MINUTES

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

October 22, 1997 -- Third Meeting of Five

MEMBERS PRESENT

MEETING IN BRIEF

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

1. Procedural Business.
2. Internal Revenue Code Update -- Federal Tax Law Changes.
3. Mental Health Property Tax.
4. Residential Rollback and Tax Exempt Property.
5. Property Tax Credits and Exemption Data.
6. Tax Increment Financing (TIF).
7. Task Force Discussion.
8. Materials Filed With the Legislative Service Bureau.

TASK FORCE BUSINESS

1. Procedural Business.

Call to Order. The third meeting of the Task Force to Study Iowa's System of State and Local Taxation was called to order by Chairperson Senator Douglas at 10:15 a.m., Wednesday, October 22, 1997, in Room 116, State Capitol, Des Moines, Iowa.

Adjournment. The meeting was adjourned at 3:25 p.m.

2. Internal Revenue Code Update -- Federal Tax Law Changes.

Mr. Carl Castelda, Mr. Loren Knapp, and Mr. Bob Rogers, all representing the Department of Revenue and Finance, discussed the state's annual Internal Revenue Code update and presented an overview to the Task Force of the 1997 federal tax law changes impacting personal income tax filers. Mr. Castelda provided an introduction to the concept of the state's IRC update which involves the State conforming with certain federal changes. Mr. Knapp summarized various provisions of the federal Taxpayer Relief Act of 1997 relating to education, taxation of capital gains, retirement accounts, and the child credit.

Child Credit and Education Benefits. Mr. Knapp explained that the child credit is provided for children under the age of 17. The credit per child is $400 in the 1998 tax year and $500 each year thereafter. The education benefits include the HOPE tax credit, the lifetime learning credit, a deduction for student loan interest, Individual Retirement Accounts established for education purposes, an exemption from income for employer-provided education assistance, expanded qualified state tuition programs, tax-exempt status for the forgiveness of certain student loans, penalty-free higher education withdrawals from regular Individual Retirement Accounts, and an enhanced technology deduction to schools.

Capital Gains. Mr. Knapp also reviewed the several changes in taxation of capital gains. The maximum tax rate on long-term capital gains is reduced from 28 percent to 20 percent, retroactive to May 7, 1997. Long-term capital gains that would have been taxed at 15 percent will now be taxed at a 10 percent rate. The federal tax legislation also extended the time property must be held to qualify for long-term treatment. For gains realized between May 7, 1997, and July 28, 1997, the property must have been held at least one year. Beginning with realizations after July 28, 1997, property must be held for 18 months. Property held between one year and 18 months will continue to be taxed at a top rate of 28 percent. Beginning in tax year 2001, gains from property held longer than five years (from January 1, 2001) will be subject to a top rate of 18 percent. The corresponding rate for taxpayers in the 15 percent ordinary income bracket will be 8 percent. Mr. Knapp also noted that the sale of property used as a principal residence will be qualified for an exclusion of up to $500,000 for joint filers and $250,000 for single filers. Principal residence requirements include owning and living in the property for at least two years during the five years prior to the sale.

Retirement Accounts. Prior to tax year 1998, the income limits for deductible contributions to a traditional Individual Retirement Account (IRA) was $50,000 of adjusted gross income for joint filers and $35,000 of adjusted gross income for single filers. For tax year 1998, they will be increased to $60,000 and $40,000 for joint and single filers, respectively. The income limits will be increased over the next ten years to $100,000 for joint filers and $60,000 for single filers. The federal tax legislation also allows individuals to make penalty-free withdrawals limited by amount or use of the funds. The federal tax legislation also created "Roth IRAs." Under traditional IRAs, contributions are tax deductible but distributions are taxable. Under Roth IRAs, contributions are taxable but distributions are not taxable. Individuals may contribute up to $2,000 per year to a Roth IRA. However, the sum of contributions to all IRAs by an individual cannot exceed $2,000 in any year. Distributions from Roth IRAs are nontaxable provided they are made more than five years after the first year for which a contribution is made and are made after the taxpayer turns 59« years of age.

