NONBUSINESS TAXATION STUDY COMMITTEE

FINAL REPORT

January 1996

MEMBERS

Senator William D. Palmer, Co-chairperson
Representative Roger A. Halvorson, Co-chairperson
Senator Wayne Bennett
Senator Emil J. Husak
Senator John W. Jensen
Senator Patty Judge
Representative Bill Bernau
Representative Gary Blodgett
Representative John M. Greig
Representative Keith Weigel

AUTHORIZATION AND APPOINTMENT

The Nonbusiness Taxation Study Committee was established by the Legislative Council and directed to review nonbusiness state taxation, including property, income, sales and use, and inheritance taxes. The review was to be an analysis of tax equity, taxation incentives and disincentives for economic development, and the long-term objectives of nonbusiness taxation. The Study Committee was granted three meeting days. The meetings were held October 12, November 3, and November 28.

1. COMMITTEE PROCEEDINGS.

a. October 12 Meeting.
The first meeting of the Nonbusiness Taxation Study Committee was held jointly with the Business Taxation Study Committee. The charge to the latter study committee was to review taxation of all businesses in Iowa, including sole proprietorships, partnerships, limited liability companies, Subchapter S corporations, and C corporations. The review was to be an analysis of tax equity, taxation incentives and disincentives for economic development, and the long-term objectives of business taxation.

Machinery & Equipment (M&E) Taxes. Mr. David Lyons, Director of the Department of Economic Development, presented issues relating to the status of property taxation of industrial machinery, equipment, and computers in light of the enactment of Senate File 69 during the 1995 legislative session. Mr. Lyons expressed concerns pertaining to the effect of the reduction in machinery and equipment taxable value on the incremental valuation in a tax increment financing district and to the method used in determining the amount of state replacement of lost taxes as a result of the reduction in machinery and equipment taxable value. Mr. Lyons indicated that language is being developed by interested parties to address these concerns.
Rollback of Property Values. Mr. Gene Eich, Department of Revenue and Finance, and Mayor Ed Stachovic, Mayor of Cedar Falls, discussed the property tax rollback.
Federal Budget and Tax Law. Mr. Lorin Knapp of the Department of Revenue and Finance stated that spending authority is likely to be enacted through an Reconciliation Bill. The Tax Simplification Act of 1995 is likely to be combined with the Revenue Reconciliation Act of 1995 and the Taxpayer Bill of Rights 2 as part of the omnibus reconciliation package. Some of the provisions of the two tax bills include: allowing for medical savings account deductions; corporation use of "excess" pension balances for limited purposes subject to an excise tax; restrictions on earned income tax credit; simplification of Subchapter S corporation and partnership classification; simplification of pension plan requirements or restrictions; and extension of certain expiring tax credits or deductions.
Property Tax Credits and Exemptions. Mr. Will Ament, President, Iowa State Assessors Association, described a survey conducted on assessors' views relating to property tax credits and exemptions. Mr. Marvin Diemer identified property tax exemptions for nonprofit retirement homes which house high-income retirees as unfair.
Tax Policy. Both Mr. James Wengert, President, Iowa Federation of Labor, AFL-CIO; and Mr. Bill Smith, Iowa Tax Reform Action Coalition, stated that Iowa's tax policy is unfair because it is a regressive tax system. They identified changes that have been made which did not make the overall taxes less regressive and changes that have been proposed that would result in less progressivity.

b. November 3 Meeting.

Status of Federal Tax Changes. Mr. Lorin Knapp, Department of Revenue and Finance, reviewed the status of pending federal tax and budget legislation. Mr. Knapp also provided a handout which details some of the tax provisions most likely to be contained in the final version of the Federal Omnibus Reconciliation Act.
Senate File 69 MH/DD Vetoes. Ms. Gretchen Tegeler, Department of Management, and Mr. John Easter, Iowa State Association of Counties, made separate presentations on the Governor's vetoes of certain provisions of the MH/DD division of Senate File 69. Ms. Tegeler stated that the two principles guiding the Governor in his review of the legislation were that cost containment be achieved throughout the MH/DD delivery system; and that discernible property tax relief be realized as a result of the State's increased funding of MH/DD services. Mr. Easter outlined the concerns of county officials raised by the vetoes, particularly the veto of the inflation growth factor and the veto of the language limiting a county's liability to provide MH/DD services if money in the MH/DD fund is fully expended.
Polk/Des Moines Taxpayers Association. Ms. Christine Van Meter, President, highlighted the Association's more pressing legislative priorities, including achieving equity in the tax assessment of property, reimbursing local governments for the costs of some state-mandated programs, and allowing tax base sharing between local governments. Ms. Van Meter, as chair of the state's County Finance Committee, also discussed the use of 1994 MH/DD expenditures as the base year amount limiting the amount of property tax dollars that may be collected for MH/DD services and suggested consideration be given to moving to a FY 1996 levy amount as the base year.
Tax Exempt Property. Ms. Christine Hensley, Des Moines City Council member and Mr. Jim Maloney, Des Moines City Assessor, made a presentation on the property tax inequities created by the large amount of tax-exempt property concentrated in the central city area of older urban communities. Ms. Vicky Atkins, Blackhawk County Assessor, also made a presentation on tax-exempt property. Ms. Atkins stated that the rule of law, i.e., that there is a presumption against exemption, has been lost among the growing complexity in the environment of tax-exempt organizations. The current situation has given rise to tax inequities between taxing jurisdictions and among taxpayers in the same jurisdiction.
Assessors' Property Tax Study. Mr. Will Ament, Allamakee County Assessor, and Mr. Dave Ellis, Calhoun County Deputy Assessor, presented to the Committee the initial results of its survey of assessors concerning property tax credits and exemptions.
Inheritance Tax. Mr. Carl Castelda, Department of Revenue and Finance, reviewed elements of the State's inheritance tax, including computation of the tax, valuation of property in an estate, and exemptions from the tax. He also presented a summary of the objectives and status of a study of inheritance tax returns recently filed with the State. Preliminary findings from the study indicate that 30 percent to 35 percent of inheritance tax paid to the State is paid by out-of-state beneficiaries; and that approximately 32 percent of net estate value is attributable to real estate.
Value-added Tax Credit. Dr. John Lawrence, Iowa State University Economist, presented an analysis of a value-added tax credit for livestock based on corn feeding rates. The Committee invited Dr. Lawrence back to present a more in-depth analysis at the November 28 meeting.

c. November 28 Meeting.

