The Old Economic Development Toolbox: TIF

Picture1.pngThis post is a TIF primer (CF's main economic development tool): free land (and infrastructure) and tax abatement. I have reservations about TIF. Reluctantly, most Iowa city's must play the game to level the field. An incentive ceases to be when it becomes an entitlement. 

The old toolbox: free land, infrastructure and rebates

Our toolbox of land, infrastructure and property tax rebates are products of tax increment financing or "TIF". TIF is a state-designed, economic development funding tool where city debts and obligations can be funded by property tax growth in a designated district (State Tax Code, Chapter 403). Once a district is created, all incremental taxable value is directed to a TIF fund that pays said debts and obligations. The taxes on the incremental value flow into the TIF fund are used to pay down qualified debt or other obligations. Qualified debts include land acquisition, infrastructure (roads, sewers, land acquisition, etc.). Cities love TIF is because the city retains the incremental tax revenue versus each taxing entity getting their piece of the pie (city, schools, county, community college, etc.). This allows for faster than normal pay-off of the development debt.  TIF districts also allow the city to rebate or abate taxes over period of time to the benefit of the property holder, lowering the cost of ownership. Interestingly TIF was originally designed as an urban renewal program but was quickly re-interpreted in the 1990s as a no-holds bar economic development tool to compete with other states and their 'free offerings'. About 90% of TIF today is used for economic greenfields.TIFgraph.jpg

There are many criticisms of TIF. It certainly distorts private development and local taxation. On the tax side, properties outside of the TIF district pay for the growing operating costs of local government. The school share is back-filled by the state which means all Iowans subsidize school districts containing sizable TIFs with their income tax dollars. On the development side, municipalities have become the sole developers of industrial property because any business would be ludicrous to not accept free land and incentives. This causes mal-investment and coincidentally, contributes to the decline of commercial and industrial areas outside of TIF districts. It contributes to urban sprawl, brews annexation confrontation, fuels business poaching, and encourages excessive risk-taking.

TaxPie.JPGToday, roughly 10% of Cedar Falls' assessed value is an economic development zone, or TIF (Downtown, Unified Industrial Parks, Pinnacle Prairie). This amounts to roughly $270MM in assessed value generating nearly $7MM per year which can buy more land, build more roads, lay power in the ground and fund more rebates mainly for the benefit of medium to large enterprises.

Most cities and economic development authorities love it. The wise taxpayer knows there is no free lunch, somebody is footing that bill for expanding city service demands and normal growth of government. Unfortunately, TIF has morphed into corporate entitlement.  The need for TIF is symptomatic of bigger problems - high property taxes, high costs to develop, poor urban planning. Government has become the gatekeeper of industrial development, more akin to central planning of bygone days of other countries.

The Enticements

Per staff, Cedar Falls uses two main incentives to for property development:

1) Free land and infrastructure. The city fronts land acquisition and infrastructure costs and then gives it away  for qualified projects (in the past, private firms would acquire land and develop infrastructure as part of a subdivision plat).

Industrial/Warehouse Projects:  1 acre of land for each 10,000 square feet of new building with minimum assessed valuation of at least $30/square foot. 

Corporate Office:  1 acre of land for each 7,500 square feet of new building with minimum assessed valuation of $60-$75/square foot.ProductionDrive.JPG

2) Tax rebate, abatement or exemption. By existing City Ordinance and Iowa Code, any company can file for a partial property tax exemption for eligible new construction or expansions in a TIF district. The city uses uses development agreements to insure:

  • Minimum assessed valuation for 10 years
  • Commitment to use utilities through CFU

Most developmental agreements (the land + tax incentive) provide for a 5 year partial property tax exemption (sometimes 50% each year or a declining percentage) provided that projects have a minimum taxable value of $1,500,000. 

State Reform

The state has more influence over the economic climate than cities. To truly elevate the economic development climate, the state needs to reform TIF and income tax reform (among many areas). There are numerous policy areas from regulation to a public pension crisis, I'm just picking two that are most germane to this post.

First, TIF reformation should be a legislative priority. TIF should be phased out in favor of general-fund-financed projects. The state could play an important role as a financing authority, but it would no longer certify districts with special property tax revenue treatment. The city could turn industrial development to the private sector (similar to our subdivision ordinance). The city could offer low-cost financing or any other incentive it deemed worthy, but the property tax treatment remains the equitable across all property classes.

Second, the State Needs to Implement wholesale change in our taxation approach. These steps could get us there in a revenue neutral way:

  • Executive decision makers are attracted to low personal income tax states, preferably flat tax states.  Iowa has an extremely high tax rate (or so it is perceived). The state should implement a low, flat tax;
  • Companies are attracted to states with low (or no) corporate tax. The state should eliminate IA corporate tax;
  • Companies are attracted to states with low commercial property tax. Eliminate roll-back altogether and strive for property tax equity among ag, commercial, and residential property.

These three tax responses will do more to spur economic growth than any TIF project.  Iowa cities would compete on merit and locally financed incentives. 

In Summary

In a nutshell, most of our economic development incentives require a brick and mortar investment greater than $1.5MM. Small businesses or start-ups need not apply. Middle and large businesses... take your entitlement!  If you want to dig deeper, the Iowa Department of Revenue has an interesting report here. Does TIF support measurable economic development (jobs and wages)? The conclusion is not what you would expect: "no evidence that TIF results in increased economic activity measurable at the county level". Rather, TIF simply displaces current activity. Now, in defense of TIF, Cedar Falls has made prudent TIF investments and is a beneficiary of early adoption resulting in measurable increases property tax valuations and job concentration. However, much of this comes at the expense of regional neighbors. TIF made it easier for Cedar Falls make riskier investments in the 80's and 90's which are shovel ready (and ready to give away). Today, all communities have similar incentives so it is no longer an advantage. Rather, our core assets set us apart. In fact, our TIF increment is so flush, we are partially funding state-owned interchanges to accommodate our growth. I'm sure that TIF creators never intended TIF revenue for DOT cost-sharing!

What to do? Well, TIF is a state issue, it requires reform from above. At the local level, we should focus on a balanced incentive approach that supports a broad spectrum of economic development.  Please read my Balanced Incentives post for my follow-up to this writing.

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