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February 2013 Policy Study, Number 13-2

   

Creating a Fair Property Tax System: Is it Possible?

   

Governor Branstad's Plan

   

 

As 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.[19] 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.[20]

 

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.”[21] 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.[22] 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, if you remember, the school districts have the largest part of the pie with property tax revenues at 42 percent.

 

The final part of Branstad’s plans 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.”[23] His plan is to cut the current 4 percent cap in half and apply it to all the classes of property, not just two. He plans to reduce “commercial and industrial property tax values by 20 percent over a four year period and provides direct funding for local governments to replace 100 percent of the property tax revenue.”[24]

 

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.

 

The last part of the Governor’s plan is very important. As stated earlier residential, commercial, and industrial are all taxed at their market value, agricultural property is taxed at its productivity, and residential and agricultural properties are linked. Increased productivity and the high crop prices will cause a significant increase in residential property taxes also. It is not hard for the average citizen to see that we need property tax reform. David Roederer, the Director of the Department 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.”[25]

 

While this proposal is similar to the proposal from last year, we have already heard quibbling from the Senate Democrats. Senate Majority Leader Michael Gronstal (D) said that “a property tax credit plan approved in his chamber last year would have yielded greater savings than the Governor’s plan for four of every five Iowa businesses.”[26] House Speaker Kraig Paulsen (R) “said he was eager to see Branstad’s proposal reduced to the exacting language of legislation, but that he was pleased with the governor’s approach.”[27]

 

Currently, the Iowa House is proceeding with a bill that is similar to the Governor’s proposal and the Iowa Senate has passed out of subcommittee a property tax bill under which “$50 million a year would go into a new Business Property Tax Relief Fund beginning July 1, 2014 to provide property tax credits for business. A permanent, ongoing appropriation would increase by $50 million each year that the state’s revenue rises by at least 4 percent, reaching a maximum of $250 million per year in reducing property taxes.”[28]

 

   

 

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