1. Iowa’s Property Tax System
Basic Concepts Applied to Recent Reforms
ISFIS Summer Conference June 7, 2017
Jon Muller, ISFIS Partner

2. Understanding Property Taxes
Basic Concepts Required to Evaluate System
Economics of Property Tax
Levies, Rates, and Valuations
Taxing Authorities and Taxing Districts
Applying Basic Concepts
Changes imposed with 2013 reforms
Short run impact vs. long run impact
TIF (Time Permitting)

3. Economics of Property Tax
Relative to Income/Sales taxes,
Property taxes are:
Unavoidable
Regressive
Neutral
Predictable
In General, property taxes impact wealth, income taxes impact wages and returns, and sales taxes impact prices.
In all cases, the REVENUE = TAX BASE X RATE

4. Core Variables of Property Tax
L = V X R
Levy: Dollars Collected by the tax
Valuation: The tax base to which a rate is applied
Rate: The amount of tax that has to be remitted on $1,000 of valuation

5. LEVY = Valuation X Rate
Taxing Authorities Levy Taxes: Schools, Counties, Cities, Community Colleges, Hospitals, and 11 other types of local authorities.
Property owners remit their taxes to the County Auditor, who then distributes to all the Taxing Authorities within their County, $5.3 billion total.
Schools: $2.2 billion
Counties: $1.2 billion
Cities: $1.5 billion
Other: $0.4 billion

6. LEVY = Valuation X Rate Effective Rate Vs. Levy Rate
Levy rate = the rate of tax applied to Taxable Value.
Effective rate = Levy divided by market value times 1,000.
Example:
Farmer has 200 acres with a market value of $1.0 million. The farmer’s consolidated rate (total combined levy rate) is $20 per $1,000 of taxable value. The taxable value of the land is $200,000.
The farmer pays $20/$1,000 X $200,000 = $4,000
Levy rate = $20 per $1,000 of taxable value.
Effective rate = Levy divided by market value = $4,000 / $1.0 million X 1, = $4.00 per $1,000 of market value = 0.4% of wealth.

7. Components of the Consolidated Rate
(Moving from Taxing Authority to Taxing District)
Taxing Authorities have individual levy rates that roll up to the total authority Tax Rate for each Taxing Authority (ie. School total rate = PPEL + Uniform Rate + Additional Rate + Debt Service Rate + Mgt. Rate + Cash Reserve Rate etc.)
Each Taxing Authority applies its rate to all the property in its boundary.
Taxing District = The unique geographic area where all the properties in the area share the same Taxing Authorities.
Everyone in a Taxing District shares the same Consolidated Tax Rate.

8. LEVY = Valuation X Rate What Do Taxing Districts Look Like?
County A, School A, City A
County B, School A, City A
County C, School A, City A
333 School Districts
99 Counties
947 Cities
Approx. 10,000 Taxing Districts

9. Rate Limitations
State imposed limits can either be Rate limits or Levy limits (ie. additional levy for schools, county mental health levy are Levy limits)
Rate limitations vary by taxing authority type (Examples)
Cities: $8.10 general limit
Counties:
Rural (property in unincorporated areas): $3.95
General (all property): $3.50
School Districts:
Uniform Levy: $5.40 (ceiling and floor – acts like a statewide levy)
PPEL
Board Approved: $0.33
Voted: $1.34
GO Debt Service: $4.05

10. LEVY = Valuation X Rate Valuation Issues
Assessment Calendar and Equalization Orders
Classes of Property
Determining Assessed Values – Ag Productivity Formula
Assessment Limitations
Rollback
Credits
TIF (Tax Increment Financing)

11. Assessment Calendar and Equalization Orders
Property is assessed on an assessment year calendar (January 1 to December 31)
Taxes are paid on a fiscal year (July 1 to June 30, with payments in September and March)
Results in 18 month lag from assessment to first payment
Property first assessed in January 2017 won’t be taxed until September 2018 (FY 2019)
Equalization Orders Occur in Odd-Numbered Years
Department of Revenue reviews assessment data, and determines whether various classes of property are assessed accurately (within 5% tolerance). State has a vested interest in making sure valuations are accurate
Equalization ordered by class of property within an assessment jurisdiction
In some cases (particularly ag property), State re-values where assessor chooses not to re-value.

