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Commercial Property Tax Reform_Letters of SupportTHE CITY OF DUB Masterpiece on the Mississippi «Email» VIA Email and 1st Class Mail «Com pleteLOCALName_Address» Re: Property Tax Reform Dear «Title» «Last», Dubuque All-AmeHCaCi1V '111' 2007 City Manager's Office City Hall 50 West 13`" Street Dubuque, IA 52001 -4864 563 -589 4110 www cityofdubuque org March 5, 2012 The City of Dubuque supports the need for property tax reform. The City believes commercial property tax relief for business owners can be accomplished though a tax credit provided by the State. This reform would hold cities harmless and provide the needed relief to our local business owners. This proposal has bipartisan support having passed the Iowa Senate as Senate File Bill 522 with a 44 -6 vote last legislative session. However, the City opposes House File 2274 which is a bill being considered by the Ways and Means Committee. The City of Dubuque opposes this bill because it is not a property tax credit program that would hold cities harmless and the bill implements restrictions on city revenues. This bill would cause a shift in property taxes to residential property taxpayers or result in significant reductions in city services. The Senate Bill imitates the Homestead Property Tax Credit Program. The State of Iowa Homestead Tax Credit is a state - financed property tax relief program which reduces residents' property tax bills directly. The State of Iowa Homestead Tax Credit is available to property owners in the State of Iowa who live in the property. This exemption is a reduction of the taxable value of their property amounting to a maximum $4,850. If the State of Iowa provides reduced Homestead Tax Credit funding to residential taxpayers, the residential taxpayers end up paying more of the tax bill. Either way the City gets the money expected based on the adopted tax levy. The only thing in question is, will it come from the State or the homeowner. Senate File 522 would work much like the Homestead Tax Credit and would have a formula to apply the residential rollback to the first $32,000 in valuation for each qualified commercial property, usually amounting to a tax credit between $500 and $600 per property. For example, the owners of a local hardware store valued at $105,000 and a Wal -Mart building March 5, 2012 Page 2 valued at $1.5 million would both receive a $600 credit. As the size of the fund grows, the value of the credit would increase. When fully implemented, it's estimated that the property tax credit would be worth approximately $4,029 for a property valued at $200,000 or greater. To pay for this permanent commercial property tax break, the State of Iowa would create a Business Property Tax Relief fund that would eventually reach a funding level of $200 million in tax credits per year. Tax credits would be claimed for commercial, industrial, or railway property improved with permanent construction. The county treasurer would show on each property tax receipt the amount of the credit that was received from the Business Property tax Credit Fund. Counties would be paid twice a year from the Fund to cover the lost revenue due to the credit for local governments. If the State reduced funding, the local governments would still get the revenue, it would just come from the business. In the case of the House Bill, the State would provide some replacement funding to cities, but if the State reduced the amount of funding, the cities would not get the revenues from the business, so services would need to be reduced or residential property taxes increased. Thank you for your continued efforts to hold the line on additional service reductions or fee increases at the local level. Please support the Senate version of the commercial property tax credit Sincerely, Roy D. Buol Mayor JML cc: Michael Van Milligen, City Manager Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager The Honorable Pat Murphy Iowa State Representative 155 N. Grandview Avenue Dubuque, IA 52001 The Honorable Tom Hancock Iowa State Senator 310 E. Main Street Epworth, IA, 52045 The Honorable Chuck Isenhart Iowa State Representative P.O. Box 3353 Dubuque, IA 52004 -3353 The Honorable Steven Lukan Iowa State Representative 7365 Columbus Street New Vienna IA 52065 The Honorable Pam Jochum Iowa State Senator 2368 Jackson Dubuque, IA 52001 The Honorable Tod Bowman Iowa State Senator 812 Grant St. Maquoketa, IA 52060 The Honorable Brian Moore Iowa State Representative 18314 267th St. Zwingle, IA 52079 The Honorable Lee Hein Iowa State Representative 11989 Richland Rd. Monticello, IA 52310 Iowa Fiscal ■ Partnership POLICY BRIEF Revised May 11, 2011 www. iowafiscal. org Unfair and Unbalanced Plan shifts commercial property tax to residential property taxpayers In the rush to close the legislative session, proposals with potentially far - reaching impacts are not receiving the scrutiny they deserve. One such proposal, House File 691 — provisions of which were incorporated by the House into Senate File 522 — would reduce commercial property tax assessments by 40 percent over five years. This is an