On Tuesday the Davison County Commissioners refused to extend a TIF to Puetz Corporation:
The Davison County Commission denied a request to delay the payoff date for the tax increment financing district plan for apartments at Mitchell Technical Institute.
The commissioners, holding a regular meeting Tuesday at the Davison County North Offices in Mitchell, voted 5-0 against the plan, primarily taking objection with the developer, Puetz Development LLC, of Mitchell, attempting to use the discretionary formula to pay for future year's taxes.
And one of the commissioners correctly points what I have been saying on this blog:
The commission wasn't very receptive to the idea, saying that using the discretionary formula and a TIF district runs the risk of "double-dipping" on incentives. They were also displeased with changing a project plan that had already been approved.
"You're changing it midstream," said Denny Kiner, who said he saw it as "breaking the original contract."
Deputy State's Attorney Jim Taylor advised the commission on the two main points used in the denial, saying the original plan didn't call for discretionary formula treatment and that the change would keep tax revenues away from the general fund for two extra years.
The proposal was approved by the Mitchell TIF Finance Committee April 21, and the Mitchell City Council approved the request for an abatement of taxes during its June 15 meeting. Commissioner Randy Reider expressed frustration about the city redirecting county property taxes.
So the City of Mitchell use of TIFs for economic development purposes ends up being a shift of monies from the taxpayers and into the hands of private business interests. In this case it is Puetz Corporation, whose was recently awarded a $14 million contract for a fine arts center for the Mitchell public schools that was 15% over budget.
David Swenson from Iowa State has done extensive research that says TIFs are not justified based on economics:
Proponents of this practice must look beyond economic principles to justify the practice, to include:
• The use of TIF authority enticed private investment that otherwise would have been indifferent to the community;
• The TIF authority is being used to substantially change or diversify the local economic structure as part of a comprehensive effort to raise area standards of living, stabilize a community, or address important social issues like pervasive unemployment or underemployment; or
• The TIF authority provides local investment “match” funds to be used to leverage state or federal aid.
These reasons may make sense at the local government level, but they are difficult to justify using economic principles on several grounds.
• There is little evidence to support the assertion that local incentives actually determine business locations. In fact there is a growing amount of research indicating the vast majority of businesses would have otherwise located in the “winning” jurisdiction, nonetheless;
• There is also precious little evidence indicating that local economic development activities substantially alter overall regional economic opportunities – the ability of a community to influence broad economic factors is limited; and
• Communities have many alternative economic development program abilities allowing them to substantially address business needs for infrastructure, to provide targeted and limited tax breaks, and to generate resources that might be used to leverage state or federal funds. These include existing general obligation bonding authority, capital reserve funding, and itemized budgeted amounts for those purposes.
• Finally, principles of intergovernmental fairness would question the legitimacy for taking other governments’ property tax collections in the name of economic development objectives.
Many communities in Iowa have suffered from losses in downtown commercial activity, industrial re-location, and population stagnation or loss.
And the negative impact on downtown Mitchell and the north side mall and other retail establishments due to the I-90 corridor development is discussed in an earlier post.
Cory Heidelberger is also covering a proposed I-90 corridor development at Spearfish:
Predictably, the developers aren’t just buying the land and making profit-magic happen. They are hoping for taxpayers to bear much of their costs through a business improvement district, tax increment finance districts, and public-private partnerships. The TIF might be not only the usual property tax arrangement, in which any additional tax revenue created by the development goes to pay off the developers’ construction loans instead of toward public works, but also a sales tax deal that would allow businesses in the new development to divert their sales taxes toward their expenses as well. Arrgghh!—are there no true capitalists left?
The Spearfish developers cite Cabela’s in Mitchell as an example of TIF and other taxpayer subsidies promoting economic development in South Dakota.
And this isn't just a natural free market response to customers' wants and needs. This is part of a "plan":
Local developers are proposing the Dakota Meadows project. The project isn’t just another housing subdivision, but a development designed to draw people to the area with amenities to include an indoor hockey arena that could host other sporting events and trade shows, a 322,000-square-foot outdoor lifestyle shopping center, three hotels and restaurants, an outdoor sports complex, a furniture store, a school, a travel center, and 400-500 acres of home sites near the intersection of Interstate 90 and Highway 85 at Exit 10 [Mark Watson, “$210 Million Development Proposed for Spearfish,” Black Hills Pioneer, 2015.06.30].
The taxpayers are being asked to fund a plan that have been no part of. Most of the benefit will be going to those who have been involved with the plan. That planning is done behind close doors or in informal settings so that the public, that is now being asked to help fund it, are in the dark.
Like Puetz Corporation in Mitchell, it will be a small number of business interests who will garner most of the benefit as they have inside knowledge of the plans and thereby have an advantage over the rest of the community. And as I have already covered, Ball State has research that says such types of economic development does not increase employment. The increase is the amount of money business owners have in their pockets.
This is the result of crony capitalism, which is not an economic system that uses a free market system to enhance competition. It instead picks winners and losers determined those who are members of the Chamber and Development Corps. These are non-governmental entities that include elected governmental officials on their boards, and that is how the informal "public/private partnerships" are formed. There is also research that warns about corruption in such relationships. I am not saying that the people involved are corrupt. I am saying the system creates legalized corruption by well intended people who believe they are doing the community good. Based on the three linked sources of research in this post, I argue that they are wrong. The competition is not where it belongs. The competition is for who can get the most out of the taxpayers. One community wins, all the other communities lose. And in the winning community, there are those who will also lose.