Allow local communities to experiment with taxes

Posted: December 15, 2009

The Register's editorial • December 13, 2009

Despite encouraging signs of economic recovery, the prospects are not so encouraging for getting unemployed Iowans back to work anytime soon. This is one time when state and local governments should look for every opportunity to encourage business expansion. Instead, businesses face the additional burden of rising taxes to pay for schools and local government.

Tackling local property taxes may not be what the Iowa Legislature had in mind in the face of a budget crisis, but this is precisely the time to do it. The state's deteriorating revenue outlook could result in property-tax increases because cuts in state spending mean less state aid to cities, counties and schools. That could force local governments to increase taxes, adding to the burden of Iowa businesses. Commercial property owners in Iowa urban centers already pay more property taxes than all but one other state, according to a Minnesota tax study.

Here's what the Legislature can do this session: Let communities experiment with local taxes. Cities and counties should be allowed to experiment with alternatives to property taxes, such as user fees for services, or an income surtax, or new taxes on hotel rooms, food, beverages or other commodities.

This builds on an idea put forward by the Iowa Chamber Alliance, a non-partisan coalition of 17 chambers of commerce and economic-development organizations in Iowa. The alliance suggests the Legislature abandon one-size-fits-all property-tax rules to let communities tailor something to meet their unique needs.

Chamber Alliance Executive Director Dave Roederer said the economies of Iowa's 99 counties and more than 900 cities and towns are not all alike. So, "Why not let local communities come up with a property-tax system that works for them?"

Property taxes are unpopular with Iowa businesses because commercial property is taxed at more than twice the rate of residential property. That's because the Legislature limited increases in the taxable value of farmland and homes. Commercial and industrial property was left out of those deals, however.

The Chamber Alliance proposes that the Legislature allow counties, or groups of counties, to adjust valuations among classes of property to lower the tax burden for business and industry. This would require a change in state law, and the alliance says changes should be made only with voter approval.

The flaw in this plan is that the alliance assumes any change would be "revenue neutral." If commercial taxes were reduced, taxes on homes would have to go up, or cities, schools and counties would have to cut spending. Neither seems likely to happen. Property taxes are too high, but local governments already struggling to pay for services won't voluntarily cut even deeper.

The Chamber Alliance proposal would be more likely to succeed if local governments had another source of revenue to compensate for cutting property taxes.

The beauty of the Chamber Alliance proposal is that it would draw upon the wisdom of local governments to try something that meets their individual needs. It is said the 50 states are laboratories of democracy. Iowa should free its cities and counties to be laboratories of tax reform, and they just might achieve something on property taxes that has eluded the Legislature for decades.