Source: Legislative Services Agency

PROBLEM

Unfortunately, property tax incentives, including TIF, haven’t created economic growth. Iowa’s Department of Revenue analyzed TIF activity in the state over the course of 15 years and concluded that TIF likely “leads to no net employment or wage gains when measured for entire local economies.” A series of national studies examining 50 years of property tax incentives similarly found “little evidence of economic benefits.”

What such widespread use of urban renewal areas can do, however, is subsidize development that would have happened even without incentives and train businesses and developers to lobby for their own handouts from the taxpayer. Communities whose public officials lean heavily on these programs may find fees and other taxes increasing to make up for the property tax dollars they have given away. This means local governments may be tying up property tax dollars needlessly while further saddling residents and businesses with growing tax burdens.

Local taxpayers aren’t the only ones footing the bill for incentives, either. Given Iowa’s laws governing urban renewal areas, the state’s general fund must backfill the school aid formula to cover property taxes devoted to such incentives. In FY22, for instance, Iowa paid out over $75 million to cover TIF’s impact on the school aid formula and over $13 million for the impact of abatements.

SOLUTION

Beyond shifting the focus of local tax policy from an endless cycle of targeted handouts to one of lower rates that benefit all households and businesses, Iowa can improve its urban renewal practices in a variety of ways:

• End the use of TIF as a development tool in areas that are already growing and return TIF to its original purpose of redeveloping deteriorating urban areas. Require an official determination of blight using objective, measurable data from a specific community. Less than 15% (Chart 2) of TIF districts in Iowa were created to combat slums or blight.
• Allow property tax incentives to be utilized only with strong evidence that a given project would not occur without the subsidy. This “but for” test helps ensure tax dollars don’t fund development that was going to happen anyway.
• Limit the percentage of a given community’s property tax dollars that can be dedicated to urban renewal areas to no more than 4%.
• Increase the frequency of the Department of Revenue’s Tax Increment Financing Evaluation Study to give lawmakers complete, current information on the program’s effectiveness.
• Redirect the benefits of incremental revenue to existing taxpayers sooner by capping the length of time urban renewal areas can exist at no more than 10 years.
• Prohibit the use of urban renewal funds for the construction of public buildings. Local governments have multiple other revenue streams and bonding options at their disposal to finance construction.