Compromise Marks End of Session, May 31, 2013

After three sessions of wrangling, a compromise on property tax reform was reached this year.  The legislation provides for a measure of property tax relief for commercial, industrial, residential and agricultural property, while holding local governments reasonably harmless.

The Taxpayers Association of Central Iowa had earlier noted that a compromise of a 20 percent rollback (to 80 percent of assessed value) in commercial/industrial and a three percent annual limit on residential/ag ought to be possible. See:  Compromise is Possible on Property Tax Reform.  The final outcome was essentially what was suggested, although roughly half of the commercial reduction took the form of tax credits and the other half took the form of a true rollback (from 100 percent of assessed value to 90 percent).

Also there were tax reductions relating to “human habitat” commercial property (apartments, nursing homes, assisted living, etc.), telecommunications companies and an earned income credit for low-income workers.

From a property taxpayer standpoint, the good news is the rollback of commercial taxable value takes place quickly – going from 100 to 90 percent of assessed value in just two years, by fiscal year (FY) 2016.    All commercial/industrial property owners (and renters, to the extent that savings are passed through on “triple net” leases) will enjoy this 10 percent savings, and it will continue automatically each year absent future law changes.  Local governments will be reimbursed annually by the State for the drop in revenue they will experience as a result of the new rollback.  It will become a fixed amount (about $150 million per year) after the reduction is fully implemented.  Should the State at some point choose not to continue its reimbursement, businesses would continue to receive the tax savings, but local governments would absorb the loss in revenue.

Businesses will also receive a state-funded tax credit based on the difference between the property tax they pay as commercial/industrial, and what their property tax would have been as a residential property, for valuations up to a certain threshold.  While the total value of this reduction ($125 million per year) is in the same ballpark as the 10 percent rollback, it is distributed very differently.

The state funding is allocated among a discrete number of properties on the basis of one credit per property unit.  A property unit is defined as contiguous property owned by the same person for a common use and purpose.   By the second year, the statewide average credit will be approximately $1,750, less for properties assessed below $144,000.  In effect, small, stand-alone businesses (valued at less than $144,000) will be taxed as if they are residential property (on about 54 percent of assessed value in FY 2016).  Large businesses and multi-tenant properties will receive one $1,750 credit but still be taxed as commercial property (on 90 percent of assessed value) for valuation above $144,000.  The owner of 801 Grand will receive the same tax credit as the owner of Jimmy John’s at 2705 Grand Ave.

Should the State at some point choose not to continue to fund the credits, local governments would not be at risk for revenue loss, but businesses would no longer receive the credit.

For homeowners and agricultural landowners, the benefit will be felt differently.  It will be a reduction in the scheduled increase rather than an actual reduction in property taxes.  The portion of residential and ag property assessed value that can be taxed was slated to rise four percent per year, but the legislation brings that down to three percent instead.  It is genuine property tax relief compared with current law; in fact by the end of ten years its value will be equivalent to the commercial cuts.  However, because most people were not aware of the increases that were coming, it may not be terribly noticeable to the average homeowner.  Local governments will not be reimbursed for the reduction in revenue from this measure; three percent annual growth in taxable value is viewed as a reasonable “allowable growth” in this era.

“Human habitat” commercial properties will see the percentage of assessed value that is taxed fall from the current 100 percent to the residential level over a period of ten years.

In total, about $329 million in property tax reductions will occur statewide, which represents about six percent of total property taxes paid.

Local governments will experience a small amount of unreimbursed  “loss” of revenue.  The average annual “unreimbursed share” per city is about $15,000; for school districts $35,000, a manageable level considering it is a reduction in revenue growth rather than a reduction in revenue.  Even without reimbursement, statewide taxable value would still grow more that two percent per year as the reductions phase in, then resume a growth rate in excess of four percent per year.

Value of Tax Credits to Local Businesses:

Assuming this year’s consolidated rates, the value of the credit for businesses with assessed value of $144,000 or more would be the following (with values less than $144,000 prorated):

 * In FY 15, the first $105,000 of assessed value is taxed at the residential percentage.

For a full financial summary, see https://www.legis.iowa.gov/DOCS/FiscalNotes/85_1464SVv2_FN.pdf

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