Rollback inequities highlight need for fresh reform

By Peter S. Fisher

If you could slice your property tax bill in half by signing a piece of paper, most people would jump at the chance.

That's what some owners of apartment buildings in Iowa have been doing, and who can blame them? By converting the ownership to a co-op, the building may get reclassified from commercial to residential property. In Iowa, that means the assessment automatically drops by more than half.

Now, cities are concerned about apartment owners unilaterally reducing their property tax base, and who can blame them? This new practice introduces revenue instability and shortfalls.

So, where to affix blame? Look at Iowa's “rollback” formula. Because of that formula, identical properties can pay wildly different property taxes.

There was a reason to create the rollback in 1977, when a California property-tax revolt caught lawmakers' attention across the land. In Iowa, the rollback emerged to prevent homeowners from paying an ever-larger share of local property taxes as home values rose rapidly. In that, it succeeded.

But in the process, the rollback system has created substantial inequities, and has eroded the ability of cities to keep up with the rising cost of providing services. A solution has so far evaded the Legislature.

How does the rollback formula work? Assessments statewide may not rise more than 4 percent a year. If market values for a particular class of property, such as residential, rise more than 4 percent, the assessed value is adjusted so that the value on which you actually pay taxes rises only 4 percent.

In the 33 years since the rollback system began, residential property assessments have fallen to just 47 percent of market value. While other classes of property have the same 4 percent growth limit, the rollback formula has resulted in commercial property being taxed on 100 percent of market value, or close to it. When you cut the residential payments in half, other property owners pick up the slack. Understandably, commercial property owners have been complaining. More about that later.

As new apartment buildings are constructed, they are often owned legally as condominiums, allowing the owners to benefit from the residential rollback even if the owners don't live in the apartments, but rent them out. Cities lose substantial revenue in the process, and owners of older buildings are put at an unfair disadvantage. If unable to bring older buildings up to code, they may not convert their buildings to condominiums and benefit from lower tax assessments.

Clearly, state lawmakers got us into this mess, and it is their responsibility to find a solution. But any solution that lowers commercial property taxes will either raise someone else's taxes, or force a cut in public services.

One way out of this dilemma is to phase out the rollback over a long period of time. This could be accompanied by selective property tax relief measures to mitigate the impact on lower-income homeowners, by funding the circuit-breaker for homeowners of all ages.

There are other options. The state could assume a larger share of mental health funding (reducing county property taxes) or school aid (lowering school taxes). Commercial property owners would get relief from the latter two measures, and the lower rates would offset the higher assessments for residential owners. State taxpayers generally, of course, would have to pick up the cost.

One important point about commercial property tax complaints: Commercial property rates often are offset by locally granted property tax abatements and rebates through Tax Increment Financing. Complaints that high commercial assessments hinder competitiveness ignore cities' power (which they exercise regularly) to compete for commercial investment by lowering taxes.

Reform should be comprehensive: Any significant reduction in commercial property taxes should be accompanied by reducing or eliminating abatements.

Cities would then be forced to quit engaging in unproductive competition for commercial property. With such reform, all assessments on property, new or old, residential or commercial, would reflect market value, erasing inequities and disparities. And with the increase in the tax base, the tax rates could be lowered substantially.

That's what real reform should look like.

Peter S. Fisher coordinates research for the Iowa Fiscal Partnership, a joint budget and tax analysis initiative of two Iowa-based organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines.