By The Gazette Editorial Board
This could be the year that the Iowa Legislature finally forges a deal on reducing the property tax burden on businesses. Although it seems like we’ve heard that before.
“I think probably (Gov. Terry Branstad’s) position is really wanting to get something done this year, especially if he runs for re-election. It’s always nice to point to what you’ve accomplished,” said Cedar Rapids Mayor Ron Corbett, a former Republican speaker of the Iowa House.
“I think what has happened since I’ve been in high school is probably going to happen,” said Linn County Supervisor Brent Oleson, a former top GOP staff member in the Iowa Senate. “Since I was a page up there, every year, they’ve talked about property tax reform. And every year, they’ve done some minuscule little thing or not addressed it at all.”
The opening days of a new General Assembly always bring a sense of renewed optimism. But with property tax reform, it’s always been wait until next year. There are, however, reasons to believe that 2013 might be different.
For one thing, the state is sitting on a hefty budget surplus, and cash is a key ingredient for smoothing over the inevitable gaps and cracks opened by tinkering with Iowa’s fragile, antique property tax system.
Most legislators agree that the current system is unfair to commercial property owners, who pay taxes on 100 percent of the taxable value of their business property. Residential property owners, by contrast, pay on only about 50 percent of a home’s value.
Gov. Branstad has made lowering commercial taxes his top priority, and he seems all but certain to seek a sixth term in office next year. It’s true that legislative control is divided, but both Republicans who run the House and Democrats who run the Senate say they want to tackle the issue.
“Doing nothing is a huge, huge residential property tax increase,” said House Speaker Kraig Paulsen, R-Hiawatha, who contends that rising residential taxes must also be addressed.
“Our interest is in broad-based tax relief,” he said.
The big question is: How will lawmakers address property taxes?
We think the Legislature should take action to reduce commercial taxes. And we believe that it should be done in such a way that provides relief to businesses but does not undermine the efforts of local governments to provide critical services. We recognize that’s a tall order, but we think it would be shortsighted to make Iowa’s property taxes more competitive by hobbling cities, such as Cedar Rapids, that are the engines driving Iowa’s economic growth.
“Cities and counties need to be kept whole,” said Cedar Rapids City Manager Jeff Pomeranz. “We’re already struggling to provide a basic level of service. We can’t afford to lose revenue.”
Getting a deal that meets those conditions likely means taking good ideas from both parties.
Branstad is still crafting his 2013 proposal, but he and Republicans have generally favored permanently rolling back the taxable value of commercial property from 100 percent to a lower percentage, such as 60 or 80 percent, over several years. They would use state dollars to “backfill” revenue lost by local governments over a period of years. And to keep lower commercial taxes from resulting in a tax shift to other properties, Republicans would place tax and spending limits on local governments.
Senate Democrats want to, instead, provide state-funded tax credits that reduce the tax burden on the first $500,000 of a commercial property’s value. That focuses the brunt of the tax relief, Democrats contend, on small businesses and would not reduce local government revenue.
We like the more permanent relief provided by rolling back commercial taxes, but we also agree with Democrats that small businesses should get targeted help. It would seem that a hybrid approach, with some reduction in all commercial taxes and credits to smaller firms, would make Iowa’s structure more competitive and put more money in the pockets of small business owners.
“Whether you’re in Clinton or Muscatine or Marshalltown, to name a few, those businesses could use the money. They could use the money to maintain their property and improve their business solvency,” said Sen. Joe Bolkcom, D-Iowa City, chair of the tax-writing Ways and Means Committee.
We think the state should fully cover the loss of local tax revenues. Direct state payments are one option, perhaps using surplus dollars. House Republicans have also considered pumping more state dollars into school funding to replace property taxes. Paulsen said he’s willing to consider helping cities with rising pension costs. Both ideas have potential.
But we’d also like to see lawmakers dive into an issue that’s gained little traction in the property tax debate: revenue diversification.
One reason that Iowa’s property tax rates look unattractive compared to other states is that our local governments are more reliant on property taxes than those elsewhere. Cities and counties in other states have more tax options for raising revenue beyond taxing property.
Creating a series of tax options for cities — such as, for example, allowing them to set their own hotel-motel tax rates — that is more palatable than higher property taxes would go a long way toward relieving local governments’ reliance on property taxes, and could help pay for further property tax reductions and reforms. That dependency on property taxes to fund so many basic local services is the single biggest obstacle to real, lasting reforms.
Slapping on state-mandated spending and budget limits does nothing to address that fundamental issue.
And with new revenue sources, local governments won’t have to rely solely on promises from state leaders to backfill loses or pay for tax credits, promises that have proved hollow in the past.
If our Statehouse leaders match their commendable desire to help businesses with a clear understanding of local governments’ vital role in economic growth, and if they see local leaders as partners in reform, not targets for more state mandates and restrictions, then this could really be the year.
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