November 3, 1995
Second of Three Meetings
Minutes prepared by Susan Crowley, Legal Counsel
Organizational staffing by Susan Crowley, Legal Counsel
Call to Order. Chairperson Palmer called to order the second meeting of the Nonbusiness Taxation Study Committee at 10:10 a.m., Friday, November 3, 1995, in Committee Room 22, State Capitol, Des Moines, Iowa.
Minutes Approved. The minutes of the October 12 joint meeting of the Business and Nonbusiness Tax Committees were approved by the members without change.
Comments by Co-chairpersons. Co-chairpersons Palmer and Halvorson noted that they have received letters from constituents and the Department of Revenue and Finance pertaining to perceived problems within the state tax system. These will be made available to the rest of the Committee members. The Co-chairpersons informed the Committee that one available meeting day remains.
Adjournment. The Committee recessed from 12:30 p.m. to 1:45 p.m. The meeting was adjourned at 3:35 p.m.
Department of Management. Ms. Gretchen Tegeler discussed with the Committee the reasons for the Governor's vetoes of certain provisions of Senate File 69 relating to the provision of services to those persons with mental health or developmental disabilities (MH/DD). Ms. Tegeler stated that the Governor was guided by two principles when reviewing Senate File 69 as enacted by the General Assembly. First, if the State is to help fund MH/DD costs, then there needs to be a system of cost containment built into the process. It is believed that a managed care system would exert some control over increasing costs. Second, if the purpose of the State's increased assistance in funding MH/DD services is to provide property tax relief, then a method must be developed to ensure that a taxpayer actually sees a real reduction in taxes based upon state aid for MH/DD services.
Iowa State Association of Counties. Mr. John Easter provided an overview of county concerns occasioned by the Governor's vetoes of certain provisions of the MH/DD division of Senate File 69. Two of the vetoes, in particular, leave key issues unresolved. First, the veto of the inflation growth factor, which was to have been used in determining the amount of property tax dollars which may be levied for the MH/DD services fund, threatens a county's ability to absorb increased costs due to more clients seeking services and does not allow the value of the base year expenditure amount to keep pace with inflation. Second, the veto of language limiting a county's obligation to pay for MH/DD services after all amounts in the MH/DD services fund have been expended leaves counties no choice but to deny services while still being statutorily liable to provide payment for those services.
Association Position Statements. Ms. Christine Van Meter, President of the Polk/Des Moines Taxpayers Association and Chairperson of the County Finance Committee, distributed the Association's 1995 Annual Report and highlighted the following position statements contained in the report:
Senate File 69 Base Year. Ms. Van Meter, as Chairperson of the County Finance Committee, that the Committee has created a subcommittee to consider continued use of Fiscal Year 1994 MH/DD expenditures as the base amount for county MH/DD levies and expenditures. The subcommittee is considering recommending the Fiscal Year 1996 levy amount for MH/DD services as the base year amount. This would result, in most cases, in more funds being available in the MH/DD services fund and a corresponding decrease in funds available to a county's general fund. The County Finance Committee is a permanent committee created in chapter 333A, Code of Iowa, with duties associated with county finance reporting and practices. The Committee is authorized to adopt administrative rules which have the force and effect of law.
City of Des Moines. Ms. Christine Hensley, Des Moines City Council member, and Mr. Jim Maloney, Des Moines City Assessor, presented to the Committee their concerns about the property tax inequities created by the large amount of tax-exempt property concentrated in the central city area of older urban communities. Ms. Hensley stated that this problem is especially acute in Des Moines. Of Des Moines' estimated $5.9 billion available tax base, approximately $1.9 billion is comprised of tax-exempt and government-owned property. Ms. Hensley stated that the impact of tax-exempt property is also affecting those smaller communities where declining populations are supporting a growing number of tax-exempt nursing homes and care centers for the elderly.
Ms. Hensley offered two recommendations to address the property tax inequities created by tax-exempt properties. First, the General Assembly should narrow the definition of tax-exempt property to reflect the changing nature of tax-exempt institutions and should require local assessors to periodically reevaluate the status of all exempt properties. Second, the General Assembly should mandate that all tax-exempt property be assessed a service fee for police and fire protection costs.
