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Image: Von Maur.
Ryan J. Foley  /  AP
A store's decision to move five miles across town to Coralville, Iowa, which promised an incentives package worth more than $11 million, has infuriated Iowa City leaders.
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updated 2/21/2012 6:06:32 PM ET 2012-02-21T23:06:32

When the leaders of this small Iowa city became desperate to land a new department store, they didn't have to look far: They lured one from the city next door, along with up to 100 jobs.

The store called Von Maur agreed to leave Iowa City for a platter of incentives offered by Coralville, which promised to put up a bigger, $9.5 million building, to provide a $1.5 million parcel of land and to discount the store's property tax bill. It even offered $650,000 to cover any penalties related to the store's departure.

As the economy slowly strengthens, neighboring cities and states can be pitted against one another in the competition for jobs and development. But it's not always clear how many positions are actually created, rather than just poached and shuffled around. And some people question whether the deals are worth the high cost.

"I think it's ridiculous," Amber Wherry said after buying a pair of jeans at Von Maur in Iowa City, expressing concern about what will happen to Sycamore Mall when the store moves five miles to the new location, probably sometime in 2013.

Coralville first tried to negotiate with Nordstrom's, Target and others, but those companies weren't interested or the talks fell apart. Local leaders say the deal with Von Maur will attract other stores and restaurants to a new retail development. But Iowa City officials are bitter.

"It's a big blow to that mall and a big blow to that area of town," said Rod Sullivan, a supervisor in Johnson County, which includes both cities.

Communities of all sizes are launching a dazzling number of taxpayer-funded schemes to bring in new businesses or keep existing ones. They're giving grants and loans, cutting business taxes, building new infrastructure and bending the ears of anyone willing to hear a sales pitch.

The competition, which includes politicians of both parties, is often just spirited jousting among rivals. But in extreme cases, cities have been willing to raid their neighbors in the quest for jobs.

"You don't have to be a mathematical wizard to figure out that's never going to pay for itself," said Peter Fisher, research director of the Iowa Policy Project, a think tank that has estimated the value of Von Maur's incentives at $18 million. "It's simply not economic development. You are moving a store from one place to another. It doesn't do anything to increase the economy of Johnson County."

Making matters worse, he said, Iowa City residents are helping subsidize the move because Coralville is diverting tax money from the county and schools to pay for the project.

The system known as tax-increment financing allows cities to use property tax revenue in once-blighted or undeveloped areas to pay for incentives to attract businesses and for improvements such as streets and utilities. Every state but Arizona has authorized its own system.

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But critics say the incentives have strayed from their original mission and are increasingly used to recruit employers to suburban developments at high cost and questionable benefit. Tax revenue is diverted from education and government services without much accountability.

Tax-increment financing districts "are a very popular economic tool. In effect, they are a way of raising money without raising taxes," said Richard Briffault, a Columbia University law professor who has written about the growth of TIFs. "They are widespread, but there's also pushback out there."

California Gov. Jerry Brown last year eliminated tax-increment financing when he signed a bill closing 400 redevelopment agencies.

Officials elsewhere are worried about what might happen in their states, said Toby Rittner, president and CEO of the Council of Development Finance Agencies, which represents 300 state and local government agencies. They are mobilizing to defend what they consider a powerful development tool.

"It's really tough to tell a community they shouldn't do something when they are looking at it from the perspective of, 'We need jobs. We need the tax base,'" he said.

The Von Maur deal has added to the momentum for changes in Iowa. Lawmakers are now considering banning cites from using the incentives to steal businesses from their neighbors. And some want to require additional study of the economic benefit of projects before they are approved.

Iowa City and Coralville are both financially stable and have low unemployment.

But leaders in Iowa City say Von Maur's closure will be devastating for Sycamore Mall, where a number of other stores have closed in recent weeks. A spokeswoman for Von Maur, a Davenport, Iowa-based chain, declined to comment.

Elected officials in Coralville, a relatively wealthy city of 19,000 with big box stores and affluent neighborhoods straddling Interstate 80, aren't backing down. They say they went after Von Maur only after learning its Iowa City location was struggling and was considering moving.

Coralville Mayor Jim Fausett said the development that will house Von Maur will transform what once was an industrial wasteland into a destination for shoppers. He credited the deal with helping persuade a brewpub to open nearby and drawing interest from other restaurants. New businesses could eventually mean hundreds more jobs in the retail, service and construction industries.

"It's finally now starting to really move forward," he said. "We think it's the right development for the area."

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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