12. LEVY = Valuation X Rate
Valuations by Class of Property – FY 2017 (AY 2015)

13. Determining Assessed Values
Residential: Market Value
Agricultural: Productivity Value, based on price and quantity of crops.
Commercial: Market Value
Industrial: Market Value
Utilities: Centrally Assessed, based on stock and debt calculation.
Gas and Electric is assessed based on generation (ie. Kwh tax).
Converted into property value equivalent
(Taxes Paid / Rate = Valuation, where Valuation is the unknown).

14. Agriculture Productivity Formula “Capitalizes Income”
Determined County by County
Determine Net Income (Revenue Minus Expenses)
Divide by 7% (Capitalization Rate Defined in the Code of Iowa)
Spread out over all the ag property in the county, so that all identical property IN THAT COUNTY has the same value.
Revenue=
+ Bushels of Corn X Avg. Price of Corn
+ Bushels of Beans X Avg. Price of Beans
+ (Repeat for all Crops)
Expenses= (BEA Expenses, Provided by ISU and others)
Property Taxes, Seed, Fertilizer, Petroleum products, labor, change in inventory

15. Agriculture Productivity Formula Example
Example – Net Income of $70 per acre equates to a productivity value (assessment value) of: $70 / 7% = $1,000
Actual calculation is a rolling 5-year average.
FY 2017 taxes are based on 2015 assessment.
2015 assessment is an average of crop years 2009 to 2013.
Property tax values may change out of cycle with the ag economy.
That amount is spread over all the agricultural property, including livestock buildings.
Adding Livestock facilities results in a reduction in assessment for all other agricultural property.
Exempting livestock buildings from the property tax would result in a direct shift to landowners, and would have no effect on owners of other classes of property (homeowners)
Curious Trend

16. Quirk of the Agriculture Productivity Formula
The Productivity Formula reduces the impact of changes in tax burden for farmers.
Property taxes are in the expense calculation.
If property tax Rate increases by $1.00 per acre in a county, what happens?

17. Assessment Limitations: Rollback
Rollback applies to all classes of property (not just residential)
Rollback Rules
Residential and Agricultural: Taxable valuation cannot grow more than 3% in a given year.
3% growth limitation is a statewide limitation - local differences can be dramatic
3% growth limitation is net of new construction.
$100K + $100K + $100K
= $300,000 Total Taxable Valuation
$120K + $95K + $110K + $150K
= $325,000 (Revaluation) + $150,000 (New)
= $475,000 Total Taxable Valuation
Year Year 2

18. Assessment Limitations: Rollback Application
Review of Rules
3% growth limitation statewide
3% growth limitation is net of new construction.
$100K $100K $100K
$120K $95K $110K $150K
Step 1: Year 1 Taxable Values - Count Them All
$100K + $100K + $100K = $300,000
Step 4: Determine Maximum Year 2 Taxable Valuation for Existing Property
Year 1 Value + Maximum Growth
$300,000 + $9,000 = $309,000
Step 2: Year 2 Assessed Values- Count Only Pre-existing (REVALUATION AMOUNT)
$120K + $95K + $110K = $325,000
Step 5: Determine Rollback Percentage - Divide the Maximum Growth Amount by the REVALUATION AMOUNT
$309,000 / $325,000 = 0.95
Step 3: Determine Maximum Growth
(Year 1 X 3% growth)
$300,000 X 3% = $9,000 Growth
Step 6: Apply Rollback Percentage to ALL PROPERTY for Year 2
=0.95 X $475,000 = $451,000 Total Taxable Valuation for Year 2

19. Assessment Limitations: Rollback Application
Apply the Rollback Percentage to EACH Property in existence in Year 2
Year 1 Taxable Value = $100, Year 2 Taxable Value = $120,000 X .95 = $114,000
Year 1 Taxable Value = $100, Year 2 Taxable Value = $95,000 X .95 = $ 90,250
Year 1 Taxable Value = $100, Year 2 Taxable Value = $110,000 X .95 = $104,500
Year 1 Taxable Value = Year 2 Taxable Value = $150,000 X .95 = $142,500

