May 2012 Brief: Volume 19, Number 14
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Tax Increment Financing: Reforming the “Magical Money”
by Deborah D. Thornton
Reforming government programs and operations is an important topic in the current political environment. Well-documented abuses of power and wasting of taxpayer dollars over the last few years at both the national and state level, coupled with the economic stresses of the recession, have put policy and management reform at the top of many lists. Recent Tax Increment Financing (TIF) actions by some Iowa cities, perceived as evidence of “crony socialism,” and diverting millions of dollars from schools, have brought the issue into focus. Accordingly, TIF reform is a hot topic, with public forums drawing standing-room-only crowds of taxpayers and local officials.
TIF systems are widely considered a “perfect closed system of self-sustaining finance” because they pay for themselves by “increasing the tax base.” They are sold to homeowners as having no impact on their property taxes, as basically “free money.” In voicing his support for this method of funding, the mayor of Sacramento, California recently called TIFs “magical things.”
However, as Americans have learned over the past five years – all financial decisions, even magical things, involve risk. Not every project or idea is a success. There is no free money. Possibly the TIF area had not been developed by the private sector in the first place because the market had decided there was no demand for X business or X building.
A TIF district might encourage “unproductive investments” with a negative end result. Resources of both the city and the private sector could be misallocated because of the encouragement offered by the TIF. Though the city mayor, council, or manager thinks a new hotel, restaurant, or office building is needed, maybe it is only their pet project, proposed by their favorite developer. Economists consider this a “moral hazard,” or systemic encouragement to act in a “detrimental manner.” In 2002, researchers in the Economics Department at Iowa State University stated that TIFs have now “become a de facto entitlement for new industry and housing development…with little to no evidence of overall public benefit or meaningful discussion of the costs of the practice.”
Chicago has made extensive use of TIF, with limited real benefit. The Central Loop TIF district ran from 1984 to 2008, with over $1 billion total in new taxes diverted, $365 million during the final year. A 2002 study by the Neighborhood Capital Budget Group (NCBG) reviewed the development and tax history of 36 Chicago TIF districts. In all districts they found that property taxes were already rising in the five years before they were TIFed. If the growth had simply continued at the same rate, the city would still have gained $1.3 billion in new tax revenues during the TIF period. The study found that over the entire 23 years only $300 million in new taxes were actually generated – though the city of Chicago spent $1.6 billion. In the meantime, the Chicago schools, some of the worst in the nation, lost $632 million in diverted funds.
In Los Angeles, the Hoover Redevelopment area, near the Memorial Coliseum, was first established in 1966. Recently it was renewed through 2051, for a total of 85 years. One must question the benefit of a TIF at reviving a “blighted” area or generating economic development if it takes 85 years to see results.
The Iowa House of Representatives passed TIF reform legislation, House File 2460, on April 11, by a 54-43 mostly party-line vote. The legislation includes increased reporting, expiration dates for TIF districts, safeguards against “piracy,” additional public input, and approvals by counties and school districts affected.
Specifically, both counties and cities using TIFs must comply with extensive annual reporting, certification, and auditing requirements, including posting a searchable database file. If the TIF applies to more than 25 percent of the total city property taxes, other taxing governments must approve it, even before public hearings are held. The number of required public hearings is increased to three and may not be waived.
HF2460 also establishes stricter requirements for determining that a TIF is actually required and addresses transferring or selling property at below market rates. It prevents the redrawing of a TIF district once it is established. These changes were made to address recent significant “piracy” uses. The specific action which caused these changes was the city of Coralville luring a business from Iowa City – less than 5 miles away – by offering over $11 million in incentives, including a below-market-value property transfer. Many State Legislators and taxpayers view this blatant piracy as inappropriate.
TIF money may not be used in other, non-TIF areas, may not be used for regular government salaries, and may not be used for public or government buildings or housing purposes unless approved by the other taxing governments (primarily public schools) affected by the TIF.
Unfortunately, some Legislators – most specifically Senator Joe Bolkcom (D-Iowa City), Representative Dave Jacoby (D-Coralville), and Representative Charles Isenhart (D-Dubuque) have chosen to characterize these changes as throwing the baby out with the bath water, and none of ‘big government’s’ business. As members of the political party which claims to represent working families, children, and equal opportunity for all, this attitude seems to instead support a moral hazard. One would think they would support Legislation addressing crony socialism, funding schools, increasing transparency, and addressing “magical money.” Or maybe they should move to Chicago or Los Angeles.
Public Interest Institute’s POLICY STUDY: “Tax Increment Financing: Magical Tool or Moral Hazard,” can be viewed at http://limitedgovernment.org/ps-12-4.html.
Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.
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