Iowa Property Tax Reform Plan Misses the Mark

On the heels of adopting one of the crucial complete state tax reform packages in years, Iowa lawmakers are again in Des Moines with property tax aid of their sights. However whereas the difficulty is worthy of their consideration, House File 1 (HF 1) as at the moment drafted misses the mark.

Property tax limitations are available in three flavors: levy (income) limits, price limits, and evaluation limits. Iowa HF 1 is a property tax evaluation restrict, that means that it caps the quantity by which the taxable assessed worth of any given property can enhance annually. On this, it follows the trail blazed by California’s Proposition 13.

Proposition 13 and different property tax evaluation limits have achieved their job, holding incumbent property house owners’ taxes in test. However they’ve include hidden prices. They discourage owners from renovating or including onto their properties, for concern of incurring a dramatic tax enhance. They make it much less enticing for rising households to maneuver previous their starter properties or for empty nesters to downsize. They intrude with efforts to alter a property’s use. And, over time, they shift prices to newer, youthful owners—the rising technology that Iowa lawmakers need to hold in-state.

Furthermore, there’s a difficulty of elementary equity: a house’s truthful market worth ceases to be the principle driver of its native property tax invoice. The proprietor of a modest new dwelling would possibly pay extra in property taxes than a next-door neighbor with an older however rather more luxurious dwelling.

Property tax evaluation limits are supposed to constrain incidental tax will increase, pushed not by acutely aware coverage however by rising dwelling values. Iowa lawmakers are proper to be involved about this, significantly given the best way valuations have skyrocketed lately. Dwelling costs are up 29 p.c in Iowa over the previous two years (by way of October 2020). Few owners really feel like they’re getting 29 p.c extra, or higher, companies from their native governments. Even after you’re taking inflation into consideration—and housing is about one-third of the inflation calculation—this represents a big enhance in authorities income, with out a commensurate enhance in the price of offering native authorities companies.

Sadly, HF 1 doesn’t simply hold property tax collections in test. Over time, it adjustments the relative worth of properties for tax functions, severing the suitable tie between property worth and tax burdens. A well-crafted property tax limitation would forestall hovering property valuations from dramatically rising the tax base, however it shouldn’t imply that these with the best enhance in property values see their tax payments rise no sooner than everybody else.

Property tax evaluation limits just like the one in HF 1 impose a constraint on the speed of development in assessed worth, on this case stipulating that annual will increase can not exceed 3 p.c except the property is considerably altered. Substantial enhancements to the property result in a brand new valuation, although the sale of the property doesn’t.

Below present regulation, Iowa combines a statewide rollback with an “ag tie” which implements an evaluation rollback if residential property values in mixture rise sooner than agricultural assessments, or vice versa. Lawmakers additionally carried out a “soft cap” in 2019 which requires a public listening to and a two-thirds vote of the native governing physique to undertake property tax charges anticipated to extend collections by greater than 2 p.c year-over-year. Each provisions curtail the speed of property tax development considerably, however owners can attest that will increase proceed to be substantial.

Sadly, an evaluation restrict doesn’t management the speed of income development. As a substitute, it gives extra favorable phrases for properties that haven’t been improved in a very long time, shifting burdens onto newer (or newly renovated) properties. That isn’t a recipe for long-term success, and the perverse incentives it creates in housing markets aren’t good for anybody.

A greater strategy could be to transform HF 1’s property tax limitation regime right into a county-level levy restrict. As a substitute of the present “gentle cap,” Iowa policymakers might comply with different states’ lead in requiring voter approval for property tax collections to develop above a certain quantity inside a given county. (These limits exist in pink and blue states alike. In actual fact, each New York and Massachusetts provide good models.) If property values soared, native governments must minimize millages to curtail the expansion of collections—except they secured an override from voters.

Below evaluation limits, authorities insurance policies intrude with personal housing selections, together with selections about renovating or constructing a house. That form of authorities meddling in housing markets by no means works. As a substitute of inadvertently constraining owners’ selections, authorities ought to focus extra narrowly on the duty of constraining authorities income development, which is at the moment on autopilot. Lawmakers have the appropriate precedence. A change in strategy can assist yield the appropriate outcomes.