Proposed manufacturing sales tax exemptions would cost Eastern Iowa cities, schools

A state rules change would slash sales tax for manufacturers by nearly $60 million over the next two years, reducing revenue for cities, counties and schools.

Cedar Rapids could be particularly hard hit, officials said, because of its share of sales tax coming from manufacturing.

The Iowa Department of Revenue proposed changes in September to Iowa's Administrative Rules that would, among other things, make consumable manufacturing equipment such as sandpaper and drill bits exempt from sales tax.

Agency officials, who held a public hearing on the proposed rules Tuesday morning in Des Moines, say the revisions would clarify the law and 'represent the landscape of manufacturing in Iowa today.'

But not every manufacturer wants to see the changes.

'I'd love not to pay sales tax,' said Walt Corey, owner of Pickwick Manufacturing in Cedar Rapids. 'But where are we going to replace that revenue? I need the fire department and the police department, and how are we going to pay for them?'

The bulk of Iowa sales tax goes to the state, so the most direct effect of the proposed manufacturing sales tax changes on cities is through local-option sales tax. Cedar Rapids voters in 2013 extended that tax for 10 years to pay for public street repairs and construction.

The Iowa League of Cities estimates Iowa cities together would lose $5 to $7 million a year in local-option sales tax money under the proposed change.

'Five million to $7 million spread statewide is not that big of a number, but when you layer it on top of property tax changes from two years ago, cities are beginning to grow concerned,' said league President Alan Kemp. 'Any city that has more manufacturing will be hit more than a smaller rural community because companies are paying taxes on materials.'

With 4.6 percent of retail taxable sales coming from manufacturing, Cedar Rapids is above the state average for some of the largest cities that are also flood-mitigation districts, according to the Revenue Department. By comparison, Coralville, which is more retail-heavy, gets less than 1 percent of its taxable sales from manufacturing.

Diane Hudson, a tax manager for Rockwell Collins in Cedar Rapids, said the proposed change would result in only a .2 percent reduction in annual Iowa sales tax liability for the avionics corporation. But the shift would also save the company money because lawyers won't have to spend so much time figuring out which items are exempt from sales tax.

'It provides a clear and common definition to replacement parts that has been exempt under the law since 1998,' Hudson said.

Some cities are concerned the change would hurt flood-mitigation programs.

'The (Dubuque) program will be more affected than other cities,' said Alexis Steger, senior budget analyst for Dubuque.

Funding for flood-mitigation projects comes from the increase in sales tax over a base year which, for Dubuque, is 2013, Steger said. If the city loses manufacturing sales tax, there will be less money available for flood projects, she said.

Cedar Rapids city spokeswoman Maria Johnson said it was too soon to know how the proposed change would affect city budgets.

The Iowa School Board Association has warned school districts of a $6 million decline in money for infrastructure and services if the manufacturing sales tax changes are approved, said Craig Hansel, Iowa City Community School District chief financial officer. This would be a loss of about $170,589 for Iowa City, he said.

Critics of the changes say they should have gone through the Iowa Legislature. The Revenue Department made a similar proposal in 2013, but it did not get sufficient support from lawmakers. Implementing the changes through a committee instead of the full Legislature seems like a backdoor move, said Sen. Joe Bolkcom, D-Iowa City.

'We don't believe the governor has the authority to create a $50 million tax cut because big corporations don't like paying a particular tax,' Bolkcom said.

A supermajority of the 10-member committee could derail the rule, but with five Democrats and five Republicans, that isn't likely to happen, Bolkcom said.

The rules are scheduled to take effect July 1.