Sales and use tax breaks cost Iowa nearly $3.9 billion in 2010, up 62 percent from 2005, according to estimates included in a new report from the Iowa Department of Revenue.
The department studied the fiscal impact to Iowa’s coffers of 133 sales and use tax exemptions and 63 property tax exemptions and credits on the books in 2010. Revenue from sales/use tax and income tax makes up about 85 percent of Iowa’s General Fund, which pays for schools, roads, prisons, social services and other state programs.
The department has not yet completed its review of corporate and individual income tax breaks.
Twenty-six property tax exemptions reduced the taxable assessment of Iowa property by an estimated $83.3 billion in 2010, the department found. The impact of another 37 exemptions was minimal or could not be estimated.
Since property taxes are paid based on assessed value, these breaks cut into state revenue. However, because property tax rates vary widely among Iowa counties, the Revenue Department was not able to accurately estimate the fiscal impact for the property tax exemptions, said Amy Harris, administrator for Revenue’s Research and Analysis Division.
The largest property tax break benefits residential property owners, who pay taxes on about half of the assessed value of their properties. This rollback reduced the taxable assessment of Iowa residential property by an estimated $70.2 billion in 2010, the report found.
Agricultural property rollbacks reduced the assessment of ag property values subject to taxes by $1.7 billion. The Iowa Legislature is debating proposals that would slash the taxable assessment for commercial property owners as well.
Tax breaks have been a hot topic in the last year as the Iowa Department of Economic Development approved up to $100 million in tax credits for an Egyptian-owned fertilizer plant in Lee County. Economic Development Director Debi Durham asked lawmakers to raise the annual cap on awarded tax credits from $120 million to $185 million.
Friday’s report shows six property tax credits cost Iowa $151.2 million in revenue in 2010. Supporters of tax credits point to the jobs created and the infrastructure improvements made when businesses locate or expand in Iowa.
Sales tax breaks are often handed out as political favors to industry groups, ranging from agriculture and manufacturing to drycleaners and newspaper publishers.
Iowa’s 2005 Tax Expenditure study found 112 sales and use tax breaks cost the state nearly $2.4 billion in revenue. The number of sales and use tax exemptions rose by nearly 19 percent to 133 in 2010, with the loss to state coffers increasing to $3.87 billion.
The largest sales tax exemption in 2010 was an estimated $421 million for transportation and delivery services. This means Iowans don’t pay sales tax on shipping and handling. An estimated $382 million in sales tax revenue was lost in 2010 from property or services sold outside of Iowa.
Gambling boat games and admissions had the third-largest sales exemption, with an estimated fiscal impact of $365 million, up 76 percent from $207.3 million in 2005. The fourth-largest sales tax loss was $362.8 million for food for human consumption.