The Business Record’s Kent Darr has an interesting story about Des Moines City Manager Rick Clark’s reaction to the commercial property tax issue, debated Tuesday in the Iowa House.
Clark expressed caution about unintended consequences that can result from tinkering with the property tax laws, which is a legitimate concern. But one of his own remarks demands caution as well. That is his concern about potential changes to tax-increment financing, or TIF, which are being considered separately this year. From Darr’s story:
“For cities in Iowa, it’s the only game in town,” Clark said. “It’s the only thing we have to encourage and promote economic activity; the other tools really don’t work. If we take away TIF or make it less effective than it is today, we’re really in a world of hurt.”
This argument is often raised and it’s just not necessarily so. First, cities do have other tools available, such as abatements. TIF is a tool that simply provides an extra revenue stream to fund those tools; in some cases, it may make sense to pool funds of various local government entities for a given project, but in others, possibly not.
IPP Research Director Peter Fisher addressed this in his recent report for the Iowa Fiscal Partnership examining TIF use in Johnson County:
It is important to understand that TIF is not synonymous with economic development incentives. TIF is merely a financing mechanism. Cities can and do promote economic redevelopment and job creation in a variety of ways; cities can build facilities to accommodate private projects, they can provide tax abatements for both residential and non‐residential property, and they can issue bonds to finance infrastructure, all without TIF. But TIF has become the mechanism of choice to finance economic development incentives in part because TIF creates the illusion that such incentives are costless, and in part because TIF in actuality shifts costs to other taxpayers.
Second, it should not be assumed that subsidies are effective. Does the subsidy cause the economic activity, or does the activity cause the subsidy? Sometimes it’s hard to say.
Furthermore, much (perhaps the majority) of TIF revenue is not used to incentivize development at all, but rather to finance routine city infrastructure spending that otherwise could be financed with city bonds, retired entirely by city taxpayers, or charged to developers.
Sensible reforms would not render TIF “less effective” for its intended purposes to the extent subsidies are effective now. Fisher’s recent op-ed in The Des Moines Register outlined five common-sense reforms that would improve TIF. They would stop what would have to be acknowledged as abuses — for example, stopping cities from using TIF to fund a project in one school district from the tax base of another.
The indefensible thing in the 2012 legislative session would be to make significant commercial property tax changes — big cuts for businesses at the expense of homeowners or critical public services — without fixing abuses of TIF. Politicians frequently ignore TIF and other preferences when they start ranting about property taxes on business.
Posted by Mike Owen, Assistant Director