TIF Money Explained
by Bill Lynn, Fifth Ward Alderman
Tax Increment Financing
Reduces the company’s property taxes for several years in order to encourage the investment in a new building or renovation.
Problems TIF money creates
Causes bidding wars between cities.
Lack of enough tax revenue to cover additional costs associated with the new property (i.e., street maintenance, additional fire and police protection, etc.).
Davenport is at a disadvantage because it only gives TIFs for commercial property (not residential)—can hurt the new housing market.
Doesn’t fit the current need for small business growth –TIF is designed for large businesses that are constructing new buildings.
Designed to favor new construction at the expense of existing.
It is critical that Davenport determine how to grow its economy. So far our approach has been similar to every other city’s approach.
TIF Money
One of the most used approaches to attract larger companies and to encourage expansion of existing companies is the use of what is called TIF money. TIF stands for Tax Increment Financing. What Tax Increment Financing does is reduce the company’s property taxes for several years in order to encourage the investment in a new building. For instance, assume a company is building a large building and the taxes would be $100,000 per year. We might agree to rebate a portion of those taxes to them for several years. It may be rebated in different forms. In this example assume we agree to rebate $70,000 per year to them for 10 years. This can be a direct rebate or it might be used for infrastructure around the new development. The company’s jobs must be full time, have benefits, and pay a designated minimum amount. They must create a minimum number of jobs. This method has been used by many cities, counties, and other local governments to attract business. Problems Created By TIF Obviously it does attract companies and jobs to the area. Are there any problems? The answer is yes there are.
First, what has happened is that about every community has used this method. This means companies can put communities into a position of having a bidding war.
Second, there are costs associated with the business. There are street maintenance issues, fire protection issues, and police protection issues. These all add to the costs of the city and the tax money received in the first years may not cover these costs. That means it must be made up by other taxpayers in the community. This creates a catch 22. We must raise taxes to cover services, and then we become less competitive to attract companies. We then must provide bigger TIFs and then search for more money to cover costs.
Some communities do not limit TIFs to commercial property but actually provide TIFs for residential property. (Davenport does not do this.) This means Davenport is at a disadvantage in residential property since we do not provide TIFs for residential development. In the long run the communities giving residential TIFs will be at a great financial disadvantage, but for now they will attract many developers since houses will be easier to sell.
Communities would be better off if they would simply lower tax rates for everyone and not uses TIFs, but that is not likely to happen soon. Too many communities have used this extensively and giving it up is difficult. They have become addicted to it.
Another problem with the use of TIFs is that they don’t fit the current need of much business growth. They are designed for large businesses that are constructing new buildings. This ignores much business development which includes many small businesses, and businesses that do not need large amounts of space. This is where much growth occurs, and this is not a good tool for this type of development.
TIF is also designed to favor new construction at the expense of existing buildings which might explain why companies tend to build new buildings when existing buildings are available.