Black Hawk County. Ms. Vicky Atkins, Black Hawk County Assessor, also made a presentation on tax-exempt property. She stated that the rule of property tax 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. Furthermore, the costs of defending in court an assessor's disqualification of an exemption places a burden on the property taxpayers of a county.
Ms. Atkins made the following recommendations to the Committee:
Mr. Will Ament, Allamakee County Assessor, and Mr. Dave Ellis, Calhoun County Deputy Assessor, presented to the Committee the initial results of the Iowa State Assessors Association survey of assessors concerning property tax credits and exemptions. Forty-seven of 109 assessors responded to the survey, which requested assessors to rate property tax credits and exemptions in terms of usefulness, fairness, and cost of administration, and also solicited comments from the respondents pertaining to the credits and exemptions. The study indicates that there is much support for elimination of the family farm tax credit and for full state funding of the homestead tax credit. Mr. Ellis provided the Committee with historical data relating to the homestead tax credit, the military service exemption, and the family farm tax credit. Mr. Ament stated that more survey responses will be garnered at the annual meeting of the Iowa State Assessors Association to be held later this year, and that the legislative committee of the Association would be formulating recommendations on the family farm tax credit at that meeting.
Proposed Federal Tax Changes. Mr. Lorin Knapp, Department of Revenue and Finance, reviewed for the Committee the status of pending federal tax and budget legislation. Mr. Knapp also provided a handout to members of the Committee which detailed some of the tax provisions most likely to be contained in the final version of the Omnibus Reconciliation Act.
Inheritance Tax. Mr. Carl Castelda, Deputy Director, reviewed elements of the State's inheritance tax, including computation of the tax, valuation of property in an estate, and exemptions from the tax. Mr. Castelda noted that the net fiscal impact of repeal of the inheritance tax and retention of the Iowa estate tax would be a $70 million to $75 million loss to the General Fund. He also presented to the Committee 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.
Pre-tax IPERS Contributions. Federal income tax provides for a state employee's pension contribution to be treated as a contribution by the state as long as certain conditions are met. The result of this practice is that the amount of the contribution is tax-exempt since it is made by the employer, and not the employee, but for the employee's pension it is still treated as the employer's contribution. However, the 1994 Iowa legislation only provided that for state tax purposes the contribution is taxed at the time the contribution is paid. At retirement, for federal tax purposes, the benefits resulting from the tax-free contributions will be taxed but will not be subject to state tax since they were already taxed. Since the computation of state tax starts with federal adjusted gross income, taxpayers or their preparers will automatically begin with that figure without realizing these past contributions which are included have already been taxed. This means double taxation. Mr. Castelda indicated that a change in the law in the 1996 Session will not have a cost effect.
Capital Gains. Federal income tax law no longer has a special capital gains deduction but Iowa still does for certain capital gains. Possible inequity arises in the case of installment sales of capital assets. If paid in one tax year, the amount of state capital gains deduction is limited to $17,500. An Iowa Supreme Court decision provides that state treatment of income is tied to federal treatment if the sale is an installment sale. Then each installment payment is considered a capital gain for the tax year received and the $17,500 limit is applied to each installment payment. The Department feels the intent of the state limit is to apply the $17,500 to the whole sale regardless of how or when paid.
Low-income Homestead Credit or Reimbursement. Present law limits the additional homestead credit for the reimbursement for taxes paid on a homestead to those claimants with incomes of less than $14,000. In computing the income, all income of the claimant or spouse and monetary contributions of others living with the claimant are included. Possible inequity with this definition of income may occur if anyone living with a claimant has a large amount of income, is not related, and contributes little. It was suggested that it would be more equitable to include all income of persons living with the claimant.
Dr. John Lawrence. Economist John Lawrence, Iowa State University, presented an analysis of a value-added tax credit for livestock proposal based on corn feeding rates. Livestock production converts lower value raw inputs, such as grain, forage, labor, and capital, into higher value products for processors and consumers. Dr. Lawrence noted that counties in Iowa with greater livestock production generate larger receipts per acre resulting in increased economic activity in the community. Dr. Lawrence stated that a value-added tax credit would encourage livestock production and increase corn utilization in the state. Typically, only about 25 percent of the corn grown in Iowa is fed to animals in this state. It was agreed that the Committee would invite Dr. Lawrence back to present a more in-depth analysis of the value-added tax credit, particularly in comparison to the present agricultural land and family farm tax credits.
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