Des Moines Register
07-02-07
Raise a tax to lower a tax?
Blame the Legislature
By ROX LAIRD
REGISTER EDITORIAL WRITER
It's said there are two things you can count on: death and taxes, and people
dread both. Some taxes are dreaded more than others, however. Property taxes,
for example.
Taxes levied against homes, farms and businesses represent the largest single
piece of many Iowans' state and local tax burden, and those homeowners who
don't roll the bill into their mortgages are reminded of how much they dislike the
tax twice a year when they have to write a big check to the county treasurer.
The Iowa Legislature has struggled for almost as long as the property tax has
been in existence to ease the burden for property owners. More than 20 years
ago, it gave cities and counties the authority to raise "local option" taxes - the
sales tax, a hotel-motel room tax or a vehicle tax - with the idea that these
alternative sources of revenue would reduce local governments' reliance on the
property tax.
Property-tax relief is a major justification for the proposal on the ballot in Polk,
Dallas and Warren counties July 10 to raise a 1-cent sales tax. The lion's share
of the revenue would be dedicated to reducing local property taxes.
Which raises the question: Does it make sense to raise one tax to reduce
another?
The answer would be yes if the new tax is seen as an improvement over the old
one. In some respects, that is true for the sales tax. A tax paid in increments of
pennies may seem relatively painless, a minor inconvenience people put up with
almost everywhere they go.
Visitors help pay
Sales taxes are paid by visitors to the community, so they help pay for city and
county services. And, to the extent the revenue is used to subsidize arts, culture
and entertainment activities, the sales tax can grow its own base by attracting
non-residents who spend money on other things while in town.
Indeed, 37 arts and cultural organizations in Des Moines generated $88 million in
regional sales in 2006, according to a study by an Iowa State University
economist for the Greater Des Moines Community Foundation. Among the 2.5
million people who attended events by those groups that year were an estimated
575,000 out-of-town visitors who traveled 100 miles or more.
Harder hit on poor?
Sales-tax critics complain that the tax is regressive - that is, low-income people
pay a greater proportion of their income to sales tax than wealthy people. This is
less true in Iowa than 11 states with the sales tax because Iowa does not charge
sales tax on food or medications. The sales tax here could be made even less
regressive, if Iowa offered credits to low-income residents, as some states do.
The property tax is also regressive in its own way, especially the way Iowa's
system works. Iowans with low or moderate incomes who rent pay their
landlords' property taxes through rental payments. In that respect, they pay
double what homeowners pay, because apartment buildings are classified as
commercial property, which is taxed at 100 percent of market value, while homes
are taxed at 47 percent.
It gets worse for renters at income-tax time in April: Homeowners can deduct
property taxes from state and federal income taxes; apartment renters cannot.
For different reasons, the Iowa system is also unfair to owners of manufactured
or modular homes, but that's another story.
Fairest? Tax income
If Iowa wanted the most progressive system of taxation to pay for local
government, it would adopt some form of an income tax that is calibrated to fairly
reflect variations in a taxpayer's income. The lowest wage-earners would pay
nothing (or receive credits), and the most wealthy would pay more as incomes
rise. Yet, for all the talk about regressivity of existing taxes, you almost never
hear anyone in Iowa propose that as an alternative.
However people may feel about the property tax, it is the financial foundation for
Iowa schools, cities and counties, and dwarfs other local sources of revenue
such as fees and user charges. If it were eliminated tomorrow, there obviously
would not be enough money to pay for teachers, police officers, firefighters,
parks, libraries or jails. The hotel-motel room tax, user fees and franchise fees on
utility bills generate minor amounts by comparison.
And, however people may feel about the sales tax, it is probably here to stay as
well. It is a staple in the vast majority of Iowa cities and counties and in 44 other
states.
The biggest difference between the sales tax and other forms of taxes in Iowa:
Cities must ask the voters for their permission to invoke the tax locally. So, if the
idea of raising one tax to reduce another seems senseless, blame the folks in the
Iowa Legislature, who write the tax laws. Local governments are only working
with what is available to them.