October 12, 1995 First Meeting
Minutes prepared by Susan Crowley, Legal Counsel
Organizational staffing by Mike Goedert, Sr. Legal Counsel
Call to Order. Temporary chairperson, Representative Roger Halvorson, called to order the joint meeting of the Business Taxation Study Committee and Nonbusiness Taxation Study Committee at 9:00 a.m., Thursday, October 12, 1995, in Committee Room 116, State Capitol, Des Moines, Iowa.
Election of Permanent Chairpersons. Members of the Business Taxation Study Committee elected temporary chairpersons Senator Vilsack and Representative Halvorson as permanent chairpersons. Members of the Nonbusiness Taxation Study Committee elected temporary chairpersons Senator Palmer and Representative Halvorson as permanent chairpersons.
Adjournment. The meeting recessed at 11:45 a.m. for luncheon recess, reconvening at 1:10 p.m. The meeting was permanently adjourned at 2:50 p.m.
Mr. David Lyons, Director of the Department of Economic Development, updated the Committees on the status of the machinery and equipment property tax exemption enacted in Senate File 69 during the 1995 legislative session. Mr. Lyons indicated that the overall result of the legislation exempting machinery and equipment from property tax has been good. Several companies newly locating in Iowa have indicated that the exemption of machinery and equipment was a factor in their decision. He stated that this assessment was garnered from communications with the companies in question. Mr. Gerald Bair, Director of Revenue and Finance, informed the Committees that emergency rules implementing the machinery and equipment legislation will be filed in about a week.
Mr. Lyons reviewed for the Committee what he termed the unintended consequences of that portion of the legislation relating to treatment of machinery and equipment in urban renewal areas which are utilizing tax increment financing. The legislation provides that, under certain circumstances, machinery and equipment first assessed for taxation on or after 1995, which would otherwise be exempt, if placed in a tax increment financing area would be taxable at 30 percent of net acquisition cost. He also discussed the issue of the treatment of replacement machinery and equipment moved into a tax increment financing district, which the legislation did not address. Mr. Lyons presented to the Committees the following recommendations pertaining to the treatment of machinery and equipment in tax increment financing areas:
Mr. Lorin Knapp, Department of Revenue and Finance, reviewed for the Committees the status of pending federal appropriation bills and the Omnibus Reconciliation Act, the legislation which authorizes federal spending. Mr. Knapp explained that the Omnibus Reconciliation Act will, in all probability, also contain three tax bills: the Tax Simplification Act of 1995, the Revenue Reconciliation Act of 1995, and the Taxpayer Bill of Rights 2. The deadline for passage of the Omnibus Reconciliation Act is November 13, 1995.
Mr. Knapp provided a handout to members of the Committees which detailed some of the tax provisions most likely to be contained in the final version of the Omnibus Reconciliation Act, including provisions relating to estates and trusts, medical savings accounts, corporate use of "excess" pension balances, the earned income tax credit, S corporation and partnership simplification, extension of certain provisions set to expire, elimination of certain tax breaks, and pension plan simplification.
Department of Revenue and Finance. Mr. Gene Eich, Department of Revenue and Finance, reviewed for the Committees Iowa's property tax rollback provisions. Under those provisions, the statewide assessments of any class of property for any given assessment year, may not increase more than 4 percent, except utilities, the rollback for which is 6 percent. Mr. Eich noted the history of the rollback provisions, citing escalating property tax assessments for agricultural and residential property in the 1970s with no corresponding decrease in property tax levies. During this period, he stated, the rollback on agricultural and residential property was enacted at 6 percent, along with enactment of increases in the agricultural land and homestead tax credits and a change in the way agricultural property is assessed by basing it on 100 percent productivity rather than 50 percent productivity and 50 percent market value of the property. The remaining classes of property were made subject to the rollback provisions the next year and the rollback rate was decreased to 4 percent. The rollbacks on agricultural property and residential property were then coupled so that assessments on either class of property were limited to the smaller increase on each of those classes of property. Mr. Eich also noted that in determining if the valuations have increased by more than the limit from one assessment year to the next, the increase in value resulting from new construction from one year to the next is not counted.
