The need for TIF reform

Economic development types have become addicted to the idea that they can use TIF to do many things without regard to the impacts on neighbors or even the real purpose of TIF.

Peter Fisher speaks at TIF forum
IPP Research Director Peter Fisher speaks at a forum on tax-increment financing as Sen. Joe Bolkcom, D-Iowa City, and Rep. Tom Sands, R-Wapello, look on.

Peter Fisher’s report for the Iowa Fiscal Partnership about the use of tax-increment financing (TIF) painted a picture of a program that has become a monster. I encourage all to find the report on our website, or to view the forum in Coralville hosted by the bipartisan team of Sen. Joe Bolkcom, D-Iowa City, and Rep. Tom Sands, R-Wapello.

It takes some folks out of their comfort zone — apparently former Iowa City Council Member Bob Elliott among them in today’s Iowa City Press-Citizen — to see what an otherwise well-intentioned and potentially valuable tool has become due to lax state law. Cities across Iowa have shown an inability to handle the responsibility that goes with the permission to divert other jurisdictions’ tax revenues with TIF. Such projects that are supposed to benefit all whose revenues are being used. Unfortunately, it frequently does not work that way.

The report offers several ideas for reform to rein in abuses; it does not call for elimination of TIF, but for regulation. Perhaps Mr. Elliott missed that, as he states, “For me, an appropriate analogy to the TIF situation would be medical drugs, which can provide great benefit or be dangerously abused. In situations like that, you don’t eliminate it, you regulate against misuse and retain the capacity for beneficial use.” Agreed.

Indeed, the drug analogy is appropriate. Economic development types have become addicted to the idea that they can use TIF to do many things without regard to the impacts on neighbors or even the real purpose of TIF. Fisher’s report offers examples from Johnson County — notably Coralville’s use of property-tax dollars from one school district to create new property-tax base in another, in a project that effectively lured a major department store from Iowa City next door.

If state lawmakers ignore such examples, they will be repeated — in fact, it would give cities tacit approval to consider these practices appropriate. Take that, Clear Creek-Amana school district. Take that, Iowa City.

Fisher’s report is a wonderful example of how a nonpartisan organization that is focused wholly on issues, and not partisan politics, can help people of any political stripe to understand those issues. Iowans use our work and contribute to it because they know they can count on IPP to provide fact-based analysis and relevant research that holds the political spinners accountable. And yes, contributions to our work are welcome. Click here.

Posted by Mike Owen, Assistant Director

TIF public forum draws out facts, and people

Sen. Joe Bolkcom, D-Iowa City, and Rep. Tom Sands, R-Wapello, hosted the Coralville forum about an issue growing in attention following the release of Peter Fisher’s report for the Iowa Fiscal Partnership.


The room was packed, but now more people will be able to view the January 4 public forum in Coralville about tax-increment financing.

City Channel 4 — Iowa City Cable TV — will show the forum, which features a presentation by Iowa Policy Project Research Director Peter Fisher and comments by Iowa lawmakers and local officials. Fisher’s recent report, Tax-Increment Financing: A Case Study of Johnson County, was the focus of commentary throughout the hearing.

Hosted by State Sen. Joe Bolkcom, D-Iowa City, and State Rep. Tom Sands, R-Wapello, the forum has drawn much attention including media coverage by The Gazette in Cedar Rapids and The Press-Citizen in Iowa City.

The Iowa City cable presentation of the forum will be shown six times in the coming week, beginning at midnight today. The program runs 1 hour, 49 minutes. Here is the full schedule, also found on the Channel 4 website:

Saturday, January 07, at 12:00 a.m.
Saturday, January 07, at 9:30 p.m.
Monday, January 09, at 8:00 a.m.
Tuesday, January 10, at 5:30 a.m.
Wednesday, January 11, at 4:00 p.m.
Thursday, January 12, at 1:30 p.m.

To view slides that Fisher used in his presentation, click here.

It’s not theater: ‘The Pirates of River Landing’

Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal ridden film tax credit.

Peter Fisher
Peter Fisher

The Coralville City Council recently approved an astounding incentive package to entice Von Maur from Iowa City’s Sycamore Mall to Coralville’s Iowa River Landing project. The city has agreed to build a $9.5 million store for Von Maur. It doesn’t matter how well your store is doing; if someone offers you free rent in perpetuity, that gets your attention.

But the $9.5 million is only half the story. The city also agreed to:

  • give Von Maur the $1.5 million building site for $10,
  • pay $650,000 to buy out the company’s lease at Sycamore Mall,
  • pay all of Von Maur’s expenses of moving from the mall to Coralville, and
  • pay all of the cost of constructing necessary streets, sidewalks, parking lots, landscaping, street lighting, water, sewer and storm sewers associated with or needed by the store.

And that’s still not the end. This was a TIF deal, where the rationale is that you are creating tax base, in the long run.

Well, guess what happens to most of the tax revenue — the city rebates it to Von Maur, with no ending date, because this TIF is in a “blighted area,” which means the TIF goes on forever.

