THE TROUBLE WITH TIF: Tax incentive plan can do more harm than good, researchers say

Unfair property taxes, erosion of school revenues among problems cited

COLUMBIA, Mo 2/6/14 (Beat Byte) --  Tax Increment Financing (TIF) can exact an unreasonable cost on schools and counties, says a 2012 report Columbia city officials are using in the debate over a "TIF district" that would encompass most of the central city.

Prepared for Iowa's largest county, the report is the latest critique of the tax incentive program, which diverts future property and sales tax revenues from schools, libraries, and county governments into a special fund restricted to redevelopment.

TIF too often strays from its core purpose -- to redevelop blighted areas and promote economic development -- found the report's authors, economist Peter Fisher, Ph.D. research director of the nonpartisan Iowa Policy Project; and Michael Lipsman, a retired tax research and program analysis manager for the Iowa Department of Revenue. 

TIF can easily "degenerate" into a "perpetual cash cow to finance city operations that have nothing to do with economic development," the researchers discovered.  Sold to voters and politicians as "temporary financing," with minimal impact on area agencies, the TIF cash cow is instead "a never-ending diversion of revenue that affects all jurisdictions providing services to residents."

In five Iowa cities, for instance, TIF revenue exceeds property tax revenue.  The result: "higher property taxes on county and district taxpayers residing outside the city," the report notes.

TIF will provide financing to upgrade, replace, and extend aging, dilapidated infrastructure without raising taxes or utility rates, Columbia Mayor Bob McDavid and city manager Mike Matthes have repeatedly told the media.

 

But their sales pitch illustrates a vice -- not a virtue.

"TIF promotes local government spending by lowering its perceived cost," but only for TIF-funded amenities, Fisher explains. "In the process, spending priorities are skewed in favor of incentives, buildings, and infrastructure, and away from services such as mental health, recreation, police protection, library acquisitions, and others."

TIF can also be bad for business.  The report found instances of TIF "used to build hotels that lose money and compete with unsubsidized hotels in the same area."

"Without serious reform, we can look forward to a future in which increasing numbers of cities TIF all or most of their city," Fisher and Lipsman explain.   "The end result will be a local property tax system that is increasingly unfair, and an erosion of revenues that threatens the ability of cities and counties to finance important public services."

Tax Increment Financing Report

TIF report briefing