Skeptics have, for decades, questioned the way that Iowa cities and counties use certain taxing tools to spur development.
Tax increment financing, or TIF, and tax abatement have their place, the argument goes, but local governments stretch each beyond their intended purpose. Those challenges have had some validity, but most critics have been tempered, agreeing that they wouldn’t want to changes to stymie local governments’ ability to encourage growth.
But that stymieing appears to be a side effect of the Iowa Legislature’s approval of Senate File 2472, a multibillion-dollar overhaul of the property tax system.
Leaders in Des Moines and Pleasant Hill have cried out loudest in central Iowa. Officials in both say they had to halt popular tax abatement programs because leaving them in place would mean deeper spending cuts then they are already predicting. Des Moines also says it’s backing off on TIF for now, and leaders of other cities say they’re proceeding cautiously.
Even after accounting for the probability of some hyperbole from the cities, shelving such powerful tools was not the intent of the property tax legislation. Des Moines accurately points out that TIF was the engine of its downtown’s renaissance from 1970s blight to today’s destination. Lawmakers said when passing the bill that they’d probably need to come back for tweaks. When they do that, they must allow cities flexibility to avoid chilling the development climate statewide.
Why tax abatement and TIF are important
Two parts of the property tax law are at issue.
One makes changes to the rules for TIF. The classic idea with tax increment financing is to set aside property taxes generated from new construction to pay for public infrastructure ― roads, utilities and other services ― that serves the new development. The revenue can also cover incentives for developers. Hundreds of local governments in Iowa use or have used the tool. This year’s property tax law puts new limits on how long a TIF district can stay in place, along with making sensible changes to promote workforce housing and protect school revenue.
The bigger piece is a limit on how much local government revenue can grow year over year. In most circumstances, the limit is 2%, plus the revenue from new construction. That is a problem when it comes to tax abatement that residents and businesses receive, usually for improvements to their properties, according to the cities of Des Moines and Pleasant Hill. When tax abatements end, according to the cities, the extra property tax generated from the improvements will count against the 2% growth cap, not as new construction.
“This means the City bears the cost of offering the incentive and never receives the benefit,” Pleasant Hill Mayor Sara Kurovski said in a written statement.
For its part, Des Moines immediately suspended work on new TIF districts when the tax law passed the Legislature, and City Council members agreed in June that a pause on tax abatement was necessary as well. The city has $1.3 billion of taxable value currently abated.
If those tools say completely off the table for any length of time, the lost opportunity could be considerable. At the micro level, having fewer incentives could discourage both new construction and upgrades for houses and other existing structures. And TIF has been indispensable for many well-liked projects. A decade ago, Des Moines put up $15 million in TIF money as part of a complex $101 million plan for a downtown convention complex hotel that advocates said was crucial for landing bigger events. A pledge of TIF money was called the final piece that will let construction start on a pro soccer stadium south of downtown. Outside of urban areas, TIF has helped spur revitalization in economically depressed areas throughout the state. A Hubbell Realty Co. executive told the Business Record that apartment projects and other multifamily development could see the biggest blow from the new law.
Bipartisan votes made the problem; bipartisan votes should fix it
Criticisms of incentives, and TIF in particular, are widespread and mostly valid. As TIF use expanded, developers came to see it as a basic expectation for almost every project. During debate on property tax legislation at the Iowa Statehouse this year, state Sen. Dan Dawson said that people digging in their heels to defend TIF would get in the way of the goal of mitigating Iowans’ property tax bills: “The people involved in TIF are probably going to make some money off it, and everyone else has to have a bad system and a high TIF rate to support it.”
State law on TIFs could be further updated, or city councils and boards of supervisors who abuse development tools could be voted out. That has little to do with what’s happened here: The property tax law is threatening to wholly wipe out systems that make growth possible. The missing ingredient here is partnership: not between cities and developers, but between cities and the Legislature. A more thoughtful property tax measure ― one where voluminous public input early on didn’t give way to closed-door drafting on the session’s final weekend ― could have kept the good of local tax incentives and weeded out the bad. Instead, it appears the law will be a wrecking ball to new, needed, construction.
The property tax bill passed on an overwhelmingly bipartisan basis. This pushback is similarly bipartisan ― Democrats have long dominated Des Moines’ city government, but Kurovski ran in a Republican primary a few years ago, and rural officials in heavily Republican areas statewide have expressed concerns, too. A bipartisan fix is in order. At the very least, the Legislature should give local governments some allowance for their budgets to benefit in coming years from incentives that were handed out before the property tax bill passed. Better would be to explicitly, and perpetually, allow new revenue from expiring incentives to be excluded from the 2% growth cap.
Lucas Grundmeier, on behalf of the Register’s editorial board
This editorial is the opinion of the Des Moines Register’s editorial board: Rachel Stassen-Berger, executive editor; Lucas Grundmeier, opinion editor; and Richard Doak and Rox Laird, editorial board members.
This article originally appeared on Des Moines Register: Fix Iowa’s property tax law so it doesn’t arrest growth | Opinion
Reporting by The Register’s editorial, Des Moines Register / Des Moines Register
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