Des Moines Register
08-13-06
Tax Increment Financing: How it works
THE DES MOINES REGISTER
Does Iowa track TIF spending?
Some cities and towns are failing to accurately report how much money is being
collected for economic development, a new state legislative report shows.
Nearly three-quarters of Iowa cities using tax increment financing will collect
more in revenue this year than they reported to the state, according to the
Legislative Services Agency.
In total, cities are collecting about $14 million more than reported. The
discrepancies were discovered by reviewing mandatory tax increment and
budget documents filed with the state.
Critics complain that some cities are also accounting for only a small portion of
the overall long-term debt they have taken on for TIF-related projects. Because
cities are hemmed in by constitutional limits on how much debt they can carry,
many report only payments made annually on that long-term debt.
State Rep. Jim Kurtenbach, R-Nevada, was able to get a law passed this year
that requires greater reporting from cities and counties. The measure will require
cities to better account for spending on TIF-related debt.
"Some cities are certainly pushing the envelope on how they're using TIF,"
Kurtenbach said. "They've come a long way from the original intent of the law."
But Bob Josten, a Dorsey & Whitney bond attorney and TIF proponent, said
cities are not required to report more than what they owe annually.
Josten said that contractually, many cities are not obligated to pay anything if
development does not occur as planned. Developers understand that when
entering into agreements.
However, defaulting on a debt agreement, regardless of whether it's considered
short- or long-term, could harm a city's credit rating and its reputation with
businesses, experts say.
What cities gain most from TIF?
Tax increment financing has been most effective in Iowa when used in major
metropolitan cities such as Des Moines, a new Iowa State University study
shows. Large urban areas saw the greatest growth in property values within TIF
areas, and they garnered the greatest percentage of job and population growth
over the past 10 years.
Medium-sized cities fared the worst, seeing the smallest percentage growth in
property tax values, according to the report. Medium and small cities both gained
jobs, but overall, their populations still dropped 4 percent to 8 percent.
In spite of the gains, the researchers question whether much of the growth,
especially in large cities, wouldn't have occurred without incentives.
Bob Josten, a bond attorney and proponent of the state's expanded use of TIF,
said that's "absolute baloney."
"Much of the progress seen around the state has been made because this tool
has been there and it's accessible," he said.
Do cities spend money to make money?
Iowa cities are spending a lot of money to spur growth. This year, Des Moines
will take in $19.7 million in new revenue from TIF projects, but it will spend at
least $18.2 million to pay for debt related to ongoing TIF projects, according to
the Legislative Services Agency.
How does the tax shift work?
Cities spread that cost from TIF projects to others. Taxpayers and businesses
have to pay more for local services, such as education or police protection, to
make up for the money spent on development.
Some cities roll all new money spurred by development in a TIF area into new
projects. Des Moines city leaders say they have been conservative in their use of
TIF, returning at least 25 percent of the new property value added through such
projects to government coffers to pay for services when they are done.
When TIF works, as it has in the Des Moines example, the overall value of
property in a city rises over time because of the new development. That feeds
the tax base, so more money can be used to pay for schools, roads, parks, and
fire and police protection, among other services.
Des Moines, for example, will gain about $6 million in property taxes to spend on
services from TIF projects this year.