Mr. Eich distributed handouts to the Committees illustrating the percentage of assessed value of both agricultural land and residential property that would be taxable if increases in agricultural and residential assessments had not been coupled and the amount of property taxes that would have been collected on these values. Mr. Eich was requested by Senator Vilsack to compute a breakdown between urban and rural residential values. He preliminarily stated that the increases in residential valuations are probably urban-driven.
Senator Bennett noted that preliminary figures show that the residential rollback for taxes payable in fiscal year 1996-1997 will be 60 percent or lower. Senator Palmer stated that the rollback tie is not equitable in that it creates artificial internal shifts in property values that are difficult to identify and such shifts affect distributions of funds such as the school foundation formula. Representative Halvorson clarified that the productivity formula relating to the assessment of agricultural land includes federal farm program payments made to farmers.
Iowa League of Cities. Mayor Ed Stachovic of Cedar Falls and a member of the Board of Directors of the Iowa League of Cities discussed with the Committees the effect of the coupling of the increase in residential values to that of agricultural property, specifically as it affects his city and Iowa cities generally. The mayor stated that the resulting rollback inhibits a city's ability to pay for those essential services provided to, and demanded by, its citizens and has resulted in revenue shifts to local option sales taxes and increased reliance on fees and charges. Furthermore, to attract businesses to a community, a city must attempt to hold tax rates down; yet the residential tie to agricultural property effectively shifts the property tax burden to commercial and industrial property.
Iowa League of Cities. Mayor Stachovic also discussed current property tax exemptions. Cedar Falls officials recently invited all property tax-exempt entities to discuss a process whereby those entities will begin to voluntarily contribute to the city's general fund by making payments in lieu of taxes for police and fire protection. This may help take some of the sting out of reduced residential taxable valuations, Mayor Stachovic said, but uncoupling the residential and agricultural property valuation increases is really the first step in solving cities' revenue problems.
Iowa State Assessors Association. Mr. Will Ament, Allamakee County Assessor and newly elected president of the Iowa State Assessors Association, described to the Committees a survey being conducted by the Assessors Association. The study seeks to garner the views of both assessors and property tax-paying citizens relating to property tax credits and exemptions currently allowed by statute. Mr. Ament indicated that the results of the survey will be made available to members of the Committees. Mr. Ament cited administrative costs of administering some credits and exemptions as being of major concern to assessors, along with perceived inequities created by some credits and exemptions. Mr. Ament recognized Mr. Don Freeman, Warren County Assessor, who discussed some of the administrative problems associated with implementation of the machinery and equipment property tax reimbursement provisions of Senate File 69.
Mr. Marvin Diemer - Black Hawk County. Former State Representative Marvin Diemer appeared before the Committees as a representative of citizens of Cedar Falls and Blackhawk County to express dissatisfaction with the granting of state property tax exemptions to nonprofit institutions which provide housing for high-income retirees. Mr. Diemer expressed concern over the current property tax exemption system that allows property taxes to be levied against a single mother who built her home with the assistance of Habitat for Humanity while high-income elderly persons enjoy no property tax liability because they live in a retirement home owned by a nonprofit entity. Mr. Diemer asserted that the law needs to be amended to provide a clearer distinction between nonprofit and for-profit entities.
John Easter, Senior Public Policy Analyst with the Iowa State Association of Counties (ISAC), informed the Committees that ISAC legislative steering committees have developed preliminary recommendations on property tax policy, but the final recommendations have not yet been ratified. Mr. Easter cited two problem areas relating to enactment of Senate File 69. The first is the mechanism by which growth is to be factored into the Mental Health/Developmental Disabilities (MH/DD) funding formula. Currently, the base factor in determining growth is fiscal year 1993-1994 MH/DD expenditures. A percentage growth factor was also passed but vetoed by the governor. Second, counties are concerned about the liability involved in limiting expenditures for statutory entitlements, i.e., the provision of MH/DD services. Mr. Easter also expressed the continuing concern of counties about the underfunding by the State of property tax credits and the recent enactment of the machinery and equipment property tax exemption.
