MINUTES

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

November 12, 1997 -- Fourth 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. Hospitals/Health Systems.
3. Utility Property Taxation.
4. Subcommittees.
5. Materials Filed With the Legislative Service Bureau.

TASK FORCE BUSINESS

1. Procedural Business.

Call to Order. The fourth meeting of the Task Force to Study Iowa's System of State and Local Taxation was called to order by Chairperson Senator JoAnn Douglas at 10:00 a.m., Wednesday, November 12, 1997, in Room 116, State Capitol, Des Moines, Iowa.

Adjournment. The meeting was adjourned at 3:10 p.m.

Next Meeting. The next meeting of the Task Force will be held on Wednesday, December 3, 1997, at the State Capitol.

2. Hospitals/Health Systems.

Property Taxes and Fees. Mr. Greg Boattenhamer, Vice President of Government Relations for the Association of Iowa Hospitals and Health Systems (IH & HS), and Mr. Kirk Norris, Senior Vice President/Legal Counsel for the Association of Iowa Hospitals and Health Systems, made a presentation to the Task Force on state tax policy as it relates to the members of their association. Mr. Boattenhamer stated that IH & HS opposes any attempts to repeal Iowa's property tax exemption for not-for-profit hospitals. He stated that increased taxes create increased expenses which must either be passed along to patients in the form of higher health care charges or which would be recouped by the partial elimination of community benefits hospitals are currently providing without compensation. Mr. Boattenhamer further stated that IH & HS opposes enactment of legislation giving municipalities and other local governments the ability to impose service fees (i.e., payments in lieu of taxes) on not-for-profit organizations. He stated that such fees are no different than taxes and would have the same effect of causing higher charges or decreased services. He did say, though, that the Association is not opposed to voluntary negotiations and payment agreements between institutions and their local governments at the local level, and not mandated by state government.

Sales Tax Exemption. Mr. Boattenhamer also discussed the sales tax burden faced by Iowa hospitals and health systems. He stated that Iowa is one of a few states subjecting private hospitals to payment of sales tax. Specifically, Iowa hospitals pay sales tax on all goods and services purchased by the hospital except for medical devices for "human use and consumption". A sales tax exemption for private hospitals is necessary to make sure those institutions remain competitive in the face of emerging regional health systems, he averred. Mr. Boattenhamer also took the opportunity to correct an observation made at the previous Task Force meeting which involved whether or not Medicare reimburses hospitals for property taxes paid even if a hospital is not subject to those charges. He stated that Medicare does not reimburse hospitals for costs they do not incur.

3. Utility Property Taxation.

Overview. Mr. Steve Evans, MidAmerican Energy executive and member of the Task Force, made a presentation to the other Task Force members on the utility (gas and electric) taxation proposal being developed jointly by the investor-owned utilities, the municipal utilities, and the rural electric cooperatives. Although the specter of deregulation in the utility industry gave rise to development of the proposed legislation, Mr. Evans stated that this utility taxation proposal is relevant and workable whether or not deregulation of the industry occurs. However, if deregulation occurs, Mr. Evans said, Iowa's utilities will be at a competitive disadvantage because of their property tax liability, and, if Iowa utility income decreases, tax revenues to local governments from Iowa utilities will be lower. Mr. Evans explained that deregulation brings competitive prices for gas and electric utilities and non-Iowa companies will be able to sell utilities to former customers of Iowa utilities without being subject to Iowa's property tax.

Proposal Description. According to Mr. Evans the utility tax replacement draft proposal replaces the current property tax on utilities with a method based upon imposition of a generation tax, transmission tax, and delivery tax. A small levy imposed against the value of property owned or used by a utility company would still be imposed in order to retain the property valuation for purposes of computing local government debt capacity which may not exceed an amount equal to 5 percent of the taxable value of the property in a political subdivision. Mr. Evans noted that local governments and the Department of Revenue and Finance were involved in developing the bill draft with the utility companies.

