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 reduction of their sights. However whereas the difficulty is worthy of their consideration, Home File 1 (HF 1) as at the moment drafted misses the mark.
Property tax limitations are available in three flavors: levy (income) limits, fee 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 accomplished their job, holding incumbent property house owners’ taxes in examine. However they’ve include hidden prices. They discourage householders from renovating or including onto their houses, for concern of incurring a dramatic tax enhance. They make it much less engaging for rising households to maneuver previous their starter houses or for empty nesters to downsize. They intervene with efforts to vary a property’s use. And, over time, they shift prices to newer, youthful householders—the rising technology that Iowa lawmakers need to preserve in-state.
Furthermore, there’s a difficulty of elementary equity: a house’s honest market worth ceases to be the principle driver of its native property tax invoice. The proprietor of a modest new house would possibly pay extra in property taxes than a next-door neighbor with an older however far more luxurious house.
Property tax evaluation limits are supposed to constrain incidental tax will increase, pushed not by acutely aware coverage however by rising house values. Iowa lawmakers are proper to be involved about this, notably given the way in which valuations have skyrocketed lately. Residence costs are up 29 % in Iowa over the previous two years (by means of October 2020). Few householders really feel like they’re getting 29 % 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 no commensurate enhance in the price of offering native authorities companies.
Sadly, HF 1 doesn’t simply preserve property tax collections in examine. Over time, it modifications 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 quicker than everybody else.
Property tax evaluation limits just like the one in HF 1 impose a constraint on the speed of progress in assessed worth, on this case stipulating that annual will increase can not exceed 3 % until the property is considerably altered. Substantial enhancements to the property result in a brand new valuation, although the sale of the property doesn’t.
Beneath present legislation, Iowa combines a statewide rollback with an “ag tie” which implements an evaluation rollback if residential property values in mixture rise quicker than agricultural assessments, or vice versa. Lawmakers additionally carried out a “smooth 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 % year-over-year. Each provisions curtail the speed of property tax progress considerably, however householders can attest that will increase proceed to be substantial.
Sadly, an evaluation restrict doesn’t management the speed of income progress. 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) houses. 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 “smooth cap,” Iowa policymakers may comply with different states’ lead in requiring voter approval for property tax collections to develop above a specific amount inside a given county. (These limits exist in crimson and blue states alike. In truth, each New York and Massachusetts present good fashions.) If property values soared, native governments must minimize millages to curtail the expansion of collections—until they secured an override from voters.
Beneath evaluation limits, authorities insurance policies intervene with non-public housing choices, together with choices about renovating or constructing a house. That type of authorities meddling in housing markets by no means works. As a substitute of inadvertently constraining householders’ decisions, authorities ought to focus extra narrowly on the duty of constraining authorities income progress, which is at the moment on autopilot. Lawmakers have the appropriate precedence. A change in strategy will help yield the appropriate outcomes.