New tax limits mock transparency

In one bill, lawmakers enshrine minority rule, punish public workers (again), penalize economic growth and hamstring cities recovering from natural disaster.

curtains-tighterMocking transparency for voters, taxpayers

In the wee hours of Thursday morning, while most Iowans slept, the Iowa House enacted a sweeping change to the way city and county governments fund public services, approving a bill that had passed the Senate just the evening before. In this one bill, the Legislature managed to enshrine minority rule, punish public-sector workers (yet again), penalize economic growth, and hamstring cities recovering from a natural disaster. With no apparent sense of irony or hypocrisy, the bill’s supporters argued the purpose was to increase transparency for voters.

Removing democracy in local decisions

The bill would limit the growth of property taxes levied by cities and counties to 2 percent each year. If local officials, elected to set budgets and decide how to finance them, find that the services their constituents are demanding require that revenues exceed that 2 percent, they cannot do so unless two-thirds of the council or board agree. So much for majority rule and local democracy.

Eroding employee benefits and security

How does this bill hurt city and county employees? Under current law, tax rates for the city and county general funds, and the county rural services fund, are limited. But the law recognizes that increases in employee benefits are to a large degree outside the control of local elected officials. The state sets the employer contributions required each year to maintain the solvency of public employee pension funds, while increases in premiums for health insurance are set by the insurance companies.

Both costs have been increasing more than 2 percent annually, often much more.[1] Under current law, a separate property tax levy for employee benefits can be increased to the rate needed to fund those benefits.

No longer. Under the bill just passed, employee benefits must now be financed along with all other public services, under the 2 percent cap. When pension contributions and health insurance premiums increase more than 2 percent, the cost of providing services goes up but the city or county may be unable to accommodate the cost increases without cutting services which means laying off the workers who provide them to keep overall spending growth under the cap. The bill pits taxpayers against the people who plow their streets, protect their homes, build roads, or maintain parks and libraries. When services are cut, public employees can be portrayed as the scapegoats.

Imposing a penalty on economic growth

The new bill also penalizes local governments for pursuing growth. There were earlier House and Senate bills that sought to limit property taxes, and the fiscal notes explaining those bills and their impact were just released on Tuesday. Both of those bills would have repealed the tax rate limits under current law, replacing them with the revenue growth caps, and would have applied the growth caps only to taxes from the revaluation of existing properties. New construction for a given year, which generates new property tax base that pays for the additional services needed to accommodate growth, would not count against a city’s new limit on property tax revenue. Under those earlier proposals, the taxes generated by new construction would not be part of the revenue increase that is limited.

But on Wednesday evening, the Senate replaced the existing bill with a new one, and then passed it and sent it on to the House. The new version keeps the rate limits in place, in addition to imposing the growth limit, and it does not exempt new construction from the limit. The effect is to severely penalize cities and counties that experience economic growth.

Under the previous versions, a city experiencing annual growth through the revaluation of existing properties at 2 percent or less would not be constrained by the law if they keep the property tax rate the same from year to year, regardless of how fast they grow. But under the new version that passed, a city levying at the maximum $8.10 levy rate and experiencing 2 percent increases in the value of existing properties, but growing from new construction at the rate of 3 percent as well, would see revenues decline by 13 percent within five years compared to current law, or the previous bills. Increase that growth rate to 4 percent, and the penalty becomes 17 percent in five years.

Will cities and counties even want to grow, knowing that they are not going to be allowed to raise the revenue needed to service the new business and new population? Did legislators even recognize that the new bill contained this growth penalty when they voted for it? Or was that the idea — to penalize the growing areas, which are predominantly urban?

Imposing a penalty on economic disaster

At the same time, the bill would hamstring cities trying to recover from a natural disaster, or from a loss in taxable value due to an economic downturn or from the vagaries of Iowa’s assessment rollbacks. Cities and counties now would face two caps: the existing rate cap, and the revenue growth cap. The combination could be devastating. When taxable value declines, say to a loss of property value after a major flood or recession, the rate cap ensures that revenues will decline with the loss in tax base, for any city or county at or near the rate limit. But as the recession ends or the city rebuilds, the new 2 percent revenue cap could now undermine recovery. The reduced revenue becomes the new starting point, so as taxable value increases again, they may be unable to restore revenues even to the previous level because they are constrained to 2 percent increases per year. And this just at a time when extraordinary measures are needed to help the recovery.

[1] The average premium for group health insurance provided by governmental bodies in the Midwest has increased on average 3.5 percent per year for the past three years, according to a survey by the Kaiser Family Foundation.

2010-PFw5464Peter Fisher is research director of the nonpartisan Iowa Policy Project in Iowa City. pfisher@iowapolicyproject.org

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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