Friday, January 9

Iowa Tax Reform or All My Axes Live in Taxes

As the legislature goes back to work this week, they will have the opportunity to consider a report by a state task force looking at changing property tax structures in Iowa headed by Iowa City's state senator Joe Bolkcom. Cities and counties generate more than 80 percent of their budgets from property taxes and the system, to many, is outdated. The issue pits local governments and property owners against anti-tax groups that want government to cut costs rather than expand sources of revenue. Death and taxes may be for sure, but fighting to the death over taxes is "for sure-er."

The report has taken a step in either opening the biggest can of worms that Iowa perhaps has ever seen or potentially addresses the inequities of taxation that have plagued the state for years. According to Bolkcom, “This is a billion dollar problem that has been more than 30 years in the making. ” Bolkcom, who is the chairman of the tax-writing Senate Ways and Means Committee, also said "We're proposing a menu of ideas for local governments. I think the revenues would be there to recover from last summer's [tornado and flooding] disaster."

The group has recommended that localities have more control over taxation such that the disparity of commercial property taxes are addressed.

The committee offered a three part proposal:

One, the Legislature should consider giving cities and counties alternatives to property taxes. The committee listed nine different alternatives including an income tax, cigarette tax, impact fees on new development and collecting money from nonprofit groups, which are currently tax exempt.

Two, 75% of the money raised by these alternatives must go to reducing commercial and residential property taxes.

Three, the remaining money must go to essential services, which may include rebuilding after last year’s natural disasters and public safety.

But will this help? I'll show both sides of the coin. But first a little discussion of how property taxes work in iowa.

How Do Property Taxes in Iowa Work?

The following is from the Iowa League of Cities:

Beginning in 1978, residential, commercial, industrial and agricultural classifications have been subject to an assessment limitation order, or “roll back,” that limits annual growth in property values to 4 percent. However, there is a further restriction in that the growth of residential property cannot exceed that of agricultural property. In essence, the growth of residential
property is capped at 4 percent or the growth in agricultural value, whichever is less. Since the law’s inception, residential property has always been rolled-back from its full valuation to comply with the law. The limitation can also be applied to industrial and commercial property when necessary.

Revenue Property Class in 2009 are:

Residential: 44.0803%

Commercial: 99.7312%

Agricultural: 90.1023%

Industrial: 100%

A Special Report with more detailed information on Iowa’s Residential Property Tax Rollback is available at

Property Tax Levies
Cities may levy up to $8.10/$1,000 of the taxable value on residential, commercial and industrial property and up to $3.00375/$1,000 on the taxable value of agricultural property
for their general fund (Code of Iowa Section 384.1). If a city is unable to meet the essential costs for services within the $8.10/$1,000 levy limit, there are several other levies available.

• A city may levy for the city’s contribution under the Federal Insurance Contributions Act (FICA), the Iowa Public Employees’ Retirement System (IPERS), the Municipal Fire and Police Retirement System of Iowa (MFPRSI) and certain otheremployee benefits. On the state budget forms, these are levied in the special revenues fund column of the Revenues Detail (Form 631.B).

• Insurance premiums, including workers’ compensation, necessary for the operation of the city and the costs of self-insurance or risk pools may also be levied outside the $8.10/$1,000 limit. The levy rate is the actual cost of the premiums divided by the total property tax base. Insurance costs on projects or improvements covered by revenue bonds and insurance on proprietary fund activities may not be levied, as these activities should fund themselves. These revenues are typically credited to the general fund even though they are restricted.

• An emergency levy rate of $0.27/$1,000 of taxable valuation that can be used for any
govermental purpose (Code of Iowa Section 384.8). This is a special revenue that is
required to be transferred to the general fund for expenditure prior to the end of the fiscal

• A city may levy to cover principal and interest payments on general obligation bonds under debt service. Provided proper procedures were followed on lease-purchase or loan agreements, the annual principal and interest payments may also be levied under debt service. The debt service levy is the dollars needed to cover the annual debt obligations divided by the total property tax base.

Code of Iowa Section 384.12 lists several other levies available to the city for specific purposes, some requiring a referendum. Non-voted levy activities include funding for the operation and maintenance of a publicly owned transit system, liability, property and self-insurance costs, a joint county-city building lease and rent, operation and maintenance of a city-owned civic center. Activities requiring a voted levy include funding for instrumental or vocal music groups, memorial buildings, symphony orchestras, cultural and scientific facilities, aid to public transportation companies, library services and emergency medical districts.

Heads: Can of Worms?

The plan offered by the task group would give counties and municipalities the ability to tax locally. If you have ever been to Illinois, you will find local sales taxes varying wildly because of this. What this does is to give localities the option to increase some kinds of taxes while reducing others. In the formula offered by the task group, the majority of relief would go to those paying commercial property taxes and to a much lesser extent, residential homeowners and helping localities pay for flood recovery.

This plan seems to favor larger cities where commercial properties are predominately located. Will this help rural communities? I don't see how it can, as it would be a zero sum gain for those communities to replace one kind of tax with another and might actually hurt the smaller communities by residents shopping in other communities where the local taxes are lower.

For larger communities, this may help them to increase their tax revenues overall, but at the expense of hurting non-profit organizations and perhaps homeowners to spur local economic development. Remembering that many human service non-profits exist in county seats or higher population centers, taxing these groups would decrease the services that could be provided. Often non-profit groups voluntarily pay fees for police and fire protection.

Also, in communities like Iowa City where there is a very high level of commercial properties, the result could be a net loss of revenue, as the state could continue to rollback property tax rates and the city would be required to rebate tax money on top of that.

Taxpayers may opt to live in outlying communities that strategically decide to not have additional income taxes and this could lead to a lessening of growth for larger communities. Again, this would lead to a zero-sum gain for those communities who opt for alternative taxes. Also, anti-tax groups see this as another way for the state and localities to tax income rather than look for ways to reduce what they see as unneeded taxes.

Tails: Idea Whose Time has Come?

Because commercial property owners pay at the second highest tax rate and to be competitive with other states for new business development, the argument is that commercial taxes in Iowa are out of line with neighboring states and should be lowered. Iowa, compared to other states, is in the top five states with respect to commercial property rates. Lowering the tax rate for commercial properties will allow for more economic development in rural communities as well as more urban areas.

Additionally, by creating more tax equity, all taxes in Iowa can be lowered by spreading taxes to all consumers of state and locality services and by implementing an income tax or other taxing options that will allow communities to address their local infrastructure and other service needs. This will actually create tax efficiencies and reduce general taxation.

Localities who have "home rule" would actually have more control over their tax bases. As it stands now, each community holds its breath to see what the state tax revenue picture is shaping up to be and then rushing to put a budget together that fits the picture. This is hardly a way for a city or county to be proactive in planning for its future needs. By giving localities more authority, it gives more flexibility to them and also for those residents who want to lobby their elected officials to figure out what to spend or not to spend these taxes on, in addition to whether to collect them or not.

In conclusion, the debate on reforming property taxes in Iowa will be, no doubt, a heated affair as individuals and groups lobby for and against changes to the tax code (and the parties draw their lines in the sand) , but it will be valuable to follow and educate yourself about because whether it happens in this session or not, there will be changes.
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