Business property tax reform was a major topic and effort of the 2012 Iowa Legislative session. The House of Representatives passed a graduated reduction plan (HF2274) reducing commercial property taxes by 40 percent over eight years. The total tax reduction would be $1.2 billion. The rollback for small businesses, those with property valued at $400,000 or less, would be accelerated to five years. It would provide homeowners with over $400 million in property tax relief, and the state would provide about $1 billion in “backfill” money to county and city governments. The Democrat-controlled Senate plan calls only for a “direct commercial property tax credit” for small businesses. This plan would provide $200-$250 million in tax reductions.
Each year the Minnesota Taxpayers Association compares the property tax rates in all 50 states. Their analysis tries to balance the individual systems to an “apples to apples” review. They review commercial, industrial, apartment, and homestead properties, at both the urban and rural levels. Iowa does not fare well in this report, as our business property taxes are among the highest in the nation – in all sub-categories (commercial, industrial, and apartment) and in both development categories (urban and rural).
Iowa ranks number one in the nation in both urban and rural apartment property taxes. The owner of an urban apartment complex, valued at $600,000 with about $30,000 in fixtures, will pay over $27,000 a year in property taxes. That is a 4.31 percent rate. The national average is only $11,417, at a 1.77 percent rate. A rural apartment complex owner will pay $21,753 on the same $600,000 valued building, a 3.45 percent rate. The national average rate is 1.51 percent, with taxes paid of $9,537.
The national average apartment property tax rates are less than half of the amount Iowa apartment owners pay. These taxes are passed onto renters, whether families or students, some of those least able to afford to pay them. We rank third in both urban and rural commercial property taxes, at all building values ($100,000/$1,000,000/$25,000,000). The Iowa rates are 3.77 and 1.81 percent respectively – again significantly higher than the average national rates of 1.94 and 1.63 percent. Commercial property tax rates have a direct impact on business location and expansion decisions.
In the area of urban and rural industrial property, Iowa business owners fare slightly better, as the national rankings fall to only 6th and 9th. The rural industrial rate is only 1.81 percent, versus 2.26 percent for urban areas. This is still in the top 10 highest taxed states in the country.
Until and unless business property taxes are reduced, if one was building commercial, industrial, or apartment property in Iowa, it might behoove that person to build in areas classified and taxed at “rural” rates in order to reduce the tax burden. Rural areas of the state with declining populations might promote this aspect of tax codes to their advantage. This smart business decision, however, also has a variety of other public policy implications on roads, water, land, and transportation.
The results of this study make one thing very clear – Iowa business property taxes must be reformed, and the sooner the better. Businesses that consider tax burdens when making relocation and expansion plans may not chose Iowa. If we are to capture new businesses and encourage those already here, the Legislature must reach a consensus and pass business property tax legislation that the Governor can sign.
The following chart provides further details.
Republished by permission from INSTITUTE BRIEF, a publication of Public Interest Institute.