What You Need To Know In The Upcoming Commercial Property Tax Battle

One of the top three priorities for the upcoming legislative session will be finally putting something on the books to bring Iowa’s commercial property tax rate in line with the rest of the nation.  After much angling by both sides last year, ultimately no adjustments were made to the tax code.

Below you will find a very brief recap and analysis of the three plans that were on the table last year.  They are important to know since past will certainly be prologue in this debate.  Both sides are essentially pushing the same proposed solutions as they did a year ago—and one way or another the law will reflect whichever side wins on the issue.

 

Governor Branstad’s Plan (House Study Bill 519)

This plan would reduce the taxable value of Commercial and Industrial property by 5% a year for 8 consecutive years.  The taxable value for these properties is currently at 100%, so in 8 years the plan would allow the State to collect on 60% of the valuation instead of the current 100%.

  • The cap for increasing valuations on Residential and Ag properties would be lowered from the current 4% a year to 2% a year.
  • The first 3 years of the 5% reduction in valuation would be guaranteed, with the additional 5 years of the 5% reduction being subject to the value of commercial property rising in its assessed value.
  • To offset the lower revenue being brought in by local governments the State would pay cities money every year.  $50 million in year one, $100 million in year two, $150 million in year three.  After the third year the amount would be raised an additional $30 million per year until it got to a $240 million backfill.  This backfill would then remain on the State’s books every year going forward.
  • The proposed money to local governments would be administered in different amounts based on how much a local government was affected by the revenue loss.

Analysis—This, much like the Governor’s education reform, would essentially be an increase in power and control at the State government level.  The positive is that, in theory, the local governments would be forced to cut spending as the backfilled money that they receive is projected to be less than the revenue loss experienced by the local governments.  In the prior incarnation of this plan the “administered based on need” language was not included, so it is quite possible that the backfill sent to the local governments would in fact not require them to actually cut their budgets—it really would just depend on how different the property valuations were from city to city.

The House Republican Plan (House Study Bill 500)

In many ways this plan has a lot of the same principals as the Governor’s plan.  One major differences is that it implements in 14 years instead of 8 (interestingly the House’s prior proposal called for the 8 years that the Governor has now adopted).

  • The biggest difference is that instead of paying local governments to offset the revenue loss, this plan would eliminate the 12.5% “2nd effort levy” (and I believe the $5.40 per $1,000 taxable valuation known as the “uniform levy”) and instead, by the year 2019, would have the State fund 100% of the per-pupil cost of K-12 education.  Note: Right now the uniform levy is taken from property owners statewide and the State pays to take that amount up to 87.5% of each years determined per-pupil cost—the remaining 12.5% is paid by local property taxes taken from inside each district.

Analysis—There are smaller components to this that I did not investigate fully, but in many ways this approach is the same as the Governor’s in that it limits the local governments taxing authority.  While the Governor’s plan would take general fund money and give it to the locals, the House plan just takes the responsibility of paying for things that the locals would otherwise have to spend on with local property tax funds (mainly education).  Also, like the Governor’s plan, it would not fully offset the drop in local government revenues and theoretically would force local entities to cut the size of their budgets.

Though “local control” is usually a Republican battle cry, in this case it is largely a Democrat argument against the Republican plans. I happen to find the criticism valid—but for different reasons.  The Democrats oppose the taking of local control because it would limit the amount that taxes can be raised, I see it more as limiting the decision making of local communities to pursue what their residents think is best (within the broader State law).  One of the unresolved issues I have here is how the State paying all of the education funds would play out in terms of funding each school district.  I believe the current formula allows a discrepancy range of a $175 per-student from district to district but, given the fact that the State would fund 100% of the burden, the questions exist—would this remain and how so?.

The Senate Plan (SF 522)

This bill passed the Senate last year 46-4.  The only 4 to vote against it were Republicans Chelgren, Dix, Whitver, and Sorenson.

  • It would tax the first $30,000 of commercial property at the same rate of residential property.  This would result in an estimated $555 to $714 reduction for typical Commercial taxpayers (this small amount is one of the reasons that the four Republicans listed above voted against it).
  • The plan would top out at a reduction of $6,856 (paltry when you consider that large retailers routinely pay over $500,000 a year in property taxes).
  • The biggest distinction from the other plans is that the savings contained in the bill would not be concrete, but instead would be tied to the total revenue amount brought in by the State.  Tax relief would only fully materialize as long as the States revenue increased.
  • The plan basically offers a $50 million reduction in Commercial property taxes per year, as long as the States revenue increased 4% in that year.

Analysis—In many ways this last bullet point means that it is not really a significant cut in taxes or spending at all, and frankly it’s shocking that only four Republicans voted against it. It has some other provisions that make it, more or less, a way to stop the impending increase in property taxes faced by everyone.  The positive here is that it does not affect the local government’s revenue stream or sovereignty (nor does it backfill anything with other State funds).  The flip-side is that it does not allow for any reduction in government spending.  It basically says that as long as the economy is good and values of property increase we will agree to give you a tax credit to soften the burden of your taxes rising along with the value of your Commercial property.

Stating the obvious here—this proposal is totally insufficient to deal with the size of the problem.  What makes this plan ridiculous is that one of the major advantages in a tax reform plan is that businesses will know that lower rates are solidly in place for future spending and hiring.  By having a bulk of the tax savings tied to the amount the State brings in in a given year, you are in essence not able to tell a business owner what his rate will be going forward—and clearly uncertainty is a killer for business owners

Overview & Summary

All these plans seems somewhat flawed and I don’t endorse any of them on their merit.  Since Democrat votes are needed to pass something, if I had to I would support the House plan.  My strong belief is that all three are unnecessarily over-complicated.  More than anything they are just moving money around and telling local governments that they can’t raise taxes beyond a certain point—how much you want to bet that this doesn’t stop the same legislature from mandating that the same municipalities do more things every year?

Ultimately my skepticism comes from the fact that these proposals are all about people paying less taxes without putting forth a dollar of specific spending cuts…funny how that works.

 

 

 

 

 

About the Author

Mr. Arnold is a long time constitutional conservative. He holds a Bachelor of Arts Degree in English Literature from the University of Iowa. Over the last few years he has been involved in numerous political campaigns, most recently serving as campaign manager for an Iowa House candidate and serving as a city chair for Tom Latham. He is self-employed, running a small business in Ankeny, Iowa where he resides with his wife.

 

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