unnecessary cut in our already low -tax state. Reducing commercial property taxes would further shift local funding of cities, schools and counties to residential property taxpayers. In addition to reducing commercial property taxes, the bill severely limits the ability of local governments to meet the needs of their citizens. Any proposals to cut taxes should be automatically suspect when Iowa faces funding challenges and no balance is offered to assure adequate and stable revenues to meet public priorities. This is doubly the case with proposals as poorly conceived and poorly analyzed in a public forum as this legislation. Backroom deals on policy of this magnitude are destined to produce poor results. Iowa's Business Taxes Already Low When one considers the whole range of state and local taxes that fall on businesses, Iowa is a low -tax state. In a report on overall taxes, including property taxes, paid by businesses, the nationally recognized accounting firm of Ernst and Young recently showed that only 15 states taxed businesses at a lower rate than Iowa as a percent of private - sector GDP.' Commercial Property Tax Break Will Spur Little or No Growth A state or local government's tax rate be it corporate income or commercial property or the combination of all taxes on business — is a tiny portion of a business' overall costs. Taken together, state and local taxes on business are, on average, only about 1.8 percent of total business costs.2 The commercial property tax by itself would be an even tinier fraction of a business' overall costs. Furthermore, cities already routinely use Iowa's Tax Increment Financing law to provide generous rebates of property taxes on new commercial and industrial buildings. The notion that cutting commercial property taxes further by reducing assessments will bring in new economic activity and new revenue is a pipe dream. Bill Would Shift Taxes from Business to Residential The bill mandates a 40 percent reduction in commercial and industrial property assessments, phased in over five years. At the same time, the annual growth in taxable residential and agricultural property value allowable under the rollback formula would be reduced from 4 percent to 2 percent. The net effect is still a sizable shift in taxes from commercial and industrial to residential property. Under current law, estimates by the Legislative Services agency indicate that the residential share of taxable property (and hence of taxes paid) will increase from 47 percent in FY2013 to 50 percent in FY2018, while the commercial share declines a little, from 29 percent to 26 percent, and agricultural property stays at 19 percent. But the House - passed version of SF522 would substantially magnify the shift from commercial to residential: The commercial share would drop all the way to 20 percent while the residential share rises to 54 percent.3 The Iowa Policy Project 20 E. Market Street Iowa City, IA 52245 (319) 338 -0773 • www.iowapolicyproject.org CHILD & FAMILY POLICY CENTER 505 5TH Avenue • Suite 404 Des Moines, IA 50309 (515) 280 -9027 • www.cfpciowa.org The bill does express a "legislative intent" to partially reimburse localities for the loss in revenue due to the new assessment limitations on commercial property. But there is no guarantee that even the partial reimbursement will continue. If past practice is a guide, it will not. Limitations on Local Governments In addition to slashing business property taxes, the legislation limits the amount of property tax revenue city and county governments may raise to support public services, in exchange for eliminating the cap on property tax rates (the "general fund levy limit "). Revenue growth from one year to the next would be limited to inflation plus new property valuation. This limitation is problematic for a number of reasons. First, inflation will be measured by the consumer price index (CPI). The CPI tracks the prices of a market basket of goods and services purchased by households. However, the CPI tends to underestimate inflation for costs affecting government. State and local government budgets are largely driven by personnel costs, and the cost to of hiring workers has steadily increased as insurance costs have increased at a pace faster than inflation. Between 2000 and 2010, the consumer price index increased by over 26 percent; the state and local governments price index increased by more than 44 percent over the same period.4 Over time the revenue limitation would force substantial cuts in local government services because revenues would not be allowed to increase as fast as costs, a problem aggravated by the bill's limitation on the inflation factor to four percent regardless of actual inflation. Since 2000, the state and local government price index increased by more than 4 percent from year to year six times.5 The formula may force further service cutbacks and employee layoffs through another provision. Most local services are services to people, and it is population growth that necessitates expansion of services and increases in local budgets. The formula does not allow for revenue to grow along with population, but