So I guess the day after perpetuity, the schools and the county will start collecting all the taxes normally due them from this project.

The property tax deal caps Von Maur’s liability for property taxes at $150,000 per year (inflated each year by the consumer price index or 2 percent, whichever is less). If you take the building cost and add the land value you get $11 million. Then throw in another $1.0 to $1.5 million for the value of interior improvements made by Von Maur that count as part of the real estate, and you get a taxable value of about $12.2 million. At the current total property tax rate in that area of $36.57 per thousand, that is about $450,000 per year for a total property tax bill.

Under the agreement, Von Maur pays only $150,000, the city pays the remaining $300,000. There is no time limit on the cap. But if we assume that the store will have an economic life of 20 years, we can calculate the present value equivalent of giving them $300,000 a year. It’s about $4.5 million (using a 3 percent discount rate). You could argue about the time frame, or the discount rate, or about how much faster property taxes will go up than the 2 percent limit on the cap (which means the rebate amount will increase).

But you will in the end come to the conclusion that the tax cap is worth a lot — $4 million to $5 million. That is, giving Von Maur $4 million to $5 million up front would be worth about the same as giving the company $300,000 a year for 20 years. That means the total incentive package is worth at least $16 million (9.5 + 1.5 + .65 + 4.5). “At least,” because that figure doesn’t include all of the city infrastructure costs, which will be substantial, or the moving costs. Von Maur, meanwhile, has to come up with just the cost of finishing the interior space to its specifications, an expense that is likely to be in the $3.5 to $4.5 million range, plus $150,000 in property taxes each year, and its share of maintaining the common property (mostly parking lots).

Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal-ridden film tax credit, which briefly promised “half-price filmmaking” before the program was shut down. In addition to covering three-fourths of the up-front costs, the city will pay two-thirds of the annual property tax bill.

Coralville Council members — perhaps soon to be known as the Pirates of River Landing — apparently think this is a wise use of taxpayer funds. We can hope that the taxpayers of Coralville have a more sensible view of the world.

Posted by Peter S. Fisher, Research Director

Coming this weekend: The State of Working Iowa 2011

State of Working Iowa 2011 coverIt’s almost Labor Day, and that means it’s time for another edition of The State of Working Iowa.

Be watching this weekend in Iowa media and on the Iowa Policy Project website for The State of Working Iowa 2011. Authored this year by Noga O’Connor, Colin Gordon and Peter Fisher, the report takes a look at how Iowa is doing in recovery from the 2007 recession, the challenges ahead and potential policy options to deal with them.

Find previous reports in the series here.

Everyone pays taxes

The federal income tax collects the most when you are in your prime earning years and can most afford it, and leaves you with all or most of your money when you are struggling and really need it. … That’s the way it ought to be.

Peter Fisher
Peter Fisher

Let’s get one thing straight. Everyone pays taxes.

Even the lowest-income one-fifth of Americans pay about 16 percent of their income in taxes; they pay gas taxes if they drive, part of their rent goes to pay property taxes, they pay sales taxes when they go to the store, some pay state income taxes.[1] There is no such thing as a class of people who pay no taxes.

Some would like to focus the debate just on the federal income tax, and have succeeded in creating the impression that there is a large, permanent class of people who never pay federal income taxes. But they ignore the fact that most of those paying no income taxes this year will pay plenty of taxes later in life, or already paid a substantial share. They may be paying no taxes this year because they are young, starting out in a low-paying job, have young kids, and therefore need every penny they earn to pay for child care and to get by until they move up the career ladder.

Or perhaps they are old, living mostly on Social Security, and are done paying taxes, which they did for most of their working lives. Many pay no income taxes because they are out of work through no fault of their own, or because they are sick or disabled and unable to work.

All this is not mere speculation. Of those who will pay no income tax this year, half owe no tax because subsistence level income is untaxed and because of deductions for dependents. Of the remainder, nearly three-fourths pay no tax because they are seniors, or because of tax credits for children and the working poor.[2]

Imagine that when you first left home and faced a lifetime of supporting yourself and perhaps a family, you could choose what kind of tax system you would be under for the rest of your life. For most people, thinking about life’s uncertainties and risks, something like our federal income tax would be the logical choice. Why? It is based on the principle of ability to pay. The federal income tax collects the most when you are in your prime earning years and can most afford it, and leaves you with all or most of your money when you are struggling and really need it. And it is small business friendly as well. If you are just starting your own business, or the recession wipes out this year’s profits, you owe little or no tax, but if the business does well, you will pay your share.

That’s the way it ought to be. And if the result is that this year, when so many people are facing economic hardship, nearly half pay no federal income tax, remember who those people are. All of them are paying state and local taxes to support our schools and fire departments and roads. And they will have their time to contribute to federal income taxes as well, as many already have.

