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MINUTES

TASK FORCE TO STUDY IOWA'S SYSTEM OF STATE AND LOCAL TAXATION

September 3, 1997 - First Meeting of Five

MEMBERS PRESENT

MEETING IN BRIEF

Minutes prepared by Susan Crowley, Legal Counsel
Organizational staffing by Mike Goedert, Sr. Legal Counsel

  1. Procedural Business.
  2. Mr. Gerald Bair, Director, Department of Revenue and Finance.
  3. Mr. Mark Douglas, President, Iowa Utility Association; Mr. Bob Haug, Executive Director, Iowa Association of Municipal Utilities; and Ms. Dawn Vance, Government Relations Director, Iowa Association of Electric Cooperatives.
  4. Mr. Dwayne Vande Krol, Taxation Committee Chairperson, Iowa Society of CPAs.
  5. Dr. Thomas Pogue, Department of Economics, University of Iowa.
  6. Mr. David Swenson, Research Associate, Department of Economics, Iowa State University.
  7. Mr. Steve Zumbach, Greater Des Moines Area Chamber of Commerce.
  8. Mr. Kent Sovern, Vice President, Government Policy, Greater Des Moines Area Chamber of Commerce.
  9. Task Force Discussion.
  10. Written Materials Filed With the Legislative Service Bureau.

