Tax credit for businesses is better

By Kris Gulick

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Commercial property tax reform has been elevated to a top focus for Gov. Terry Branstad and both houses of the General Assembly. As president of the Iowa League of Cities and an owner of a business that provides accounting services, I understand the need for commercial property tax reform.

Over time, due to the design of the current property tax system paired with economic factors, Iowa's property tax system has created a higher burden on businesses, as compared to other property classes.

Cities are concerned with how property tax reform is accomplished. The method for achieving the goal of commercial property tax reduction will make a significant difference in the effects on local governments and other classes of property tax payers.

With such a high dependence on property tax revenue to fund local services for citizens, and few alternative revenue options, any major cut to this revenue source could have severe effects.

Two prominent alternatives for commercial property tax reform discussed during the 2011 legislative session included a business tax credit approach that passed the Senate on a bipartisan vote, and a rollback approach favored by Gov. Branstad.

The League supported the former and opposed the latter.

The business tax credit approach would give a state tax credit based on a percentage of valuation to the business owner, and avoid cutting into city budgets like a rollback would.

Cities favor this tax credit approach because if the Legislature decides not to fully fund the credit, city budgets are protected. Cities can prorate the credit based on the amount the state decides to fund.

A deep rollback would force local elected officials to either raise property taxes on homeowners to make up for potentially large revenue shortfalls or to make cuts to services.

The most concerning approach for cities is a rollback to 60 percent of taxable valuation on commercial and industrial property taxes.

For Cedar Rapids, the cut (not taking into account other factors such as changes in assessed values, any potential increases in residential property taxes, backfill, or tax increment financing) would mean an approximately $14 million annual loss - 15 percent of the city's general fund budget.

The complexities created for cities by a rollback are many. Legislators and the governor have discussed allocating state dollars to “backfill” city losses.

Even with state dollars as backfill for lost city revenue, a rollback creates much more uncertainty for cities. It seems unlikely the backfill of state dollars would be permanent, despite a potentially permanent revenue loss.

As we have seen in the past, with the phaseout of the machinery and equipment levy, a former revenue source for local governments, the state eventually stopped funding the shortfall, leaving cities to figure out how to fill the gap.

The rollback also creates more complications than the tax credit approach, including effects on existing Tax Increment Financing (TIF) districts used to incent economic development.

For instance, in Cedar Rapids in fiscal year 2012, property taxes related to TIF districts generated $3.3 million. This money pays for outstanding debt that has been issued to pay for the infrastructure improvements in these areas.

A 40 percent reduction of $3.3 million would be a $1.32 million loss in TIF funding, a situation that would require a

10 percent increase in the property tax debt levy rate to fund repayment.

A large rollback also would affect city bond ratings. If cities are downgraded, public debt becomes more expensive, leading to higher costs for taxpayers to fund necessary projects such as infrastructure upgrades to roads, bridges and other city projects.

For all these reasons, the League of Cities supports a tax credit approach.

Kris Gulick is the president of the Iowa League of Cities, Cedar Rapids City Council Member for District 1 and owner of Kris G. Gulick CPA PLC and Entrepreneurial Services Group LLC. Comments: krisgulick@gmail.com