Mr. Jim Wengert, spokesperson for the Iowa Federation of Labor, discussed with the Committees the nature of Iowa's tax system and the combined effect of that system on Iowa taxpaying citizens. Because of its heavy reliance on property taxes and the sales tax, the Iowa tax system is regressive, i.e., it captures a greater percentage of the income of lower income people than it does of higher income people. It is the Federation's view that any change in the tax system ought to be accepted if it increases the progressivity of the system and rejected if it does not. Mr. Wengert cited the increase in the dependent personal exemption credit from $15 to $40 as a progressive change to the system, but the change could have been made more progressive by also making the credit refundable. Mr. Wengert recommended that the personal exemption credit be made refundable, that a refundable credit be enacted for those senior citizens who have little or no pension income, and that the property tax relief for low income Iowans enacted in 1992 be fully funded.
Mr. Wengert also discussed some aspects of Iowa's business taxes, stating that decreasing the tax revenue base of local governments with enactments such as the exemption of machinery and equipment for businesses will not create more jobs, but rather, will provide more profit to the stockholders of those businesses. Before any further business tax cuts are enacted, the legislature must first determine what businesses are paying what portion of the taxes. This can be accomplished by making those tax payments public records.
Mr. John Sorensen, Legal Counsel for the Iowa Bankers Association, described for the Committees Iowa's franchise tax on financial institutions. The tax is equal to 5 percent of net income and is paid primarily by commercial banks and savings and loans. Of the revenues collected $8.8 million is returned to local governments (60 percent to cities and 40 percent to counties). The Iowa Bankers Association recommends that the cap on local revenues of $8.8 million be removed so that all of the revenues may be used for local development. Revenues from the franchise tax were $34 million in fiscal year 1993-1994. Mr. Sorensen noted a decrease of about $5 million for fiscal year 1994-1995, due primarily to increased utilization of bank investment subsidiaries. The law was changed in 1995 to effectively eliminate any benefit banks are realizing from the utilization of bank investment subsidiaries, but the impact of the legislation on tax collections will not be seen until 1995 returns are filed in April.
Mr. Sorensen stated that changes in the delivery of banking services, such as ATMs and cyber-banking provided via the Internet and elimination of restrictions on interstate banks illustrates the importance of having a competitive tax structure for financial institutions that is also considered equitable. The Iowa Bankers Association considers it inequitable that credit unions are taxed differently than banks and savings loans. Mr. Sorensen reported that the Iowa Bankers Association has determined that Illinois, Nebraska, and Missouri have more favorable financial institution tax structures than does Iowa.
Iowans for Tax Reform Action Coalition is an advocacy group comprised of farm, labor, and church organizations and concerned citizens who support progressive tax policies at all levels of government. Mr. Bill Smith, a representative of the Coalition, stated that it is the Coalition's view that Iowa should provide property tax relief primarily to the elderly, disabled, and poor who reside in rural areas and in the inner cities because these are the geographical areas where property values are decreasing with a corresponding increase in tax rates to maintain government services. The Coalition advocates the increased use of circuit breakers to accomplish this property tax relief. The use of circuit breakers would result in tax liability being ratcheted according to the property taxpayer's income, i.e., ability to pay.
Future Presentation. Ms. Christine Van Meter, Executive Director of the Polk/Des Moines Taxpayer's Association, was unable to address the Committees and was invited to return at a subsequent meeting.
Further Information. The members of both Committees discussed the following issues and requested from staff further information, where available, pertaining to these issues:
Future Meetings. The members of both Committees also instructed staff to set subsequent meeting dates after conferring with each member on their availability.
OTHER INFORMATION FOR THIS COMMITTEE:
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