4. Subcommittees.

Membership. The Task Force members were assigned to one of three subcommittees: 1) Property Tax Subcommittee, 2) Income Tax Subcommittee, and 3) Sales and Use Tax Subcommittee.

Members of the Property Tax Subcommittee are Representative Dwight Dinkla, Chairperson, Representative John Greig, Representative Richard Myers, Mr. Gary Bilyeu, Mr. Steve Evans, Mr. Ron Geiger, Ms. Nancy Gilman, Ms. Ann Hutchinson, and Mr. Jim Sage.

Members of the Income Tax Subcommittee are Senator JoAnn Douglas, Chairperson, Senator Jeff Angelo, Senator William Palmer, Representative Don Shoultz, Representative James Van Fossen, Mr. Tom Jarrett, and Mr. Peter Voorhees.

Members of the Sales and Use Tax Subcommittee are Senator Richard Drake, Chairperson, Senator Steve Hansen, Ms. Janice Laue, Ms. Sharon McCrabb, and Mr. Patrick Murphy.

Alternates of Task Force members were assigned the same subcommittee as their member.

Property Tax Subcommittee. The Subcommittee is chaired by Task Force Chairperson Dinkla. Also present were Representative Greig, Representative Myers, Mr. Bilyeu, Mr. Evans, Mr. Geiger, and Mr. E.J. Giovannetti who substituted for Ms. Hutchinson, and Mr. Sage. The Subcommittee members agreed they would focus their scrutiny of the property tax system on the source of revenue and statutory modifications affecting the source and on use of the revenue, i.e., where the revenue should be spent. Concentrating primarily on the rollback, tax credits, and classification of property, the Subcommittee developed a series of hypothetical scenarios to present to the Department of Revenue and Finance, requesting the Department to run models showing the effect of the changes in the scenarios.

Income Tax Subcommittee. The Subcommittee chairperson is Task Force Chairperson Douglas. Also present were Senator Angelo, Senator Palmer, Representative Shoultz, Representative Van Fossen, Mr. Jarrett, and Mr. Voorhees. The members suggested areas that should be looked at as possible changes to the individual or corporate income taxes. These areas include looking at all individual deductions, exemptions, and credits; establishing a flat tax by setting the individual income tax at a percent of federal tax or taxable income adjusted to be revenue neutral; tying the corporate tax to the individual tax similar to Illinois; repealing the deduction for federal taxes paid under individual and corporate taxes and reducing rates; and establishing a flat tax or graduated flat tax with an income exemption for certain taxpayers. The Department of Revenue and Finance was requested to provide information. Mr. Carl Castelda of the Department reviewed the status of the collection of sales or use tax by those making catalog sales.

Sales and Use Tax Subcommittee. The Subcommittee is chaired by Senator Drake. Also present were Senator Hansen and Mr. Grant Veeder who substituted for Ms. McCrabb. Senator Drake stated that a ground rule for the Subcommittee is to provide revenue-neutral proposals if sales tax reductions are desired. Mr. Veeder presented a proposal to fully fund mental health, mental retardation, and developmental disability costs from state general fund sources in lieu of property taxes. This proposal would cost approximately $119 million initially. A possible revenue replacement for the MH/MR/DD costs would be an increase to the retail sales and use taxes. The Subcommittee also discussed the possibility of receiving taxes from direct marketers ($13-15 million potential), applying access charges to the Internet, and authorizing an additional one cent local option tax. Other ideas proposed were limiting or reducing sales tax on clothing items below a certain sales price and granting a sales and use tax exemption for those medical care facilities which are not owned by government agencies.

5. Written Materials Filed With the Legislative Service Bureau.

a. Mr. Greg Boattenhamer -- Written Testimony.

b. Mr. Steve Evans -- Overlays from Testimony; Utility Company Property Tax Replacement Bill Draft.

c. Tax Letters from the Department of Revenue and Finance.

OTHER INFORMATION FOR THIS COMMITTEE:

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