Extension Communications
3614 Administrative Services Building
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(515) 294-9915
10/16/00
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, medelman@iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
delmarks@iastate.edu
PLAIN ECONOMIC SENSE, Column 401
For release Oct. 16, 2000
Property Tax Facts
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Tax issues -- especially property taxes -- have become a hot topic in several state legislative campaigns. As a result, many Iowa voters are interested in gaining a better understanding of recent trends in Iowa taxes, particularly the property tax. Recently I was asked to provide information on recent tax trends at a forum sponsored by the state association of counties. Here are some facts based on legislative fiscal bureau information and data from Dave Swenson, an Iowa State University researcher who works with tax information.
Since the property tax freeze was removed in 1998, Iowa's property tax collections have grown about 11 percent in three years or about 3.5 percent per year. The current 3.5 percent annual collections growth is actually lower than the 3.8 percent annual property tax growth rate average for the past 10-year period of 1989 to 1999 that includes the years in which a property tax freeze was imposed. So, while the current growth in collections is higher than it was during the freeze years, one can also say that property taxes currently are growing more slowly than the average for the past decade.
Iowa's local property taxes also have grown more slowly over the last 10 years than Iowa's other major taxes for a number of reasons. Iowa's income tax collections have annually averaged about 6 percent growth since 1989. Iowa's sales tax collections have grown about 8 percent per year since 1989. The state tax revenue sources have been tapped to provide more state aid for local schools, local government services and property tax relief. In addition, local option sales taxes are increasingly being used as an alternative source of revenue for local schools and to provide other local services.
Economists normally expect tax revenues, barring rate changes and added exemptions, to grow at about the same rate as the growth in the economy -- which includes both inflationary growth and real growth. The national economy has grown an average of 5.4 percent since 1989. Of this total 3.0 percent has been real growth and 2.4 percent has been general inflation. So property taxes have been growing faster than inflation but slower than the growth in the gross domestic product -- the broadest measure for the overall economy.
This doesn't mean that property tax collections for all taxpayer groups have been growing at the same rate. Since 1989, property tax collections for commercial property have averaged 6.8 percent growth annually in collections. While new commercial property construction has contributed to this growth, taxable values for commercial property are close to 100 percent. They do not benefit from the large taxable rollbacks that benefit residential property.
The combination of high property taxes and local option sales is placing increased pressure on many rural main street businesses. While businesses do have some ability to pass taxes on to consumers, this ability is increasingly limited with the emergence of e-commerce that is generally not subject to either tax. Rural leaders increasingly see Iowa policy as a choice between school vitality and main street vitality.
The growth in valuations of residential, industrial and utility properties have averaged 3.9 percent, 3.8 percent and 3.7 percent respectively. Residential property is currently taxed at 54 percent of value due to the rollback provision in the Iowa code. Industrial property has benefited from an exemption of machinery and equipment. Utility property is valued on the basis of income.
Property tax collections for agricultural buildings have averaged an annual 2.4 percent growth since 1989, while farmland has averaged the lowest rate of any class of property with a 1.7 percent average annual increase in property taxes.
A number of factors contributed to limited growth in farmland property taxes. First, farmland and farm buildings are assessed for property tax purposes based on a productivity valuation process defined by state law. A five-year average estimate of crop income is divided by a statutory 7 percent capitalization rate to impose a cap on taxable agricultural property valuation in each county. This process results in a taxable valuation that is about 40 percent of actual market value for farmland in many counties. As the lower crop income years of 1999 and 2000 are added and higher crop income years are taken out of the productivity formula, agricultural property taxes may experience even slower growth.
In addition, because the agricultural valuation in each county is capped by the crop productivity formula, new agricultural buildings such as animal confinements actually have had the impact of lowering property taxes for farmland and other agricultural buildings in the county. In contrast to adding a new factory, adding a new animal confinement building does not increase the countywide valuation base for the benefit of all taxpayers. This occurs because the county equalization cap as determined by the State Department of Revenue can only use the crop productivity formula in setting the county wide equalization cap for agricultural property.
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