Legislation pending in both the Iowa House and Senate could change the way city and county governments gather revenue as early as 2012.
Among the features of the House Omnibus Budget proposal (HF697, passed by the House on June 8th) is a rollback of the assessment rates of commercial, industrial and railroad property taxes. The Iowa Legislature would allocate general fund monies to local governments to make up for some of that lost revenue. This plan further tilts the responsibility of funding local government toward individuals and families and away from business.
Equally important, it’s unclear whether the property tax replacement fund would adequately replace the revenue local governments lose as a result of the commercial and industrial property tax assessment rollback.
Additionally, the House bill alters and limits how city and county governments budget. Local government budgets would be capped, using a highly flawed formula. Though the formula accounts for inflation using the Midwest Consumer Price Index (CPI), the CPI isn’t a good measure of inflation in government costs. Further, the inflation factor is limited to 4 percent, meaning that in a high inflation year, this formula flaw could seriously impede the ability of local governments to meet their commitments.
The Senate’s counterpart, SF538 (introduced earlier this week and passed by the Senate June 22) would also reduce the tax responsibly of commercial, industrial and railroad property owners, as well as alter and limit local government budgets.
Rather than reducing the property tax assessment maximums, however, the Senate bill creates a Property Tax Credit for commercial, industrial and railroad property. The state’s general fund, the bulk of which is generated from of individual income taxes, would finance the Property Tax Credit. Though there would be less shifting of responsibility than in the House proposal, the distribution of this credit to businesses and railroads still would push more of the responsibility for financing government toward individuals and families.
The restriction on local government budgets in the Senate proposal is far less restrictive than the House version. Though the Senate version uses the same flawed formula, relying on the Midwest CPI to calculate maximum budgets, some slight deviations from the House version would leave local governments with considerably more freedom in their budgets. First, the inflation factor in the Senate proposal is not limited to 4 percent, meaning that in a high inflation year, local governments could correspondingly increase their budget. Second, local governments may factor unfunded federal or state mandates into their budget limit calculation under the Senate version. Third and most significantly, the Senate proposal does not curtail the revenue local governments can raise through commercial, industrial and railroad property tax.
Both the Senate and the House proposals would place a bigger chunk of the tab of financing government into the hands of individuals and families and further reduce the contributions of businesses to public services. Each chamber’s proposal would limit the ability of local governments to respond to citizens’ needs and demands. Though the mechanisms in each proposal differ slightly, the primary difference is simply one of magnitude.
Posted by Andrew Cannon, Research Associate