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November 23rd, 2009

Rants – Iowa’s Perfect Storm: Property Taxes…

Rants HS copyIowa taxpayers, along with local and state governments, are facing the perfect storm of lack of business development, an escalating tax burden, and a school funding crisis brought on by years of neglect and bad fiscal discipline in Terrace Hill. Where do those three storm clouds intersect? Property taxes, property taxes, property taxes.

Storm Cloud #1 – Obstacle to Business Development

Iowa’s commercial property tax burden is the third highest in the country. Those in the industrial classification are in the top ten. Residential owners are in the top fifteen. If you take the time to talk to business owners, big or small, they’ll tell you that property taxes are the key obstacle to expansion. Ask a developer or builder, and they’ll tell you that Iowa’s property taxes per square foot of built out space make it uncompetitive to build and lease property compared to other states.

If Iowa is to compete with other states for jobs it is our property tax burden that has to be addressed first and foremost. Consider this example: an out of state manufacturer wants to build a new plant. The decision makers will continue to reside in their home state, it’s the managers and production staff that will be in Iowa, so the income tax isn’t much of a factor. Because of Iowa’s single factor formula, the manufacturer will only pay income taxes on the products sold in Iowa to Iowans – products sold out of state are not figured into their corporate income tax. This formula already gives Iowa a leg up on other states when it comes to income taxes for manufacturers. But consider that before the plant ever starts up its assembly line, before any profit can be realized, property taxes must be paid first. That is what makes Iowa uncompetitive.

Consider a second example of the small business owner currently living and operating in Iowa. Many small businesses are run as sole proprietors, and therefore aren’t subject to the corporate income tax. Instead they file as individuals, and receive the advantages of federal deductibility, but still are paying the third highest property taxes in the country on their business property.

Property taxes come regardless of profit, regardless of economy, regardless of loss. They are ever present.

All taxes on investment and productivity carry some level of disincentive and resistance to additional marginal investment. But it is Iowa’s property taxes that carry the most disincentive uniformly across all business models.

Storm Cloud #2 – Automatic Tax Increases On the Horizon
Bottom line: property taxes in Iowa are escalating and will continue to go up unless action is taken. Failure to act is tacit approval of what is about to happen.

Governor Culver’s across the board cut is having the effect of raising property taxes over $250,000,000. While Culver proclaims he is opposed to local school districts raising property taxes to make up the difference, he has taken no action to stop them, instead declaring that the legislature should act when it returns in January. In the last month I’ve met with 23 different school superintendents; 18 are planning on raising property taxes as a result of Culver’s action, none are waiting until January to see what the legislature will do.

Culver’s action is just the latest, in a string of bad news for property owners. For the last three years I have been sounding the alarm that residential and agriculture property taxes are going up – without a single vote being cast to raise the levy rates. In short, Iowa formula for calculating property valuations is in the process of causing $477 million in tax increases for home owners and farmers.

RollBackProjection

For years the property tax “roll back” has been of benefit to homeowner and farmers. As the above graph shows, the taxable value of a persons home has been declining since 1992. It reached its low point in fiscal year 2009 at 44%. But now its on the rise and will continue to do so for years to come. This can be predicted based on the agriculture productivity formula’s five year rolling average. The non-partisan legislative service agency that runs such numbers shows that the “roll-back” will actually roll up to almost 60%. Bad news for homeowners.

CityResidentialGrowth

For city dwellers, its estimated that the “roll up” will cost them $238 million. Again, this will happen automatically without a single city council raising their levy rate.

CountyResidentialAgGrowth

Counties will collect an additional $239 million from residential and agricultural property owners.

Package those two facts with Culver’s de-facto tax increase, and tax-payers will be paying an additional three quarters of a billion dollars in the next few years. Failure to address these facts can only be taken as tacit approval by policy makers.

When this storm cloud hits, it will only compound Iowa’s business development problem.

Storm Cloud #3 – School Funding Formula Inequity

Iowa’s formula for funding schools – a mix of property taxes and state general fund dollars – has grown increasingly inequitable over time. What once worked two decades ago is now out of date and hasn’t responded to the changes in Iowa’s economy and property tax valuations.

The fact is, Iowa is on the cusp of a class action lawsuit over the question of equity in funding K-12 education. The lawyers will argue that “property poor” school districts (those that have a low dollar property valuation on a per pupil basis) are unable to provide the same level of education as “property rich” school districts. If such a lawsuit goes to trial, the “property poor” districts will win. The arguments correlating property valuations and test scores are irrefutable. Poor districts levy higher taxes, yet collect less money. They offer fewer programs for educational excellence and enrichment and thus have lower student achievement scores.

Thus far the debate on this topic has been largely confined to the forums of the Iowa School Board Association. But the patience of the disadvantaged districts is waning. Culver’s cut, and resulting property tax increase only exacerbates the problem. Many “property poor” districts don’t have the luxury of building up cash reserves, nor do they have other discretionary programming to cut. Because their revenues are capped by the formula, they will not see any benefit from the above mentioned increase in state-wide property valuation increases that city and county governments will reap.

The impact of this problem that is seldom talked about is the impact this has on business. It is a disincentive to build in “property poor” areas, leading to urban sprawl and the taking of agricultural land.

