Distinctly Different

Tax Increment Financing: A Critical Tool for Local Economic Development

By Tom Deimerly, Executive Director, Marshall Economic Development

As each Iowa legislative session begins, we like to run a reminder of one often misunderstood, but critical tool in the public sector’s economic development toolbox: Tax Increment Financing (TIF). We do this annually because as TIF detractors attempt to make changes to the tool at the state level, we believe it’s important that people, whether against or in favor of TIF, have an understanding of how it works.

TIF is one of the few tools available to cities and counties to spur economic development projects and make the necessary investments and reinvestments to infrastructure that enable new growth while also supporting the overall local economy of a geographic area. These investment and reinvestment projects include improved water and waste water treatment facilities, new roads/repair of existing roads, assistance to upgrade downtown buildings, and the local match necessary to utilize outside assistance programs from other governmental entities.

At its core, TIF is a method of reallocating property tax revenues which are produced as a result of an increase in taxable valuation above a “base valuation” figure within a tax increment area to spur investment by a private entity. You are probably asking yourself right now, “What?” I did the same thing when I first heard those words.  In fact, I had more questions about our property taxes and public financing systems after hearing that than I did before hearing it.

Let me give a local example: picture an existing cornfield or hayfield that has a new big box retail store built on it.  The taxes generated from the original use (as an agriculture production field) are still put into the general use categories of all the taxing entities, however, the new taxes paid after it is built are put towards infrastructure improvements that allow the project to occur. These investments are paid for by the box retailer. In this particular case, the additional tax revenues generated by the project are utilized to meet the needs of the business to expand a road to three lanes and meet their own needs. The ancillary effect of that opens an additional 37 acres for increased development and ultimately additional tax revenue which will lower taxes for everyone as we all pay to have the civil services that each resident and business pays for through taxes. An increased tax revenue base lowers the overall burden placed on everyone for essential services.

Let’s look at an example with real numbers: The base tax collected on a project before the improvement is $5,000. The improvements add valuation that will garner an additional $4,000 worth of taxes. This $4,000 is the increment and can be used for the improvements. The tax on the project will eventually be $9,000. The school, city, county, and college still collect and share the base tax of $5,000, but will eventually collect and share the additional $4,000. Nothing is removed from the existing taxing general funds and ultimately everyone shares in the valuation after the infrastructure improvements have been funded. Those additional taxes received may have never been available had the project not received assistance through TIF and other development tools.

That is a very high level overview of this critical economic development tool. If you have additional questions or would like to discuss past uses of TIF for economic growth, do hesitate to contact Tom Deimerly, Executive Director, Marshall Economic Development at (641) 753-6645.