Commercial Property Tax Reform_Letters of SupportTHE CITY OF
DUB
Masterpiece on the Mississippi
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«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