Iowa Tax Shift Plan
|August 16, 2003||Posted by Staff under Progress Report, The Progress Report|
A REVENUE NEUTRAL TAX SHIFT PLAN
For thriving cities, productive business and industry, livable wages, affordable housing, effective schools, sustainable use of natural resources
Iowas Current Problems:
Severe shortfall in state and local tax revenues
Over taxation of the state economy by $5.4 billion
Depletion of natural resources, environmental degradation
Families suffering from low wage jobs, low quality housing
Business and industry suffering from high prices for land, high rents
Caused by: Excessive Spending on Property Tax Relief (PTR)
Tax cuts on land Rent force taxation of Wages and Interest.
Property tax on buildings (1846) a tax on Interest earned by Capital.
Income tax (1934) on Wages and Interest earnings
Retail sales tax (1934) on Wages and Interest earnings
User charges for public goods (1846) on Wages and Interest earnings
Landowners capitalize tax cuts on land, raise land prices for builders
High land-prices force Entrepreneurs & Builders to expend capital to acquire land after which they must pay a high rate of property tax on their buildings and face a market reduced by government taking of wage and interest income from consumers along with landowners perpetual taking of land rents.
Wages to Labor and Interest to Capital are earnings from productive effort. Land is passive, a gift of nature. Land on its own cannot produce wealth. Rent paid for use of Land is therefore a taking from Wages and Interest. With Property Tax Relief taxes also take Wage and Interest earnings from producers. With No Property Tax Relief government shifts from a taking (taxing) of Wages of Labor and Interest of Capital to a taking of Rent taken by landowners from the Wages of Labor and the Interest of Capital.
Solution: TAX LAND MORE, BUILDINGS LESS
a. No tax on new buildings in cities or on that for farm, utility or railroad use.
b. Tax all land at 100% actual value.
c. Cut taxable percent of building values to limit growth of combined values to 4%.
d. Cap actual valuations of all classes of buildings at Jan. 1 2002 assessments.
e. Assess utility and railroad lands and easements separately from capital values
f. Authorize city levy to fund credits for city minimum water/sewer charges
g. Replace two-cents of five-cent state sales tax with state property tax levy.
h. Encourage local governments to replace local sales tax with property levies.
i. Allocate $70 more in state road funds per capita to cities, towns and townships
Explanation: Modifies tax system to collect more Land Rent and cut taxes on Wages and Capital by permanently exempting new construction in cities and by farmers, utilities and railroads anywhere from property tax, lowering the taxable value of existing buildings, shifting cost of city mandated minimum water/sewer services from households and businesses to local land-owners, cutting state and local sales tax by forty to fifty percent and raising state and local tax rates to fund state and local government. Increasing the allocation of state road funds to cities, towns and townships returns locally generated gas tax receipts to local governments to reduce property tax levies.
Expected growth in actual land values from increased demand for land on which to erect tax-free buildings and no change in annual growth limits of combined land and improvement values will gradually lower taxable improvement percentages (rollbacks) for each property class.
Capping stops Assessors and Boards of Review from raising improvement valuations when re-evaluating property in response to higher prices for land caused by developers bidding for building sites.
New incentives to improve properties or sell to producers
No tax ever on new construction increases demand for land, labor and capital
$1.76 Billion savings for Iowa consumers to spend or invest
$369 million in water/sewer bills (estimated at $411/dwelling unit)
$957 million sales tax collections (from state sales tax reports)
$438 million on existing buildings (calculated from 1997 assessment data)
$145 Million aggregate cut in deadweight tax on Polk Countys urban economy
Landowners pay more tax on land but can invest in tax-free improvements or sell
181% more on residential lots
45% more on commercial, industrial and agricultural land
User charge and sales tax cuts offset property tax increases for most homeowners
Tax impact on Polk County township agricultural class land
Current landowners pay $10 more tax per acre
Buyers capitalize tax rise to lower land price, pay $10/A tax instead of $10/A interest.
Added tax on land an incentive to develop new uses of agriculture land
Absentee landlords more likely to sell land to owner-operator farmer
Families supply labor to produce high value products instead of low value bulk product
Diversion of fragile land to tax exempt uses such as riparian protection, wetland or forest
Add income by leasing sites for wind power, broadcast towers or other high value uses
Attract investment in buildings required for value-added production
Town development will increase markets for farm products cut farm supply costs
Developers will look to farm product processors and marketers to occupy new sites
Also manufacturers and vendors of farm equipment and supplies to occupy developments
Commercial Class Property Downtown Des Moines $2.3 Million Current Land Price
Avoid $1.4 million tax on $32 million building
$95,000 less taxable income (state & Fed.)
