Iowa Property Tax Reform: A One-Eyed View of Government

America is in dire need of lower taxes. Our corporate taxes are punitively high, and even income taxes are taking a heavy toll on families around the country. When combined, federal, state and local taxes can claim more than half of a person’s income on the margin. But perhaps the biggest problem on the tax front is the property tax. It is a long-lasting cornerstone of American taxation and is as deeply rooted in our way of funding government as the notion of public education, which is not a coincidence since property taxes was an original source of funding schools. Today, though, government has sprawled in all different directions. Local governments are involved in everything from housing to sports arenas and convention centers. They are also taking on more and more responsibilities for spending programs that are jointly funded with states and the federal government. Consequently, their budgets have exploded and their need for revenues has become insatiable. It is therefore no coincidence that whenever there is talk about tax reform, especially property tax reform, cities and counties get worried. The current efforts to reform property taxes in Iowa is a case in point. From the Des Moines Register:

Reactions to Gov. Terry Branstad’s version of commercial property tax reform were largely the same as those heard on a competing House Republican proposal. In short, businesses like it, but cities, counties and school districts have concerns. Those views were aired in a House subcommittee this morning — the fourth hearing on property tax reform so far this session, and perhaps the last in which members of the public will have a formal opportunity to express their views. … The process of unifying the governor’s plan and the one put forward by House Republicans must balance several competing concerns. Not only do the two bills vary substantially in their details, but neither has been embraced by the Iowa League of Cities, the Iowa State Association of Counties or other organizations representing local levels of government.

It is easy to see why Iowa’s local governments are worried. Their spending record is not exactly fiscally conservative. The U.S. Census data for local government spending shows that Iowa’s counties, cities, towns and school districts expanded their budgets by more than 13 percent in the two years, from $12.8 billion in 2007 to $14.5 billion 2009 (latest year available). In fairness, this is less than the 17.8-percent expansion of state state government spending in Iowa during that time, but this does not make it easier for taxpayers to keep up with the growth in government.

The people who pay for this government spending spree are, ultimately, Iowa’s families. How many of them saw their income grow eight, seven or even six percent per year in the last years before the Great Recession?

But questions about who is going to pay for all this government spending seemed to be shoved to the side when (tax-funded) lobbyists for the local governments in the Hawkeye State had their chance to comment on the proposed property tax reform:

On Tuesday, representatives from those groups described their concerns, focusing on the bills’ limitations on municipalities’ ability to raise revenue through property taxes and the uncertain impacts the reforms could have on their budgets. “We do see some concepts here that are trying to help cities absorb the loss. …” League of Cities lobbyist Jessica Harder told the subcommittee. “We at least appreciate the movement toward that, although overall we still are opposed to bill because it is a significant revenue cost to cities.”

I am not a state legislator in Iowa, and maybe that is a good thing for both me and the Iowans. But if I were, I would throw a question back at this lobbyist: How about reviewing where all that extra spending went that you took on back in the heydays before the recession?

The laments from the local governments are even more difficult to understand when we take into account the details of the two proposals for tax reform:

The governor’s bill rolls back assessments on commercial and industrial property taxes by 15 percent over three years, and could ultimately reduce the value on which a property is taxed by 40 percent over eight years. To offset the cost that decrease in taxes would represent to local governments, the governor provides for state aid increasing from $50 million to $150 million over three years and perhaps rising to $240 in subsequent years. His bill also limits the amount that residential and agricultural property tax assessments could increase or decrease to 2 percent per year, and limits the annual amount cities can levy in property taxes based on inflation. The House bill similarly reduces the tax burden on commercial and industrial properties, and also ultimately achieves a 40-percent reduction, although it does through a different calculation mechanism and over a 14-year period. The House plan also limits the growth  in residential property tax assessments, and requires the state to take on a higher share of student-instruction costs to offset the cost that reduced property tax revenues will mean to school districts.

Even when the reform leaves the local governments with a nicely padded cushion they still complain loudly. This is the same exhibition of insatiability, spendoholism and utter self-centeredness that runs through almost every legislature, almost every government bureaucracy in the country.

There is one major flaw in the proposed tax reform: it is an isolated incident of fiscal conservatism. If the bill was tied to structural reforms that would relieve counties and cities of spending mandates imposed from the state, it would be a lot easier for those local governments to cope with this proposed reform.

Tax reform only works over the long haul when tied to spending reform. The best lesson on this is from California’s classic Proposition 13, which tightened the stream of revenue increases from property taxes without imposing an equally strong cap on the growth in government spending.

Best of luck to the tax cutters in the Iowa state legislature. They have not made their own work easy, but there is still time to correct the errors and get this one right.