Fiscal impacts. Mr. Bob Rogers provided the Task Force members with estimates of the fiscal impact of the federal tax legislation on state general fund receipts. The estimates are for the 1997/1998, 1998/1999, and 1999/2000 fiscal years. Mr. Rogers provided two estimates for each fiscal year -- one estimate indicates the fiscal impact without state conforming legislation and one estimate indicates the fiscal impact with state conforming legislation. Mr. Rogers noted that the estimates include assumptions based on predicted behavioral responses to the federal legislation. Mr. Evans and Mr. Geiger requested that the Department also provide the Task Force with a description of corporate income tax changes in the federal tax legislation and their fiscal impact.

3. Mental Health Property Tax.

Mr. John Pollak of the Legislative Service Bureau provided an overview of the mental health, mental retardation, and developmental disabilities (MH/MR/DD) funding authority of the counties over the past few years. According to Mr. Pollak, Senate File 69, enacted in 1995, established a framework for funding MH/MR/DD services which included a cap on county property tax levies for MH/MR/DD services; state appropriations to fund MH/MR/DD services in exchange for a dollar-for-dollar reduction in property taxes; an allowed growth factor for costs associated with new consumers of services, service cost inflation, and investments for economy and efficiency; and the development of county plans to manage MH/MR/DD services. In response to a question by Ms. Sharon McCrabb, Mr. Pollak stated that there has been discussion about the State paying 100 percent of MH/MR/DD services costs, but it was decided that, because the counties would retain control of services management, that some responsibility for funding should remain with them also. He also stated that the State has been unable to obtain good data from other states on per capita spending for MH/MR/DD services.

Ms. Margaret Buckton, Legislative Analyst with the Legislative Fiscal Bureau, provided the Task Force members with a history of state funding of property tax relief since fiscal year 1995/1996 for MH/MR/DD services. Ms. Buckton reviewed the distribution formulas for both property tax relief dollars and for allowed growth dollars. The allocation of allowed growth dollars among counties will begin with the 1997/1998 fiscal year. Ms. Buckton also provided a county-by-county breakdown of the allocation of state dollars to the counties since the 1995/1996 fiscal year and each county's base year expenditures for MH/MR/DD services.

4. Residential Rollback and Tax-Exempt Property.

Ms. Christine Hensley, Des Moines City Council member, spoke on behalf of the Iowa League of Cities about the fiscal problems caused cities by the property tax rollback and tax-exempt properties. Ms. Hensley stated that the residential property tax rollback is currently set at 57.6 percent. The rollback, she said, limits the amount of taxable value available to the city which, in turn, limits revenue needed to improve city services and infrastructure.

Relating to tax-exempt property, Ms. Hensley directed her comments to the problems faced by the city of Des Moines and her suggestions as to how to address these problems. According to Ms. Hensley, 95 percent of the tax-exempt property in Polk County is located in Des Moines. She went on to say that the present value of all real estate property in Des Moines is approximately $7.8 billion. The amount of that $7.8 billion which is exempt from property tax or government-owned is $1.9 billion, or 24 percent of the total. Ms. Hensley suggested that state institutions and buildings, hospitals, and state-supported colleges enter into agreements with cities to make payments in lieu of taxes for the cost of providing police and fire services by the city. This is being done in a few cities around the State, notably Ames, Iowa City, and Cedar Falls. However, because these agreements are voluntarily entered on the part of the tax-exempt property owner, most cities have been unable to tap that source of revenue effectively. Ms. Hensley also suggested that in the case of hospitals the state use the sales tax receipts collected by the hospitals to pay for city police and fire costs.

5. Property Tax Credits and Exemption Data.

Mr. Mike Goedert of the Legislative Service Bureau explained the homestead, military, elderly and disabled, agricultural land, and family farm tax credits. He provided a chart that listed the dollar amounts paid by the state for each credit for the fiscal year 1996/1997, how the credit was determined, an approximate range, and a cursory noting of eligibility requirements. Mr. Goedert also distributed documents provided by the Department of Revenue and Finance. The first provided data on the Elderly and Disabled Tax Credit Programs, including the number of property tax and rent reimbursement claims filed, the total amount of state warrants issued to pay the cost of the claims and the average claim paid. Similar data was provided in the second document for the homestead, military, agricultural land, and family farm tax credits.