TASK FORCE BUSINESS

1. Procedural Business.
Call to Order. The first meeting of the Task Force to Study Iowa's System of State and Local Taxation was called to order by temporary Chairperson Representative Dwight Dinkla at 10:10 a.m., Wednesday, September 3, 1997, in Room 116, State Capitol, Des Moines, Iowa.
Election of Chairs. Senator Drake moved that the temporary Chairpersons Senator Douglas and Representative Dinkla be elected permanent Chairpersons for the duration of the Task Force. The motion was seconded by several members and adopted by voice vote.
Adoption of Rules. The rules governing the Task Force were presented by the Chairpersons and adopted by voice vote. The adopted rules are on file with the Legislative Service Bureau.
Adjournment. The meeting was adjourned at 4:02 p.m.
2. Mr. Gerald Bair, Director, Department of Revenue and Finance.
Prior Studies. Mr. Bair informed the Task Force that most state taxes were first enacted in the 1930s and underwent few legislative changes until the 1960s. He presented to the Task Force an overview of three studies of Iowa's tax system that were undertaken in 1966, 1985, and 1997; the recommendations from each; and indicated whether or not the General Assembly acted upon the recommendations of any of the three studies. Each of the tax studies reviewed Iowa's tax system based on the following characteristics: 1) simplicity, 2) fairness, 3) revenue mix, 4) equity, 5) economic incentives, 6) competitiveness, 7) progressivity/regressivity, 8) complexity, and 9) the relative tax burdens on taxpayers.
Tax Collection. Mr. Bair also discussed the Department's tax collection efforts noting that the amount of accounts receivable collected over the past two fiscal years has increased in proportion to the amount of accounts receivable outstanding. Mr. Bair noted also that the number of taxpayer telephone calls to the Department for assistance is increasing each year and the number of errors made by taxpayers on their income tax returns is also increasing.
Federal Coupling. Mr. Bair informed the Task Force that, although Iowa's individual income tax "couples with", or reflects, the federal income tax, there are currently 29 adjustments allowed for Iowa net income that are not allowed in arriving at federal adjusted gross income; and there are nine adjustments to Iowa net income in arriving at Iowa taxable income that are not utilized in computing federal taxable income.
Inconsistencies. Mr. Bair also stated that the Department's Business Tax Advisory Group Subcommittee has so far identified 60 inconsistencies in the State tax code in the areas of corporate income tax, individual income tax, sales and use tax, and property tax. According to Mr. Bair, an inconsistency exists when various segments of the same class of taxpayers are treated differently. He offered to make available to the Task Force the final report issued by the Advisory Group.
Local Taxation. In terms of local government taxes, Mr. Bair noted that the local option sales tax has grown from 812 jurisdictions imposing the tax in fiscal year 1993 with disbursements in excess of $63 million to 2001 jurisdictions imposing the tax in fiscal year 1997 with disbursements in excess of $112 million. Mr. Bair also illustrated to the Task Force the changes from the 1986 assessment year to the 1996 assessment year in the mix of statewide taxable valuation by class of property for purposes of property taxation. Property tax issues cited by Mr. Bair for consideration by the Task Force include the continued usefulness of property valuation limitations; whether current property tax exemptions and credits are fulfilling their intended purposes; what impact deregulation may have on the property taxation of utilities, telecommunications companies, pipelines, and railroads; and how much information is needed by the taxpayer to understand the property tax process.
3. Mr. Mark Douglas, President, Iowa Utility Association; Mr. Bob Haug, Executive Director, Iowa Association of Municipal Utilities; Ms. Dawn Vance, Government Relations Director, Iowa Association of Electric Cooperatives.
Representatives from three utility associations made presentations to the Task Force explaining the process by which property taxes are imposed on investor-owned utilities, electric cooperatives, and municipal utilities. According to Mr. Douglas, real and personal operating property of utility companies (except for pollution control equipment) is assessed for property taxation by the Department of Revenue and Finance. Office buildings and other facilities are locally assessed. The assessed valuation is determined annually by combining three measures. A weighted 50 percent of the valuation is based on stock and debt -- the estimated market value of the utility's common stock, preferred stock, debt, current liabilities, other liabilities, leases, and deferred credits. Another 40 percent is based on the income capitalization approach which estimates market value by dividing operating income by a capitalization rate based on cost of capital and market risk factors. The cost approach involves determining the cost of the operating property less depreciation and is weighted 10 percent. The composite assessed value is adjusted to reflect the utility's operations in Iowa and then allocated to each taxing district in Iowa where the utility has property. The allocation is based on line miles of facilities and other factors.
Ms. Vance stated that electric cooperatives are also centrally assessed based upon the cost approach. This varies depending on the type of cooperative with distribution cooperatives valued at 25 percent of original cost if a rural facility and at 100 percent if a nonrural facility, and gas and transmission cooperatives are valued at original cost less depreciation. Ms. Vance noted that the actual taxes paid on a per kilowatt basis are on a par with other utilities.
Mr. Haug noted that municipal utilities are generally exempt from property taxes except if the utility is jointly owned or financed or if the property was built for pecuniary profit. Mr. Haug emphasized that even though municipals are generally exempt they do make transfers to local governments directly or indirectly. Direct payments may be from surplus funds to support other city government functions. Indirect payments may take the form of free or discounted service to local government agencies.
