When it was passed in 2013, backers of Iowa's business property tax reform law said it would be a boost for Iowa's economy, that it would help businesses expand and create new jobs. But as the four-year-old law has become a target amid the state's revenue struggles, critics say it has failed to live up to the hype. Instead, they say, it left the state cash-strapped and has done little to boost the economy.

The wide-ranging reform law, years in the making, was a high priority for Gov. Terry Branstad. He had complained for years the state’s commercial property tax rates were among the highest in the nation. When he signed the bill in June of 2013, after it received bipartisan support in the Legislature, he hailed it for the things that were to come.

"This tax relief bill will put more money in the pockets of Iowa families and make it easier for Iowa businesses to invest and grow in our state," the governor said at the bill signing ceremony at Hawkeye Ready-Mix Concrete in Hiawatha.

The law had a lot of parts, but its centerpiece was a provision that changed how much a commercial and industrial property’s actual value was subject to taxation, lowering it from 100 percent to 90 percent. Already, residential properties see about half their assessed value exempt from taxation, and business owners had complained they were being treated unfairly.

In addition, the law provided a business property tax credit that was aimed at helping Main Street enterprises.

Those two things together led to a lower tax burden of $15.7 million in Scott County for taxes paid in 2016/17, according to the Iowa Department of Revenue.

But has it worked? Has it helped the economy?

The governor says it has.

"Gov. Branstad and Lt. Gov. Reynolds believe that implementing the largest commercial property tax cut in Iowa’s history in 2013 has made a real difference on our Main Streets and in our communities,” said spokesman, Ben Hammes. “Iowa continues to experience the lowest unemployment rate in 16 years and there is no doubt that businesses small and large benefit by a lower tax payment on property.”

Critics of the law scoff at the notion that changes to property taxes have boosted the economy. They say a lot of things go into a business's decision whether to expand or locate here.

“I would be doubtful that it had much of an impact on economic growth,” said Peter Fisher, research director for the Iowa Policy Project, which criticized the proposal when it was in the Legislature. He said that much of the benefit is going to retailers, including larger ones based out of state, as well as other businesses whose operations are driven by local market conditions, not tax policy. Big boxes, he says, are getting a good deal, but he adds: “It’s hard to see any of that benefiting Iowa.”

In the Quad-Cities, the economy has bumped along since the law was passed.

The average unemployment rate for Scott County in 2013 was 5.6 percent. That dropped to 4.6 percent this past year. But that decline has come as the size of the labor force has shrunk, not more people being employed. In fact, the number of people employed in the county has shrunk by 400 on average between 2013 and 2016.

Statewide, the economy has performed better. The jobless rate dropped from 4.7 percent in 2013 to 3.7 percent in 2016. But, unlike in Scott County, the number of people employed in the state went up from 2013 to 2016 -- by about 40,000 to 1.638 million people.

Henry Marquard, director of government relations for the Quad-Cities Chamber of Commerce, which backed the law, said the tax changes help. He said it is important for Iowa to compete with other states that are improving their tax climates. “We’re continuing to see all of these states we compete with step up their game, and it’s important that we keep up,” he said.

Marquard said he believes Kraft Heinz’s decision to build a new plant at the Eastern Iowa Industrial Center was partly attributable to a better property tax climate.

Defenders of the law say that it has improved Iowa's competitiveness with other states. A study of commercial property tax rates released last year by the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence said Iowa's rankings improved after the law was passed.

For example, for a commercial property with a value of $100,000 Iowa's property ranked 22nd highest in the country. The year before, it was ranked 10th highest.

For a property with a $1 million value, Iowa ranked 9th highest; The year before it was 5th.

Critics of the law say there's more to making a state attractive to business than just the tax climate, and property taxes are only a piece of that.

Dave Swenson, an economist at Iowa State University, dismisses the idea there was an impact on the state’s economy. Instead, he said, there was just a shift of the tax burden.

“The advantages have accumulated to the commercial sector but were offset to the disadvantage of the taxpayers at large. It’s a zero sum game,” he said.

He added, "The transfer to commercial property owners comes at the expense of spending those dollars on public programs, which do tend to have a higher multiplier effect."

As for Iowa’s low jobless rate, Swenson said the state has traditionally been well below the national average.

Local impact varies

Property taxes are the lifeblood of local government. They are the revenue source mayors and aldermen have the most control over, and their rise and fall guide budget-making.

Local governments have extraordinary sway over property taxes, and that can have an impact on how state tax policy rolls out.

Take Frontier Management, Corp., the owner of the Best Western Plus Steeplegate Inn in Davenport. The hotel is one of two the company owns in Iowa. The other is in Dubuque.

Dan Huber, the company's chief executive, said the commercial tax break was welcome. But, he noted, that in Dubuque the assessment on the hotel there spiked significantly in 2015. The company appealed, but it still ended up being higher. That higher assessment, combined with a slightly higher tax rate, led to a nearly $16,000 tax increase over the year before.

That was more than the benefit gained by the reduction in the amount of the commercial property's value subject to tax.

"The work that the legislature did to provide relief is very, very welcome, and as a small business we appreciate it. But at the same time, when your assessed values and so on are going up and up, it can certainly negate some of the work that is done in the legislature," he said.

Deere and Co.'s Davenport Works on East 90th Street is another example of how local changes can have an impact on individual properties. Taxed at just 90 percent of value instead of 100 percent, Deere's tax bite under the new system against the old system, results in a $94,000 savings from what it would have been otherwise. But the City of Davenport re-evaluated all its commercial properties in 2016, and for Deere that will result in a 20 percent increase, to about $29 million, in assessed value for the 2017/2018 tax year.

"For Deere, the 10 percent commercial property rollback has been completely offset by higher assessed property values," said Ken Golden, a Deere spokesman.

For their part, local governments say their budgets have come under greater pressure because of the property tax reform law. The state is reimbursing for lost commercial and industrial tax revenues. But it isn't paying local governments for revenues lost because of the law's changes to apartments and similar multi-residential properties.

The law is changing how those properties are being taxed, so that by 2022 they'll be treated the same as single family homes.

"It makes it difficult for us to keep up with the pace of growth we’re having," said Brandon Wright, the City of Davenport's finance director. "The result of that is a tighter and tighter budget every year."

Tax cut back in the crosshairs

This year, the property tax law has become much more controversial because of the state's financial struggles.

Three times since the fall, the state has revised downward its revenue expectations. That included a report in March in which the Revenue Estimating Conference said income for the rest of the fiscal year, which ends June 30, would fall $131 million short of expectations.

That means the state will likely draw from reserves to balance the budget.

Already, Democrats and other critics say the state is shortchanging education and other priorities, and the property tax reform law, along with generous business tax credits, have taken important dollars off the table. “The impact has clearly been we’ve been struggling to finance basic services,” said Fisher, of the Iowa Policy Project.

In the face of such shortfalls, there is talk about overhauling existing business credits, and some lawmakers have said the 2013 reform law should be reexamined, too.

Meanwhile, the legislature faces pressure from local governments who already are fretting the state will back off reimbursing them for the lost revenues from the 2013 law. Branstad's office, though, stressed that the governor has committed to replacing those revenues -- and that it stands by policies aimed at making it easier to run a business in the state. "Gov. Branstad and Lt. Gov. Reynolds remain focused on policies that will create an even better environment for our job creators to provide more job opportunities for Iowans," Hammes said.


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