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February 2013 Policy Study, Number 13-2

   

Creating a Fair Property Tax System: Is it Possible?

   

How the Property Tax System Works

   

 

To fully understand why property tax rates need to be cut, we first have to understand the property tax system and everything that goes into that sheet of paper you received from the County Treasurer’s office saying you owe X dollars in taxes. Property taxes are collected on five classes of real estate: residential, agricultural, commercial, industrial, and utilities/railroads. Most of us think that only if I own a home do I care about property taxes, but that is not true. If you rent an apartment or a home you are paying for the property taxes in your rent, and if you purchase anything at a business you are paying for their property taxes in the price that you pay. But property tax reform for all classes is what will be best for our state and all Iowans. We too long have focused only on residential and agricultural and need to remember all categories need to be reformed.

 

So who pays property tax in our state? Chart One shows you the breakdown of the $4.7 billion that is collected. As you can easily see, the top two groups paying over 69 percent of all property tax revenue are residential and commercial. This is why they are the two groups targeted for a reduction in tax rates.

 

Chart One

 

Our property is assessed every two years, and railroads and public utilities are assessed every two years also.[3] From the assessments comes the ability of a “taxing authority” to levy taxes. The Iowa Department of Revenue Website lists the following as entities that can collect taxes:

 

Property tax supports many different ‘taxing authorities.’ Cities, counties, school districts, and townships are the most common. Taxing authorities may also include community college districts, agricultural extension districts, assessor offices, hospital districts, and sanitation districts. In addition, there are associations for fire protection, drainage, and other public needs that levy taxes.

 

Iowa has more than 2,000 ‘taxing authorities.’ Most property is taxed by more than one taxing authority.[4]

With over 2,000 “taxing authorities,” you can imagine there are many interested parties concerning cutting property taxes. I am sure that when you look at your property tax bill you look at the total amount due for half a year or year and don’t always take the time to look at all the entities listed for getting a share of your property tax revenue.

 

Next comes the problem of figuring out taxes due to “rollbacks.” Rollbacks are what the state government uses to keep our property taxes “fair.” So they say! Over 30 years ago the value of residential property was quickly rising and the state felt they had to do something to help deflate the effects of the high inflation on property tax payers.[5] This was accomplished with Section 441.21 of the Iowa Code. The section provides for the reduction of property tax valuations according to assessment limitations.[6] Did you just say “what?” We need to keep in mind that when the Iowa Department of Revenue indicates a 100 percent rollback, that means that there is no rollback of property taxes, meaning that those in that category are paying property tax on 100 percent of the value of the property. The following are the assessment limitations applied to each class of property:

 

• For the agricultural, residential, commercial, and industrial classes of real estate, the taxable valuation for each class is limited to 4 percent annual statewide growth from revaluation.

 

• The taxable valuation for utility property is limited to 8 percent annual statewide growth from revaluation.

 

• The assessed valuation for railroad property is adjusted by the lowest of the assessment limitation percentages for commercial, industrial, and utility property to determine the taxable valuation.[7]

 

Additionally, agricultural and residential properties are linked; the growth in both classes of property must be the same, with the maximum being 4 percent. Therefore if one of these two classes grows less than 4 percent, then the other is limited to the same increase.[8]

 

As we look at Table One, we see the property tax rollbacks over the last 22 years. The glaring change is that agricultural has gone from 100 percent to 59.9334 percent, a decrease of 40 percent. Residential is all over the place, from 73.0608 percent to a low of 44.0803 percent and now starting to increase again at 52.8166 percent. So what do these numbers mean to you?

 

 

The first thing to understand about property taxes is that all categories except agricultural land are taxed on assessed value. Agricultural land is taxed on its productivity. This is why there is a big difference between the categories. Let’s take a look at what it means to have $100,000 in taxable property for each category, bearing in mind this looks different in each county due to the productivity formula for agricultural land.

 

The agricultural category is 287 acres of farmland with a market value of $574,000, the commercial and industrial is a market value of $100,000, and the house is a market value of $208,333.[9] As we all know there is a big difference in all those categories and yet they have the same taxable value: not very fair and equitable.

 

 

I am sure that the rollbacks are as clear as mud. But the real reason to bring this up is to show how they shift the tax burden. If we take a look at this analysis from the Iowa State Association of Counties from January 5, 2007:

 

That depends on from whose perspective you choose to answer the question. If you are a residential property owner, the rollback positively affects your tax burden; i.e., the rollback reduces the percent of taxes paid by you and other homeowners. However, the rollback increases the percent of taxes paid by all other property owners. Consider these numbers from assessment year 2005 (FY 2007):

 

Class Assessed Value % of Total Taxable Value % of Total
Agricultural $21.4 billion 13% $21.4 billion 20%
Commercial $24.6 billion 15% $24.4 billion 23%
Industrial $4.0 billion 2% $4.0 billion 4%
Residential $103.6 billion 64% $47.6 billion 45%

 


In 2005, the latest year for which data is available, the residential rollback is 46.0%; all other property classes are at or near a 100% rollback. The table above shows that residential property accounts for 64% of all assessed value, but only 45% of taxable value. The rollback essentially wiped $56 billion of residential property value off the tax rolls. Agricultural, commercial and industrial property, on the other hand, all have greater shares of taxable value than of assessed value, specifically because the rollback’s benefit to residential property has to be paid for by the other property classes. The bottom-line effect of the rollback is that it causes residential property owners to pay lower taxes, and everyone else to pay higher taxes.[10]

 

The following table shows this same information for FY2013.[11]

Class % of Total Assessed Value % of Total of Taxable Value
Agricultural 17.4% 19%
Commercial 16.1% 23%
Industrial 3.0% 5%
Residential 57.3% 47%

 

 

That should cause you to pause and think about the businesses we work for and the shops and restaurants that we visit. Those establishments pay more taxes so that I pay less on my house. But the truth is we pay it anyway, in the increased cost of food at restaurants and the cost to buy that pair of shoes, so wouldn’t it make sense to make this system work better and be more equitable for all citizens in Iowa?

 

   

 

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