instead allows it to grow only with construction of new taxable property. This provision puts additional pressure on local governments to engage in unfair "fiscal zoning" practices to exclude properties that tend to bring in families with children and with below- average valuation, and encourage only high -value property that brings with it few people and few additional demands on services. The alternative is to cut services because revenues can't keep up with the needs of a growing population. For schools, the promise to replace a share of property tax funding with state aid will be far more costly to the state than projected, in the wake of daunting state cutbacks and stated resolve of some leaders to further reduce state spending. The fiscal note for the bill projects an additional state cost escalating to almost $550 million when fully phased in, in 2019, but even this estimate is heavily understated. The estimate assumes zero percent growth in per -pupil spending authority for FY2012 through FY2019 — even though Iowa lawmakers have never held allowable growth that low for even one year. The prospect of future state budget cuts in lean years when a greater share of budget authority comes from state aid will introduce a new measure of fiscal instability for local districts, which already have seen their share of instability due to state actions. Clearly, this part of the proposal needs greater study. A bill this complex and far - reaching demands further analysis and discussion than the General Assembly has given it. Likewise, Iowans should demand far more study than this legislation has received. Legislators are elected for two- and four -year terms and a year remains before the next election; there is no need for a rush to judgment. 1 Ernst and Young for the Council on State Taxation. Total State and local business taxes: State -by -state estimates for fiscal year 2009. March 1, 2010. <http: / /www. cost /org /StateTaxLibrary.aspx ?id= 17768 >, as cited in "Iowa's Businesses Already are Taxed Lightly," Iowa Fiscal Partnership, February 9, 2011. <http: / /www.iowafiscal. org /2011docs /110209 - IFP - biztaxes- bgd.pdf>. 2 Peter S. Fisher, "Corporate Taxes and State Economic Growth," Iowa Fiscal Partnership, February 2011. < http : / /www.iowafiscal.org /2011dots /110209 IFP- corptaxes.pdf . 3 Iowa Fiscal Partnership calculations from data provided by the Legislative Services Agency, Fiscal Services Division, relating to the impact of HF691 on taxable valuations. 4 Iowa Fiscal Partnership calculations of Consumer Price Index for all Urban Consumers (CPI -U) and National Income and Product Accounts (NIPA) price index for state and local government. 5 Iowa Fiscal Partnership calculations of NIPA price index for state and local government. J Estimated $357 million difference in taxes raised by cities, counties and school districts under current law & what would be raised once HF2274 implemented 1 J City of Dubuque Comparison of Property Tax Reform Bills: Senate File 522 and House File 2274 Senate File 522 4. Creates Business Property Relief Fund for $50 million in first year. Increased $50 million each year state revenues grow at least 4 %. Capped at $200 million. Commercial, Industrial & Railway property apply for tax credit with assessor's office by March 15th Tax credit computed on first $390,000 of property's value Tax Credit = Taxable Building Value X Business Class Rollback Less Residential Rollback x Property Tax Rate Divided by $1,000 FY13: $169 tax credit for City portion of property taxes to businesses with property valued at $32,000 or more Fully Implemented: $2,061 tax credit for City portion of property taxes to businesses with property valued at $390,000 or more Credit paid for through state revenue growth rather than cutting taxable authority of local governments 1 City and County services held harmless since it is a credit and not a reduction in taxable value ■ House File 2274 Creates Commerical & Industrial Property Tax Replacement Fund in FY15 for $100 million. Increases $50 million in FY16. Increases $30 million thereafter annually until capped at $240 million in FY 19. If insufficient balance - pro rata percentage used to compute & pay County Auditor for claims Residential & Ag: Annual growth in taxable value reduced from 4% to 2% Growth in tax collections for city & county budgets limited to maximum of 4% based on annual growth factor tied to CPI 1 FY15 -FY19 Maximum assessed value reduction based on 15% of $400,000 or $60,000 FY20 Maximum assessed value reduction based on 10% of $400,000 or $40,000 FY21 Maximum assessed value reduction based on 5% of $400,000 or $20,000 Allowed only for property not located in an urban renewal areas r Reduces Commercial & Industrial rollback by 5% per year beginning in FY 2015 until reaching 60% in FY22 4 Property Value Times Assessed Value Reduction (95%) Times Rollback (60%) Equals Taxable Value I.. FY15: $66 tax savings for City portion of property 7 taxes for businesses with property valued at $32,000 dr Fully Implemented: $1,808 tax savings for Cty portion of property taxes for businesses with property valued at $390,000 dr