When a city approves a Tax Increment Financing (TIF) zone, the property taxes collected are not divided between the city, county, and school districts Instead the increased (increment) revenue is all diverted to only the city which established the TIF.

It was thought that by allowing the city to first develop infrastructure such as roads, water, and sewer systems in “blighted” areas, private-sector businesses would be more willing to develop the property. TIF funds paid the bonds taken out to build the infrastructure or as the local-match for other tax money. Funds could also be returned to the property owners as tax rebates, direct grants, or business loans.

The Iowa TIF law is considered “one of the most indulgent” in the United States because of this lack of “effective state or local oversight mechanisms.” There is no method for negotiation of revenue sharing and no oversight body. There is no prevention of “rollovers” which keep the TIF long after the original work. There are no required performance guarantees, such as a certain number of jobs over a certain length of time.

Importantly, there is “no prohibition on the use of TIF funds to create structures which are themselves tax-exempt.” Cities have taken advantage of this to build community buildings, parks, and fire stations.

While these facilities are important, there are other funding methods available. However, bonds for these projects must be passed by a 60 percent majority vote. Often cities have decided that a TIF was easier than convincing 60 percent of taxpayers to pay new taxes. Because the law allows TIF to be used for these projects, it is.

In 2008, the Public Interest Institute (PII) issued a Policy Study titled “Tax Increment Financing: Getting it Right.” This study questioned the use of TIF for infrastructure development in economically “blighted” areas and for residential development.

It noted that one of the problems with TIFs was a general and undefined eligibility standard. Additionally, prior to FY2009 the TIF revenue had been “lumped together with an assortment of funds federal grants, road use taxes” and labeled as special revenue funds. Therefore it was impossible to track the amount or use of TIF taxes by a city. Other concerns included the lack of input and oversight by citizens and affected jurisdictions. Unfortunately, most taxpayers have little familiarity with the intricacies of TIF.

As of FY2009, funds are tracked separately from other tax revenue. This transparency has resulted in more questions about TIFs and the impact on both county governments and school districts.

The most significant questions about TIFs have been raised in Johnson County, where the city of Coralville diverts millions of dollars from the county and school districts. Additionally, there is a long history of retail “piracy” and questions about how businesses are chosen to receive the benefit. With the increased public focus on “crony capitalism,” recent actions by the City of Coralville are resulting in significant pushback from private-sector business people.

Officials with the Clear Creek Amana and Iowa City school districts are also concerned. Clear Creek Amana will lose $2,974 per pupil in property tax revenue in FY2012 (totaling $4.4 million/year) because of the Coralville TIF.

Public meetings on TIFs are drawing standing room only crowds and calls for significant changes. Ideas suggested were time-frame limits, individual-project limits, a prohibition on piracy offers, a percent of property limit, a better definition of allowable projects, and joint approval and review processes.

Peter Fisher of the Iowa Policy Project said, “many cities view a TIF area as a perpetual cash cow to finance city operations that have nothing to do with economic development.” While most Iowans like cows, this “cash cow” is in need of significant reform.

And the pirates should go to the Caribbean over spring break leaving our tax money where it belongs.

The views expressed in this column are those of the author and not necessarily those of the Public Interest Institute. They are brought to you in the interest of a better informed citizenry.

Deborah D. Thornton is a research analyst for the Public Interest Institute in Mount Pleasant.