By Peter S. Fisher, Research Director


[1] Citizens for Tax Justice, America’s Tax System Is Not as Progressive as You Think, April 15, 2011. http://ctj.org/ctjreports/2011/04/americas_tax_system_is_not_as_progressive_as_you_think.php

[2] Rachel Johnson et al, Why Some Tax Units Pay No Income Tax, the Urban-Brookings Tax Policy Center, July, 2011. http://www.taxpolicycenter.org/UploadedPDF/1001547-Why-No-Income-Tax.pdf

Iowa’s already competitive tax system

Lawmakers often hear — and voice — complaints about the competitiveness of Iowa’s tax system. In fact, Iowa’s taxes on business already are very competitive.

“Pay no attention to that man behind the curtain!”

So said the Wizard of Oz, to distract his visitors from how he was manipulating them.

Well, thank goodness for Toto’s work in exposing the fraud.

Likewise, IPP’s Peter Fisher and others doing real research have exposed the myths about corporate taxes in Iowa that justify every political claim of a supposed need to reduce taxes on business. The fact is, it’s simply not a problem, as noted in the Iowa Fiscal Partnership backgrounder, “Iowa’s Businesses Already Are Taxed Lightly.”

Few States Tax Businesses Less Than Iowa

State Corporate Income Tax: Percent of Private-Sector GDP — Comparison to U.S. Average

Few States Tax Businesses Less Than Iowa — State Corporate Income Tax: Percent of Private-Sector GDP

Sources: IPP analysis of data from the U.S. Census, State Government Tax Collections; and the Bureau of Economic Analysis, Gross Domestic Product by State

Lawmakers often hear — and voice — complaints about the competitiveness of Iowa’s tax system. In fact, Iowa’s taxes on business already are very competitive. Whether one focuses only on the corporate income tax (above and linked here), or the whole range of taxes falling on business, Iowa’s state and local taxes are well below average, and have been for some time. (See state and local ranking of all states)

Iowa’s corporate income tax in recent years has been considerably lower than the national average level of taxation and lower than all but 11 states. The best summary measure of the level of corporate income taxation from one state to another, that takes into account all features of the tax code, is the amount of tax collected as a percent of the private economic activity generated in the state, as measured by state private sector GDP (gross domestic product).

In Iowa, this fraction fell from 0.31 percent in the mid-1990s to 0.24 percent over the last five fiscal years, as shown in the graph above. On this measure, Iowa’s rank among the 50 states fell from 36th to 40th. (For the most recent year, 2009, Iowa ranked 36th.) In both periods, Iowa taxed well below the average for all 50 states. Similarly, the conservative Tax Foundation found that Iowa ranks 43rd among the states in its level of corporate income taxation, measured as corporate taxes paid per capita on average for fiscal years 2004-2008 (and 36th for 2008).

See our two-page backgrounder on this issue at www.IowaFiscal.org.

Posted by Mike Owen, Assistant Director

Why Social Security Cuts Should Not be Part of the Deficit Discussion

Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits.

Peter Fisher
Peter Fisher

The short answer: Because Social Security is not the cause of deficits in the first place.

So then why do so many commissions and politicians insist on including Social Security “reforms” on their lists of things to do to reduce the federal deficit? Because it is a politically convenient way to force cuts in Social Security benefits onto the public agenda.

In actual fact, Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits. Social Security has been financing part of the federal deficit by investing the surplus in federal bonds.

Now let me tell you a story. One day a guy named George lent a friend $1,000 for a year. He didn’t need the money now, but he would in a year’s time to pay tuition when his daughter started college. But when the time came for his friend to pay George back, the friend said, “Geez, that’s a problem; if I have to actually pay you back the money you lent me I’ll be short, and it will be your fault, for demanding that I repay the loan. I think the fair thing is for you to cut back by not sending your daughter to college so you can afford to roll over my loan indefinitely.”

Would anyone take such an argument seriously? Of course not. Yet many people seem to take seriously the argument that it will be Social Security’s fault if at some point Social Security needs to be repaid some of the money it lent the federal government. And that the solution is to lower the standard of living of future retirees so Social Security can continue to buy federal bonds.

In a few years Social Security will be paying out more in benefits than it is collecting from payroll taxes. Then it will have to sell some of those bonds held by the Trust Fund to pay full benefits. This is precisely what the Trust Fund was set up to do: to be drawn down to ease the burden of paying baby boomer retirement benefits. But Social Security will still not be contributing to the deficit; it will simply no longer be helping to finance it.

How large the federal deficit will be will depend largely on how well we contain rising health care costs and other expenses, and whether we continue to renew tax cuts to the wealthy. Who will finance that deficit is a reasonable question. The important point is that when the Social Security Trust Fund is no longer purchasing federal bonds, and is cashing in some of the bonds it holds, the size of the national debt will not be one dollar larger because of that. The only thing that changes is who holds the debt. The Trust Fund will hold less, private investors and foreign governments will hold more.

As for the benefit-cutting deficit hounds, I am thinking about asking them if I can borrow $1,000. Just to conduct a little experiment in logical consistency.