Working in Iowa

 

It is taken as an article of faith that Iowa is a high tax state, and that its high taxes impede economic growth.  The chief tax offender, it is often argued, is the commercial property tax, though the state’s personal and corporate income tax system is often maligned, too.

 

The accompanying chart clearly shows us that all state and local taxes on production in Iowa are much lower than the national average, and the gap between Iowa and the U.S. improved over the last decade.  From an aggregate tax cost perspective, Iowa is a highly desirable state in which to do business.  Any claim to the contrary is hooey.  We can set aside the high tax state argument, most especially as it relates to business productivity.

 

Iowa is, more correctly, a goofy tax state, and Iowa’s tax goofiness is entirely of its own making.  It retains preferences and allowances from times past, the justifications for which no one can recall anymore. 

 

Iowa has really done nothing substantive regarding tax policy since major property tax reforms were passed in the late 1970s.  It now has an archaic and oddly contorted system of valuing agricultural land for tax purposes that protects ag land owners from sharp spikes in ag land values – it prevents ag land taxable values from increasing by more than four percent per year.  The system works so well for farmers ag land’s taxable value has now declined to a mere 16 percent of ag land market value in 2010. 

 

Residential properties also benefit from the same growth limit, and those properties were taxed at just under half of their market values last year. Our property tax policy also favors manufacturers in that their production machinery and equipment are not taxed. Commercial properties theoretically benefit from the same four percent annual rate of growth limit as the other property classes, but unlike ag land, which the earth isn’t making any more of and so tends to be more valuable over time, and housing, which until the bubble burst had historically risen in value, commercial properties decline in value annually due to use.  New retail establishments don’t appreciate, they wear out; therefore, commercial properties are almost always taxed at 100 percent of their current, yet annually declining, valuations.  That fact notwithstanding, commercial property owners howl that their persistent 100 percent valuations aren’t fair in light of the lucrative situation of homeowners, factories, and farmers.  

 

What they instead ought to be howling about is the fact that over the years more and more of the state’s commercial tax base has been sequestered within Tax Increment Finance (TIF) zones.  These districts allow the city to keep all of the property taxes generated from all taxing jurisdictions (schools, counties, and the city) on the growth increments in those zones to be used for economic development purposes, usually in the forms of district improvements or tax rebates to the new firms.   All of the non-TIF property owners end up making up for the local taxes for general government services that the new developments evade.

 

Last year, nearly 17 percent of commercial valuations in cities with TIF activity and nearly 20 percent of factory valuations were in TIF districts.   As more and more valuations are set aside into TIF districts, local tax rates on the remaining tax base outside of the TIF zones have to increase to cover the costs of basic government service.  So, commercial property values don’t see as much of that expected valuation decline as would be expected because they must pay higher and higher tax rates to provide basic city, school, and county services that have been shifted onto them from the new developments.  Every non-TIF property owner pays more, commercial or not.

 

The state can fix portions of this quite easily by establishing limits on the use of TIF authority and by setting fixed fractions of ag land and residential property that should be taxed, but the past 30 years have demonstrated clearly that lawmakers are unwilling to take on the sacred cows that would have to be sacrificed.  And I have learned the hard way that taking on the special interests that created and now thrive on existing TIF policy is a dicey prospect.  Those folks are mean.  Really, really mean.

 

Iowa’s legislators and the governor have pledged one and all to make commercial property tax reform a priority issue, but it is Iowa’s entire system of property taxation and the use of the tax base as an economic development incentive that needs to be reformed.  

No matter what they do, however, it won’t change the fact that Iowa, contrary to common belief, is a low business tax state.