Iowa Legislature taking 'bold' steps on property tax reform

After years of study, the Iowa Legislature took what its sponsor called a “bold and aggressive” step toward property tax reform.

“I think everybody can agree that property taxes have been studied to death and it is now time for action,” Senate File 522 floor manager Rep. Tom Sands, R-Columbus Junction, said May 10 before the House voted 58-40 to approve a plan that was a cooperative effort of House majority Republicans and GOP Gov. Terry Branstad.

The next step in property tax reform is uncertain because the House approach is at odds with a plan approved by the Democratic-controlled Senate. House Republicans substituted their plan for the Senate's, which would offer $200 million in targeted commercial property tax relief. It would provide a tax cut of about $600 for each eligible commercial parcel in the first year. The $50 million in yearly relief would be achieved by taxing the first $30,000 of assessed value for commercial and industrial property at the same rate as residential homes – roughly half their taxable value.

The property tax relief would be triggered only if state revenue grew by at least 4 percent – the same amount Branstad's future budgets are based on, Democrats said.

The House amendment to Senate File 522 would roll back commercial and industrial property taxes to 60 percent of valuation over five years, increase the state's share of the school foundation formula, cap local government's property tax revenue and tie increases in local government property taxation to a consumer price-like index.

Republicans contend lower property taxes will spur economic activity that will offset the revenue loss resulting from the rollback.

However, the change is unfair to existing small businesses, especially those struggling to recover from floods, tornadoes, other natural disasters as well as economic challenges, said Rep. Dave Jacoby, D-Coralville, whose Cedar Rapids business was damaged by flooding in 2008.

A new business moving in next door to an existing business would be taxed at 60 percent while the existing business would not get the same tax advantage for five years.

That disadvantage exists now, Sands said.

“We just call it tax abatement,” he said. “This is more general, fair tax policy than local governments picking winners and losers.”

The bill further coupes agricultural land and residential property, which exacerbates the inequities in the property tax system, Jacoby said.

Even in fast-growth communities, he added, new revenue from economic development will not keep up with the revenue loss from the rollback.

Backfilling that revenue loss is not tax relief, Jacoby continued. It merely shifts the cost of local government from property taxes on commercial and industrial property to income and sales taxes.

“Backfill is not property tax relief. It's shuffle, shuffle,” Jacoby said.

House Minority Leader Kevin McCarthy, D-Des Moines, warned the GOP plan would lead to the largest growth in the general fund in the state's history. The general fund impact will start at $57 million in the first year and be $799 million in the fifth year, McCarthy said.

He noted the next bill on the House agenda, the state takeover of mental health services delivery, will cost that state $250 million a year.

“One billion dollars in just two bills. Wow,” he said.

Sands countered that doing nothing would be a $1.3 billion tax increase in five years.

The property tax shift is and has been occurring, he said. The rollback that has reduced taxes on residential property to less than half of its value has shifted the burden to commercial and industrial property.

If the Legislature doesn't act, Sands said, the rollback is expected to rise from about 44 percent to 58 percent, resulting in a $1.3 billion property tax increase in five years.

“Doing nothing is not an option,” he said.