. 4/9/03