Consumers have more to spend
50% less tax on retail sales
Builder Free water/sewer @ minimum usage
$0.4 Million land price after capitalizing
tax increase on land
$95,000 tax increase on land Tax shift to land lowers land price barrier by amount of capitalized tax
Tax Shift raises land values in economically depressed urban residential areas
(Des Moines current combined building and land tax equals 51.6675% (rollback) X 4.437746% (tax rate) versus revised taxable value with land at 100% plus buildings at 38.285% times 6.44153% tax rate)
Aggregate values of 13 dwellings on 173,369 sq. ft. (Des Moines) Land tax
Bldg. Tax Increases
Ex: Sherman Hills
*(To build 40 new SFR units @ $120,000 ea., move salvageable units to infill other blocks)
Even after paying $555,000 for land the builder can project a $7,000,000 development value after capitalizing tax shifts and savings of $3,684/unit ($2,757 bldg. tax, $524 sales tax for $25,000 household income and $409 user charge). With rising tax on land cutting speculative profits from just hanging on and new residential development competing for buyers or tenants owners of low value dwellings will more readily accept a builders offer when they can invest proceeds in new affordable units. Subsequent development of both residential and commercial land will pressure even more owners of under-used sites to improve or sell. Overall each community can expect an increased supply of affordable housing and places for business along with increased demand for land, labor and capital.
With greater reliance on property tax on land Iowa can have:
- Economic development
- Environmental protection
- Tax cuts for businesses and families
- All tax revenues as levied, no shortfalls
- No jail for failure to file or pay
- Rising personal incomes*
(*High tax states that also rely heavily on property tax have higher per capita personal incomes but high incomes not likely to cause high property tax. Personal income per capita for the top ten states in 1993 was 48% greater than for the bottom ten, all taxes 71% greater and property tax 173% greater (Mason Gaffney and Richard Noyes, Losses of Nations ed. Fred Harrison, Othila Press, 1998.)
So who needs a Tax Shift?
Young people, families and businesses do. The state now sticks families with $5.4 billion in deadweight taxes on earned income, dilapidated buildings and vacant urban lots that produce no business, no industry, no jobs, no affordable housing and too little fun. In FY2000 Iowas 1.2 million families paid 60% of $2.6 billion property tax, 58.3% of $2 billion sales tax, 90% of $0.3 billion corporate tax, 100% of Iowas $2 billion personal income tax and $0.4 billion in municipal user charges. They also paid over $2 billion in land rent and billions more in higher land prices to the 250,000 landlords who control most of the land but who paid only $0.5 billion tax on land they own. (percentages from KPMG, Peat Marwick, 1993, Iowa Tax Study, amounts from Dept Revenue & Finance Annual Report FY2000).
Given low taxes on land and $7 billion less for families to spend landlords have no pecuniary obligation to invest in affordable housing and new businesses when they can make more speculating on land. State and local governments spend money to encourage economic development but can never have enough to be effective.
Tax Shift is an effective remedy.
It permanently exempts new construction in cities and that by farmers, railroads and utilities from property tax. It cuts $1.76 billion from Iowas $5 billion in deadweight taxes by substituting $1.76 billion in state and local levies on the 100% actual valuation of all classes of land for three-cents of state and local sales tax and minimum city water/sewer bills. It also avoids spending tax money to aid the private sector in re-developing urban sites served by existing infrastructure.
It opens high-value city land to building new or keeping-up existing buildings. Developers seeking sites for tax-free buildings bid up land prices at the same time the rising tax on land raises the cost of keeping land idle. Taxable percentages and taxes on all buildings will soon fall to zero since rising land values will push combined property values beyond Iowas 4% annual growth limit. Cuts in deadweight property and sales tax and tax cuts from less state and local spending on economic development will raise family and business income, the key to economic growth everywhere.
Some say landowners shift land taxes to consumers or, if not, the capitalized tax reduces the tax base. Neither are so. Landowners can raise rent only if tenants can pay more but a rise in land tax wont of itself raise tenant income. Besides, newly improved properties will compete with older properties for tenants. As to the tax base it can rise only with increased productivity from better use of land.
Others claim property taxes take more from poor families than from the wealthy. The fact is wealth derives from ownership of land but most low-income families own none. For those who own a reasonable amount of land opportunities for higher earnings and tax cuts offset the higher tax on land.
Wrong to fear higher taxes on farmland
Excessive prices for farmland are actually capitalized farm subsidies and tax expenditures for property tax relief. Rising land prices dont raise soil productivity but do raise collateral values for landowners who can rely on cash flow from state and federal subsidies to buy more land. They, and 120,737 landlords, control as much as 72% of Iowa farmland. Their subsidized rent-seeking drives price-busting over-production of bulk crops to the harm of all farmers and local communities. Higher taxes on land and cuts in deadweight taxes will encourage sale of farmland to owners more able to practice economically efficient and sustainable production of diversified crops.
Tax shift builds homes and creates job, business, and farm opportunities.
Shifting taxes from wages and profits to land raises earned income for families and businesses and lowers after-tax land-rent income. It therefore spurs landlords to relinquish farms to farm operators and residential, commercial and industrial lots to owner producers who can make best use of the land. By investing in tax-free improvements such as housing, farm and commercial buildings, factories, railroads and energy production and delivery systems landlords become entrepreneurs who hire labor (create jobs) to produce housing and open new businesses and factories in cities and towns without reliance on government aid. Everybody wins. (Feb. 2002)
By Robert P. Willis, 3921 Columbia, Des Moines, IA 50313. See also www.progress.org