Mr. Douglas added that the weighting formula based on the three approaches results in approximately 90 percent of the valuation actually being related to income in some form or fashion.
4. Mr. Dwayne Vande Krol, Taxation Committee Chairperson, Iowa Society of CPAs.
Mr. Vande Krol provided the Task Force with what he termed a "wish list" in regard to the Iowa tax structure from an accountant's perspective. The list included uniformity between Iowa and federal law and amongst the various states, certainty and stability in regards to interpretation of tax statutes, and administrative ease and simplicity.
5. Dr. Thomas Pogue, Department of Economics, University of Iowa.
Property Tax. Dr. Pogue presented an overview of Iowa property taxation. Mr. Pogue stated that the trend occurring in Iowa is a decreasing reliance on property taxes as a source of revenue due, in part, to the property tax relief efforts of the General Assembly. Dr. Pogue identified several problems associated with Iowa property taxation. First, the tax base is narrowing as the class of exempt property is increasing and the use of partial exemptions is increasing. Second, because of mechanisms such as the rollback (i.e., valuation limitations), the assessed value of property bears less and less relation to its market value. Third, property taxes are becoming more complicated to administer.
Tax Reform. Dr. Pogue stated that Iowa's tax system can be improved by implementing comprehensive rather than piecemeal reform; by forgoing the use of taxes to manipulate the private sector; by broadening the income, sales, and property tax bases; by reducing tax complexity; and by increasing stability and predictability of taxes. A broader tax base lowers tax rates and is less complex. When it comes to reforming the tax structure, state policymakers should aim for uniformity, simplicity, and stability, Dr. Pogue averred.
Economic Development. Dr. Pogue also discussed public spending and taxation relative to economic development and distributed to the Task Force an outline detailing the issues. In his written and spoken comments, Dr. Pogue stated that government can best promote development by providing public goods and services that people are willing to pay for, financing those goods and services with taxes that least distort private sector decisions, maintaining a system of contracting and property rights that supports efficient markets, and intervening in markets only when there are significant externalities or restraints on free trade.
6. Mr. David Swenson, Research Associate, Department of Economics, Iowa State University.
Mr. Swenson displayed a series of slides to the Task Force which illustrated comparisons of certain property tax statistics for fiscal year 1989 and fiscal year 1997. He compared total taxable values and total taxable values for each class of property, both adjusted for inflation. He also provided a comparison of the assessed and taxable values, adjusted for inflation, of the various classes of property in rural, urban, and metropolitan counties.
According to Mr. Swenson, commercial and industrial property are the only two classes of property which have had a real (adjusted for inflation) increase in taxable valuations from fiscal year 1989 to fiscal year 1997. The impact of this is evident in increased tax rates, particularly in the rural areas, he said.
7. Mr. Steve Zumbach, Greater Des Moines Area Chamber of Commerce.
Mr. Zumbach presented to the Task Force an analysis of the impact of various taxes on the manufacturing industry as compared to 11 other states. This analysis is part of a larger study which is seeking to identify those business climate characteristics that help to make an area attractive to manufacturers. Taxes studied included corporate income tax, sales and use taxes, property tax, and unemployment and worker's compensation taxes. The states included in the study are Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, Ohio, South Dakota, Tennessee, Texas, and Wisconsin. In terms of total tax burden, Iowa ranked 10th of the 12 states. Mr. Zumbach noted, however, that the greater the investment in real property the greater the total tax burden for Iowa businesses as compared to the other states.
8. Mr. Kent Sovern, Vice President of Government Policy, Greater Des Moines Area Chamber of Commerce.
Mr. Sovern made a presentation on the adverse impact of the residential property tax rollbacks on commercial and industrial property taxes. He stated that the rollbacks create an imbalance in the percentage of valuation of each class of property subject to property tax which has resulted in commercial and industrial properties bearing a greater share of the total local property tax burden.
9. Task Force Discussion.
Members of the Task Force mentioned their items of concern relating to the various presentations or other related tax areas. Items discussed included the Chairpersons' plans for dealing with the approximately $40 million in income tax windfall resulting from federal tax legislation; the need for tax changes to be made as a whole rather than piecemeal; describing the property tax rollback process in layman's terms; the need to change the method for taxing property; and the complication of filling out income tax returns.
The Chairpersons directed each member to identify the two areas of concern which they would like to be addressed by the Task Force. These are to be provided to the staff before the next meeting.
Next Meeting. The Task Force set the date of its second meeting for Wednesday, September 24, 1997.
10. Written Materials Filed With the Legislative Service Bureau.
a. Department of Revenue and Finance - Summary of Testimony.
b. Iowa Utility Association - Summary of Testimony.
c. Iowa Association of Municipal Utilities - Summary of Testimony.
d. Iowa Association of Electric Cooperatives - Summary of Testimony.
e. Dr. Thomas Pogue - "Iowa Property Taxation: Overview" and "Public Spending, Taxation, and Economic Development: An Outline of Issues".
f. Mr. David Swenson - Photocopies of overlays used in presentation.
g. Greater Des Moines Area Chamber of Commerce - "A Comparison of Business Taxes for Central Iowa Manufacturers" and "Impacts of Residential Property Tax Rollbacks on Commercial and Industrial Property Taxes".
h. Task Force Rules.

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