Failure to address this problem in 2010 or 2011 is an almost certain invitation to a class action suit. The risk is not that the court will throw out the existing formula, that’s a certainty. The risk is that a new formula imposed by the court may be good for schools, but even worse for taxpayers who are already being soaked by the aforementioned storm clouds one and two…

An Umbrella for Iowa Taxpayers

Property taxes are too high and inhibiting business growth. It is indisputable that they are going higher in the near future for all classes of taxpayers – commercial, residential and agricultural. They are causing problems for school districts and will likely go higher still if no action is taken.

There is no silver bullet to these three challenges. Addressing this problem is difficult and the solutions will be complicated.

Step 1 – Stop the shifting of the valuation burden (the rollback) between classifications by tying them all together and freezing them at their current rate. I will be the first to admit that it is an imperfect solution, but we can’t wait any longer to act. A lifeguard doesn’t wait until the a drowning swimmer reaches the bottom of the pool before they act – they jump in before they go all the way under. In the past policy makers were reluctant to address the roll-back question for fear that residential taxes would go up. Now that they are going up, it’s the perfect time to freeze it. A freeze doesn’t eliminate the commercial property owners problem, but it stops the homeowner and farmer from getting soaked. We address the commercial owners problem with…

Step 2 – The decision to raise taxes must be a conscious one. With the classifications tied together local governments must set their tax rate by setting their levy rate. That sounds obvious and simple but it is not. Today “budgets” are approved based on how much the current levy rate generates when multiplied against the increased valuation. The process must be changed to require affirmative votes on levy rates. The state income tax wouldn’t automatically fluctuate depending on how much spending is approved – neither should property taxes.

Step 3 – The school aid formula needs to be re-written with the state general fund picking up a larger share of the cost, and an elimination of the property tax equity issue. To accomplish this, property tax relief must be the number one priority of Iowa’s next Governor. It must drive every single budget decision made. That cannot be stressed enough.

If the revenue estimating conference raises their estimate of tax receipts – all new revenue must go into addressing this issue, rather then restoring budget cuts made by Culver or about to be made by the legislature in January. If revenues exceed the estimates, a mechanism must be set to put those revenues into property tax relief rather than building up an ending balance in the state’s general fund treasury. State agencies and departments will have to live with the reductions made this year and next so that property tax payers can see some relief. Reductions in the state workforce will have to become permanent so that the private sector can grow.

No exceptions. Property tax relief must come first. Time is running out and failure to act will only make things worse. The place to act is an equitable solution to the education funding formula.

Step 4 – For real long-term savings to occur, the overlapping layers of administration that exist in all aspects of local government must be eliminated. For that to occur the voters must be empowered to initiate change.

How many chiefs of police are required to ensure that a squad car responds to a 911 call in the middle of the night? Only one, but think about your own sheriff and the number of municipal police chiefs in your county.

How many superintendents are required to oversee the existing number of local attendance centers, principals and teachers in each county? If local schools are to remain open, Iowans can’t continue to spend more than 10% on administration of each district.

The challenge for the taxpayer in both of these examples is that their only option is one of reaction. The system is such that citizens cannot initiate such tax-saving ideas. That is only the purview of un-elected administrators and elected officials whose jobs might be placed in jeopardy.

This step will be controversial to be sure, and easily demagogued by proponents of the status quo. Yet they cannot explain how the status quo is sustainable ten years from now without a massive increase in property taxes to keep it afloat. Such an increase is what I seek to avoid.

The opposition can be lessened by helping local governments experiment with combining administrative functions if the state picks up the remaining administrative cost upon reaching a threshold of savings/property tax relief. Experiments that work well will be held out as a model for others to follow. Those that fail to deliver the intended results will fall by the wayside without impacting other parts of the state.

Step 5 – No effort at relief will be successful or lasting unless changes are made to Iowa’s public employee collective bargaining law (Chapter 20). Without changes, any gains made by the taxpayers will be taken away by the unelected arbitrator. There are many changes that should be made, but none is more important than the issue of “ability to pay.” Today local school districts may receive a 4% growth in their funding, yet the teacher’s union wins a 6% increase at the bargaining table. City tax receipts grow 3%, yet the police and fire fighters negotiate a 5% benefit package increase. Binding arbitration must require the arbitrator to consider the local taxing jurisdiction’s ability to finance any award with existing tax revenue.

In summary – There are no perfect or easily solutions to the threat Iowa is facing. Those that say more study is needed haven’t taken the time to look at the mountain of data already amassed. Those that would put our limited financial resources, or their political capital to other fiscal issues – while they may be noble and well meaning intentions – only let these storm clouds and the problems associated with them worsen.

I am running for Governor because I believe that doing nothing on the issue of property taxes is no longer an option. The perfect storm is upon us. The difference between the candidates on the issue of taxes could not be greater. If you agree that Iowa’s next Governor must address this challenge, I would ask that you join my campaign and help take this message of the risk of doing nothing, and the potential solutions to your friends and neighbors.

The above article was written by Republican Gubernatorial Candidates Chris Rants.

For the next three days, TheIowaRepublican.com will feature op-eds on the issue of tax reform written by Christian Fong, Rep. Chris Rants, and Rep. Rod Roberts.


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