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June 2013 Brief: Volume 20, Number 18

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Creating a Fair Property Tax System: Is it Possible?

 

by Jennifer L. Crull

 

We have constantly been bombarded with statements like “my property taxes are too high” and “we have to reform property taxes now.” So this year the Iowa Legislature is again trying to tackle the problem of reforming the property tax system to make it more “equitable.” I do apply that term loosely, for there is nothing equitable about our property tax system. It keeps getting band-aids placed on it, and now it is one of the most complicated tax structures we have in the state. You definitely need a degree in accounting to make sense of the complex systems that our state uses to figure our annual property taxes.

 

Currently in the state of Iowa we have over 2,000 “taxing authorities” when it comes to property taxes. This definitely adds to the complex mess of that property tax system.[1] Another problem with our system is the “rollbacks.” This system, which was supposed to help the property tax system, has just shifted the burden and caused more problems with the current system.

 

So as you can already see, cutting property taxes is easier said than done. There are so many entities involved in the property tax system that one move can affect ten different entities at once. So for the state to come up with a method to cut taxes and not negatively impact everyone receiving property tax revenue is not a small task.

 

In FY 2013 this system is bringing in $4.7 billion for schools, cities, counties, community colleges, and other entities that use the property tax system to collect revenue.[2] Property taxes provide the funding for many different governmental entities and therefore are a sacred cow when it comes to reform or efforts to reduce the burden that property owners face.

 

When Governor Branstad gave his State of the State address in January, he proposed some significant changes to the property tax system that would provide nearly $400 million in actual property tax relief.[3] This plan has three significant parts. Governor Branstad stated that property tax reform is very important for all Iowans. This quote from his address speaks to the impact property taxes will have if left unchecked:

 

If left unchecked, current law will allow property taxes to grow by over two billion dollars in the next eight years and half of the increase will fall directly on Iowa homeowners. I find that prospect terrifying and ask you to work with me to ensure property taxpayers are protected from this unprecedented property tax increase.[4]

 

The first point of his plan is for the budget to fully fund the “Homestead Tax Credit and the Elderly and Disabled Tax Credit in fiscal year 2014 with an additional appropriation of $33 million.”[5] The 2010 Legislature failed to fully fund property tax credits and Governor Branstad wants to make sure that doesn’t happen again, since that has dire effects on the property taxpayers and entities receiving property tax revenue.

 

The next item Governor Branstad would like to change is the school finance formula. He would like to replace the “allowable growth” with 100 percent state aid.[6] What does this mean? This would prevent the school aid formula from triggering an automatic increase in local property taxes, which it currently does. Also, the school districts have the largest part of the pie of property tax revenues, at 42 percent.

 

The final part of Branstad’s plan is to bring forth legislation that will stop the “future tax shifts between classes of property by tying the classes together in one combined rollback.”[7] His plan is to cut the current 4 percent cap in half and apply it to all the classes of property, not just two. His plan reduces “commercial and industrial property tax values by 20% over a four year period and provides direct funding for local governments to replace 100% of the property tax revenue.”[8]

 

One may wonder why these are important changes to the property tax system. But we have to remember that first off the change in school funding will provide much-needed direct relief to the residential property taxpayer. With the current system, anytime we have any increase in allowable growth that automatically triggers an increase in our property taxes. Moving to 100 percent state funding will stop this automatic increase in property taxes.

 

It is not hard for the average citizen to see that we need property tax reform. David Roederer, the Director of the Office of Management, explained during the budget briefing “that property tax payments have increased by 54 percent in the last ten years, but will jump an additional 47 percent in the next eight years if something is not done. The Branstad plan would limit that growth to 22 percent.”[9]

 

On Wednesday, June 12, 2013, Governor Branstad signed into law Senate File 295, which will reduce property taxes in Iowa. While it doesn’t include everything that Governor Branstad wanted in his plan, it does provide some much needed relief for property owners.

 

Senate File 295 provides a reduction of 10 percent in assessed value over two years to commercial and industrial property owners, creates a new tax credit for commercial and industrial property, and changes the limit on allowable growth from 4 percent to 3 percent for residential and agricultural property. It also provides property tax reduction for apartments, nursing homes, assisted living facilities, and telephone companies.[10] This is a great start to helping out the property tax owners in our state, but let’s hope the Legislature will consider doing more in the coming years.

 

We as voters have to continue to contact our elected officials and allow them to know our thoughts on property tax reform. This is the only way our elected officials will understand where the public is coming from. If you want to see lower prices in stores, or just want to see more of your paycheck stay in the bank, then you will urge lawmakers to continue to review the property tax system and provide the reforms that are best for all Iowans.

 

(Endnotes)
[1] “An Introduction to Iowa Property Tax,” Iowa Department of Revenue, <http://www.iowa.gov/tax/educate/78573.html> accessed on January 7, 2013.
[2] “2012 Iowa Factbook,” Legislative Services Agency, p. 15, <https://www.legis.iowa.gov/DOCS/LSA/FCT/2012/FCTMMT000.pdf > accessed on January 2, 2013.
[3] Governor Branstad State of the State Address, < https://governor.iowa.gov/2013/01/%E2%80%9Cour-opportunity-our-iowa-%E2%80%9D-gov-terry-e-branstad-delivers-2013-condition-of-the-state-address/> accessed on January 18, 2013.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Craig Robinson, “Branstad’s Push for Property Tax Reform More Likely Now That State Has Surplus,” The Iowa Republican, January 16, 2013, < http://theiowarepublican.com/2013/branstads-push-for-property-tax-reform-more-likely-now-that-state-has-surplus/> accessed on January 18, 2013.
[10] Iowans for Tax Relief, “The Taxpayers’ Watchdog,” May 23, 2013, <http://taxrelief.org/reports/0000/0191/May_23_2013_ITR_Watchdog.pdf> accessed on June 12, 2013.

 

Jennifer L. Crull is an IT Specialist with Public Interest Institute, Mount Pleasant, Iowa.
Contact him at Public.Interest.Institute@LimitedGovernment.org.

 

Permission to reprint or copy in whole or part is granted, provided a version of this credit line is used:"Reprinted by permission from INSTITUTE BRIEF, a publication of Public Interest Institute." The views expressed in this publication are those of the author and not necessarily those of Public Interest Institute. They are brought to you in the interest of a better-informed citizenry.

   

 

 

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