Study points out potential flaws of TIF system

By Gigi Wood

A recent report will be the centerpiece of a meeting on tax reform this week.

Peter Fisher, research director at the Iowa Policy Project, will present the findings of his Nov. 21 study “Tax Increment Financing (TIF): A Case Study of Johnson County” Jan. 4 at a TIF reform meeting in Coralville.

The meeting will take place from 6-7:30 p.m. in the Jean Schwab Auditorium at the Coralville Public Library. It will be open to the public and include Sen. Joe Bolkcom (D-Iowa City) and Rep. Tom Sands (R-Wapello), who are chairs of the Senate and House ways and means committees, respectively. Those committees will discuss the issue during the legislative session, which starts Jan. 9. Officials from Coralville, Iowa City, Johnson County, North Liberty and the local school districts will participate in the meeting.

Mr. Fisher began the study in June, about three months before the city of Coralville announced Von Maur would become the anchor retail tenant of the Iowa River Landing District. The city is providing more than $16 million in incentives to the department store for the deal. When the store opens in 2014, it will likely close its Sycamore Mall store in Iowa City. Coralville is using funds from its Coral Ridge Mall TIF district to finance the deal.

The Von Maur deal has been highly controversial in the community and has received a slew of media and Legislative attention. Many say the state’s TIF laws need to be reformed – a conclusion of the study, as well.

The Iowa Policy Project is a nonprofit, nonpartisan organization founded in 2001 to produce research and analysis to engage Iowans in state policy decisions.
Mr. Fisher conducted the study using data collected from the Johnson County Auditor’s Office as well as the Iowa Department of Management, the state’s planning and budgetary agency.

TIFs are used by cities to incentivize development projects. They are intended to help cities improve blighted areas by encouraging development in those neighborhoods. The original value of the land is set as the base value and the city, county and school districts continue to receive tax proceeds based on that original base value. After a project is developed and the taxable value of the property increases, the county and school districts, for the most part, continue to receive tax proceeds based on that original base value. The new value of the property once developed is sometimes millions of dollars more than the original value. The schools and county do not receive tax proceeds on that new, higher amount.

Instead, the new tax revenue generated by the higher value is funneled into a city TIF fund to pay for costs the city incurred to develop that land. In the case of Plaza Towers, which received TIF money to help pay for the multi-million-dollar high rise in Iowa City, the city retired the TIF once the city’s costs were recouped. The new taxable income is now funneled to the city, county and school districts.

The city of Coralville did not retire the TIF fund for the Coral Ridge Mall when the city’s costs were recouped, the study points out. The new tax revenues from the mall district continue to be funneled into Coralville’s TIF fund and are being used to pay for incentives and improvements for the Iowa River Landing District.

Study conclusions

The study refutes the commonly-held belief that TIFs are costless. Because the mall TIF fund has not been retired, the county and school districts are not benefitting from the improved land. The study states that of the $5 million in school property taxes diverted because of the mall TIF, 44 percent is offset by the state’s school aid formula, the remaining 56 percent is recovered through higher school property taxes, the study stated.

Also, TIF revenue diverted from the county and school district forces higher property taxes on county and district taxpayers outside the city. The average residence in Johnson County with a market value of $200,000 and a taxable value of $94,000 pays an extra $373 a year because of all of the TIFs in Johnson County. A small business with $250,000 in taxable real property pays an extra $991, while an average 1,000-acre farm pays an additional $2,489 annually.

Of the nearly $20 million in property taxes collected within the Coral Ridge Mall TIF, more than $12.8 million are diverted to the Coralville TIF fund. That includes money that would typically go to the city’s general operating budget. About $4.7 million that could otherwise fund police, fire, roads and other city functions is diverted to the TIF fund for spending on economic development projects.

“I wanted to document the revenue coming from just one area in TIF dollars, $12 million a year is a lot of property taxes going into economic development,” Mr. Fisher said. “A lot of it comes from taxpayers outside of Coralville. It’s not that surprising that it’s happening, but the magnitude (is surprising).”

The study concludes that TIF throughout the state cost Iowa $46.8 million this fiscal year. The TIF rules need to be reformed to eliminate the use of TIF money to fund residential and retail projects, and TIF money should not be used to entice retailers from one town to a neighboring one, it stated.

“Cities are using it largely under the law but I think pushing it far beyond what it was intended to do,” Mr. Fisher said last week.