Mr. Goedert also provided data on the approximate market value of tax-exempt property for the 1994, 1995, and 1996 assessment years. These totals did not include government properties that are exempt. In addition, statewide totals of partial property tax exempt valuations for the 1989 through 1994 assessment years were provided. Partial exemptions include qualified property located in urban revitalization areas, certain industrial property and cattle facilities, pollution control property, forest and fruit tree reservations, and historical property. Mr. Goedert distributed to the Task Force members the "Tax Exempt Property Report" for 1996 published by the Department of Revenue and Finance.

6. Tax Increment Financing (TIF).

Mr. Jon Studer, Legislative Analyst with the Legislative Fiscal Bureau, described to the Task Force the concept of using TIF districts to finance projects in certain qualified areas of a city or county. He noted that, although statutory authority for tax increment financing has been around since 1958, its use has grown rapidly over the past five years. Mr. Studer stated that for the fiscal year 1996/1997, there are 1,453 TIF areas statewide with total incremental value of $2.366 billion of net taxable valuation. Mr. Studer described the two basic reasons for using TIFs which are for urban renewal purposes and for community college jobs training programs. He explained the effect that TIFs had on other taxing jurisdictions including school districts and, as a result, the State. Because the tax revenue from the incremental value is not available to the school district, the State appropriation to that district will increase by the amount of lost revenue. Mr. Studer noted that the lost revenue to the schools from the incremental value caused the State to increase the general fund appropriations $12.8 million in fiscal year 1996/1997.

7. Task Force Discussion.

The Task Force members discussed how the Task Force should proceed in its future meetings. Chairperson Dinkla suggested that two subcommittees be formed -- property tax and income tax. Although concern was expressed by some members that it would be difficult to proceed with developing recommendations when the Task Force has not been informed by legislative leadership nor by the Governor's office as to the amount of revenue available to it, Chairperson Dinkla cautioned the members that limiting recommendations to a dollar figure from leadership or the Executive branch may limit the members' thinking when formulating recommendations. In addition, of that amount available to spend on tax system changes, what portions should be spent on changes to what taxes, pondered Representative Greig. He said that the Task Force should first determine what tax contributes the most to the state coffers.

Ms. Gilman stated that it would be a huge task, but that it is incumbent upon the Task Force to consider recommendations geared toward achieving simplicity and equity in the tax system. Mr. Evans stated that, in order to accomplish worthwhile changes in property, income, and sales taxes, the Task Force must identify the changes that are necessary in the sense of the "big picture" and then hone in on specified areas for which there is consensus for change. Mayor Hutchinson said it was also necessary for the Task Force to consider the services funded by taxes, particularly the property tax, and ask whether it is still viable for government to be funding them. Mr. Smith said that the Task Force wants to avoid becoming just another study group and it needs to be aware of political and fiscal realities before finalizing recommendations.

Mr. Geiger stated that it would be impractical to suggest a drastic overhaul of the tax system in Iowa and that the Task Force would be taken more seriously if small, concrete changes are recommended. As a taxpayer, Mr. Geiger stated, he does not see equity in the State's current system. Mr. Voorhees said that some taxes are too high and most taxpayers have that perception.

8. Written Materials Filed With the Legislative Service Bureau.

a. Department of Revenue and Finance -- "Estimates of Fiscal Impact on General Fund Receipts From 1997 Federal Legislation" and a summary of selected provisions from the Taxpayer Relief Act of 1997.

b. Mr. John Pollak -- Summary of Testimony.

c. Ms. Margaret Buckton -- Summary of Testimony.

d. Ms. Christine Hensley -- Summary of Testimony.

e. Mr. Mike Goedert -- Property Tax Credits and Tax-Exempt Property.

f. Department of Revenue and Finance -- information on selected property tax credits and 1996 "Tax-Exempt Property Report."

g. Legislative Fiscal Bureau -- "Tax Increment Financing (TIF)."

OTHER INFORMATION FOR THIS COMMITTEE:

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