Compromise is Possible on Property Tax Reform, May 7 2013

Over the past ten years, property taxes in Iowa have grown at more than double the rate of growth in our state’s personal income, double the rate of growth in inflation, double the rate of growth in state taxes, and infinitely more than our population, which has remained constant.

Compromise is Possible 2

The result is that commercial property, because it is taxed at 100 percent of value while residential is taxed at around 50 percent, is now being taxed at a level that is hard to explain away.  The unfortunate truth is that a commercial property located in Des Moines is paying more than a similar property in any of the other largest cities in each state, except for Detroit or Providence.

Why should we care?  Owners and renters of commercial and industrial property create jobs.  Businesses whose margins are too small to absorb such a high cost will simply not materialize, nor grow in Iowa.  In many instances, except for those who travel often, we don’t even know what we’re missing.  In other cases, when property taxes eventually become unaffordable, the declines in Main Street businesses are more obvious.  In any case, there is a cost in terms of jobs and in terms of the vibrancy of communities.

Property tax reform has been opposed by local governments, especially cities, who say the State would need to replace the revenue they would lose as a result of proposed changes.  Yet these same local governments go on to say they distrust the State to do so.

The question is, do they really need the State to make up the difference?  Isn’t there a solution that doesn’t rely on replacement dollars?

Growth in local government spending is related to growth in revenue.  The more revenue there is in the system, the more spending will grow.  This is because of Iowa’s collective bargaining laws, where growth in revenue is viewed as the floor for pay and benefit increases.  With pay and benefits already comprising up to 80 percent of operating budgets, total spending growth will typically be a percent or two above the rate of growth in revenue, however high or low that is.

The seventy percent growth in local revenue over the last ten years has certainly not brought about a 70 percent improvement in services (in fact services have declined in some cases), but it has raised public sector compensation.  Conversely, a slower growth rate in revenues, one closer to inflation, is not any more likely to impact services but it might just bring public sector pay and benefit increases more in line with inflation.

Using the projection models jointly developed by the legislative and executive branches of state government, our analysis shows that without any law change and with constant tax rates, cities will see a 5.3 percent compound annual growth rate in property tax revenue over the next ten years, statewide.  Some cities will see a higher growth rate, others lower, but the statewide average will be 5.3 percent.

There certainly appears to be room to reduce that rate of growth.  In fact, the statewide currently mandated growth in residential taxable value could be reduced from four percent to three percent, and the commercial base reduced to 80 percent over five years, while still allowing city property tax revenue to grow an average of 3.8 percent per year (given constant rates) over the next ten years.

Even in the first five years, while the commercial reduction is being phased in, revenue growth would still average 2.7 percent per year, a rate well above projected inflation.

Compromise is Possible

Whether local governments see a 5.3 percent annual growth rate (current law), or a 2.7 percent annual growth rate, the number is best understood as a rough proxy for the rate of growth in public employee pay and benefits.  This is especially true if the legislature kicks the pension issue down the road and funds part of the cities’ obligations to their police and fire pension plan.

Do we really need to see 5.3 percent annual growth in compensation, or would 2.7 percent – still above projected inflation – be adequate?

Iowa needs property tax reform, and there has never been a better time to do it.  Our analysis shows that with compromise on both sides, there is a way to:

  • Provide meaningful commercial and industrial property tax reform (by reducing taxable value to 80 percent of assessed value);
  • Protect residential property tax owners from the high growth they will otherwise experience (by reducing the statewide residential growth factor from four percent to three percent);
  • Preserve the ability of local governments to deliver quality local services (by continuing to allow growth in taxable value above the rate of inflation); and
  • Do so without relying on the State to reimburse local governments for their foregone revenue (thus saving millions of dollars in the state budget and relieving local governments of worry about the actions of future legislatures).

This is the third year of deliberations about property tax reform.  A compromise is possible, and needed.

Leave a Reply

Your email address will not be published.