Value-added Tax Credit. Dr. John Lawrence, Iowa State University Economist, presented an expanded analysis of the value-added tax credit for livestock production based on corn feeding rates which, he stated, would increase both livestock production and in-state corn utilization. The tax credit was first discussed at the November 3rd meeting.
Property Tax Credits and Exemptions for Veterans of Military Service. Mr. Hugh Griffin of the Federal Department of Veterans Affairs, and a member of the Governor's Task Force on Veterans Issues in the State of Iowa, discussed real estate tax issues being studied by a Task Force subcommittee in an effort to curb the loss of veterans from the state. The subcommittee is currently examining three proposals for providing an incentive for veterans to remain in Iowa, or to return if they have previously relocated. The subcommittee is also investigating the question of whether Iowa's income tax is a primary contributor to veteran relocation to other states.
Agricultural Land Productivity Formula. Mr. Richard Stradley of the Department of Revenue and Finance presented an overview of the agricultural land productivity value calculated over a five period. Mr. Stradley provided a sample agricultural assessment formula calculation, and noted that agricultural assessments based on productivity result in greater stability when compared with market value assessments.

2. Recommendations.

The following recommendations were approved by the Committee:

LSB 3271IC. Representative Halvorson proposed for recommendation a bill establishing a sales and use tax exemption for packaging materials used in agricultural, livestock, or dairy production. The exemption would also apply to commercial greenhouses. The bill was submitted to the General Assembly as House Study Bill 501 and Senate Study Bill 2051. A copy of HSB 501 is attached.
LSB 3240IC. Senator Palmer proposed for recommendation a bill providing a maximum livestock production tax credit of $5,000 per livestock operation based upon the amount of corn or corn equivalents used by hog, livestock and dairy, and poultry operations. The bill would also repeal both the agricultural land and the family farm property tax credit. The bill was submitted to the General Assembly as Senate Study Bill 2052 and House Study Bill 500. A copy of SSB 2052 is attached.

3. Written Materials on File with the Legislative Service Bureau.

a. Procedural rules adopted by each Committee.

b. Memorandum submitted by Mr. Mike Ralston, Iowa Taxpayers Association.

c. Fact Sheet submitted by Mr. Kent Sovern, Greater Des Moines Chamber of Commerce.

d. Handouts submitted by the following persons who provided testimony at the meetings:

Mr. David Lyons - Machinery and Equipment Exemption Recommendations
Mr. Lorin Knapp - Status of Federal Tax Legislation
Mr. Gene Eich - Property Tax Rollback
Mayor Stachovic and the Iowa League of Cities - Written Testimony and Figures on Property Tax Rollback
Mr. Marvin Diemer - Tax Exempt Property Articles
Mr. Jim Wengert - Written Testimony
Mr. John Sorensen - Written Testimony and Figures on Taxation of Financial Institutions
Mr. Bill Smith - Written Testimony

e. League of Iowa Cities' memoranda on tax-exempt property and the residential rollback.

f. Governor's veto message for Senate File 69.

g. ISAC letter on MH/DD vetoes in Senate File 69.

h. 1995 Annual Report - Polk/Des Moines Taxpayers Association.

i. Illustrations regarding exempt property in Des Moines.

j. Written testimony of Ms. Christine Hensley.

k. Written testimony of Ms. Vicky Atkins.

l. Assessors property tax study documents, including memoranda on homestead property tax credit, family farm tax credit, and tax abatement.

m. Outline of inheritance tax features prepared by the Department of Revenue and Finance.

n. Memorandum on federal tax changes prepared by Mr. Lorin Knapp, Department of Revenue and Finance.

o. Value-added tax credit outline and related documents submitted by Dr. John D. Lawrence, Extension Livestock Economist, Iowa State University.

p. Governor's Task Force on Veterans Issues, real estate tax issue summary, and related documents submitted by Mr. Hugh E. Griffin, Federal Department of Veterans Affairs.

q. Agricultural equalization valuation material submitted by Mr. Richard Stradley, Department of Revenue and Finance.

r. Proposed Bills:

Sales and Use Tax Exemption (LSB 3271HH).
Federal Income Tax Deductibility (LSB 3239XS).
Livestock Production Tax Credit (LSB 3240XS).
Tax Repeal and Reform (LSB 3235YH).
Homestead Property Tax Credit (LSB 3238XS).

s. Memorandum on the estimated cost of phasing out the homestead tax credit submitted by Mr. Jon Muller, Legislative Fiscal Bureau.

t. Written testimony regarding state and local taxation of nonprofit organizations, submitted by Ms. Sue Boesen Copple, Iowa Association and Homes and Services for the Aging.

u. Written comments relating to the Iowa State Association of Counties presentation from the second meeting, November 3, 1995, submitted by Mr. John Easter, Senior Public Policy Analyst, Iowa State Association of Counties.

OTHER INFORMATION FOR THIS COMMITTEE:

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