The future of tax increment financing (TIF) will be debated this legislative session. TIF is a popular mechanism for underwriting city support for industrial, commercial and residential developments. Taxes collected on new properties in a TIF area are retained by the city to retire community debt incurred to support the development. Unfortunately for Iowa at large, TIF is frequently misused. And all taxpayers pay the cost of the misuse in higher local and state taxes.

Cities’ most essential purposes are to ensure the health, safety and welfare of their residents. Secondarily, they provide an array of community services and amenities – parks, libraries, pools, community centers and such. Finally, communities manage land use and growth, and when needed or feasible, they help facilitate orderly development by providing business-supporting and residence-supporting infrastructure.

TIF was originally authorized as a self-financing mechanism to restore seriously blighted urban areas. TIF was amended in the mid-1980s to allow cities to use its revenue-generating authority for economic development activity of any kind. Prior to that, this extraordinary use of public funds was justified only to remedy clear-cut social and market failures. After the change, TIF was frequently used as a deal-sweetener for industrial and commercial prospects.

As a rule, the incremental taxes are used to extend infrastructure and otherwise help enable a development, rebate the cost of infrastructure spending made by new firms or, in many instances, rebate all or part of a firm’s property taxes. Once all of these TIF debts are satisfied, the increments are then released to all of the local governments, and everyone reaps the benefits of the growth.

But many cities are loath to release their TIF revenues because they get to keep all of the counties’ and school districts’ taxes along with their own and use them for all manner of spending. Though most toe the line, several have used their TIF increments to fund general road improvements, fire stations, libraries and city parks, not just economic development projects. It is fun to spend other people’s money.

Of all the questionable uses of TIF funds, though, none is as dubious as the recent Von Maur debacle in Coralville. Millions in TIF funds were used to woo a store from Iowa City to Coralville, a move of maybe four miles. It is outright neighborhood thievery in the name of economic development – and an idiotic zero-sum transaction. The relocation will not enhance the regional economy.

So folks are howling, and reforms are proposed. I’ve watched this before, going back to the mid-1990s; bond attorneys, developers and the cities successfully fended off nearly all proposed constraints. But this time feels different. Coralville and its acolytes have stretched their TIF behaviors so far that remedy is mandated. People are onto them.

Real reforms, though, will require TIF oversight with teeth, buy-ins from affected local government, realistic sunsets of TIF projects and a firm definition of allowable uses of TIF resources.

Oh, and legislative courage.

David Swenson is an associate scientist in the department of economics at Iowa State University.