Tax increment financing (TIF) is a mechanism that was introduced during the 1950s to help cities redevelop blighted and economically distressed urban areas by granting cities, for an indefinite period of time, sole authority over the increased value in property tax (the increment) in a given area.
Because cities are reluctant to invest in depressed areas, infrastructure in these areas has traditionally tended to languish, further forestalling private capital investment and leaving these areas in a state of municipal impoverishment and dysfunction. TIF intended to solve this problem by allowing municipalities the authority to freeze property taxes at current levels and granting them sole access to the increment.
However, the primary purpose of TIF is no longer the revitalization of blighted areas; instead, TIF is now primarily an economic development tool. The potential problems with TIF are palpable. Much of Iowa ’s public infrastructure is supported through property taxes, which make up approximately one-third of all taxes paid to the state.
In addition, it has been shown that TIF is highly deregulated. Advocates of limited government often applaud any policy that opposes increased government regulation; however, it must be emphasized that TIF districts are NOT private enterprises, although they may transfer funds to private industries. Rather, TIF is simply a method local governments use to enhance tax revenues quickly and easily. Because TIF makes it so easy to raise funds there has been a virtual explosion of TIF in Iowa . In 1991 there were 746 TIF zones in Iowa . By 1997 this figure had risen to 1,014, and by 2006 there were a total of 2,058 TIF districts or projects.
As TIF has become increasingly popular, it is important to understand two things about it. First, TIF diverts funds that would otherwise be collected by other districts, such as the county, school districts, and the state. These entities must make these funds up elsewhere through fees and taxation. Second, TIF is borrowing against the expectation of future income, not a guarantee.
However one may feel about TIF as an economic development tool, two things are generally agreed upon: 1) TIF should enhance tax revenue, and 2) the process should be transparent. For the last several years neither of these requisites has been met in Iowa. This is because TIF funds have not been isolated in city budgets: instead these funds have been lumped together with an assortment of funds — federal grants, road use taxes, etc. — into one great hodgepodge called a “special revenue fund.”
However, in May 2007 the Iowa Legislature changed this when House File 923 was signed into law. Sections 3 and 4 of the Act amended sections 384.16 and 331.434 of the Iowa Code. Henceforth county and city budgets “shall include estimated and actual tax increment financing revenues and all estimated and actual expenditures of the revenues, proceeds from debt and all estimated and actual expenditures of the debt proceeds, and identification of any entity receiving a direct payment of taxes funded by tax increment financing revenues.” Essentially, TIF revenues and expenditures, beginning in 2009, will no longer be part of a “Special Revenue Fund;” instead, cities and counties will be required to provide a separate “TIF Budget.”
This is a positive change, and the Legislature should be commended for its initiative and foresight.
For more information on this topic, see POLICY STUDY 08-6, “Tax Increment Financing: Getting It Right.”
Jon Miltimore is a Research Analyst with the Public Interest Institute in Mt. Pleasant, IA.
Web site: www.limitedgovernment.org
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