20. Assessment Limitations: Rolling back the Rollback
Ag-Residential Tie: Neither class grows faster than the other – The total taxable value of all pre- existing parcels of one class cannot grow faster than the other. So, each class’s real limit is the lesser of 3% or the taxable value growth in the other class.
The tie will be meaningless until most of us are retired. Even if assessed values of Agland fell 5% per year for 10 straight years, Taxable Values will still increase 3% per year.
Takeaway: If you run a rural district, your taxable valuations are going to be extraordinarily predictable, to the extent Ag Values are a large share of your tax base. And Statewide, Residential and Agricultural Taxable Values will be extraordinarily predictable for the foreseeable future

21. Core Variables of Property Tax
L = V X R
Levy: Dollars Collected by the tax
Valuation: The tax base to which a rate is applied
Rate: The amount of tax that has to be remitted on $1,000 of Taxable Valuation

22. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
SF 195 changed a remarkable balance
Rollback used to be 4% limit for all classes, including Commercial Property.
Law reduced it to 3% for Ag and Res, and increased it to 10% for Commercial and Industrial.
Fixed Rollback percentage for C&I. NOT an annual limit.
Under the old law, Commercial was guaranteed not to have Taxable Value growth greater than 4% in a year.
Under the new law, each year’s Assessed Valuation is rollback 10%. ERGO…..if Commercial Assessed Valuation grows 10% in a year, then it’s taxable percentage will grow 10% as well. Less stability
Created Business Property Tax Credit. Funded at $125 million per year. It’s a fixed valuation credit that works from the bottom up, exempting every owners first dollar of valuation….then 2nd dollar….then 3rd dollar….and so on until the cost reaches $125 million.
Apartments are taxed as a new class of property, at 86.25% of value. That number will fall 3.75% per year until it reaches the value of the Residential Rollback of 55.6%.

23. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
Prior to 2013, the relative share of the tax burden was relatively stable (aside from shocks).

24. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
If there was a shift in burden, it wasn’t to Commercial Property

25. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
On the one hand, the reform looks to help everyone by lower valuations.

26. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
Remember the balloons
Take-away: No one likes to be told they USED to have a good deal.

27. Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
SF 195 and Your Budgets
With Taxable Valuation growth suppressed (relative to pre-SF 195), what happens to……
Your General Fund Levies?
Management Levies and Cash Reserve Levies?
PPEL and Debt Service?
Further pressure State funding diverted to paying tax cuts. However, this amount is fixed at FY 2017 levels, and should have a more mitigated impact on the change in resources available each year.

28. Tax Increment Financing
TIF is financing tool cities use to make improvements to an area.
The city borrows money to make the improvements.
The city repays the loan with the taxes paid by the growth in taxable valuation in the area.
Taxpayers in a TIF district pay the same rate as those outside the TIF. But their payments are intercepted before they ever get to the local governments that would otherwise have received the payment.

29. TIF Allowable Purpose
Original Focus: TIF was only allowed to finance improvements to slum and blighted neighborhoods.
Economic Development Tool: TIF was then allowed for economic development. A city needs to install water and sewer lines so a company can locate in the city. The company won’t locate without the infrastructure, and the infrastructure is pointless without the company. The city TIF’s the company, so the company’s future taxes repay the cost of development.
“Economic Development” Has Evolved
Malls and other retail
Local Services
Tax rebatement – allows circumvention of 5-year abatement limit.

32. How TIFs Shift Burden (Burden Shifted to Property Taxpayers)
Freezes Taxable Valuation: TIF districts freeze the valuation for all taxing authorities in the district
Schools, cities, counties, hospitals, etc all require higher tax rates to cover the lost valuation
Local Government Normal Growth
Local Government Growth With TIF
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation

33. How TIFs Shift Burden (Burden Shifted to All Iowa Taxpayers)
School Aid Formula is based on three factors:
Taxable Valuation Per Student
Cost Per Student
Number of Students
Uniform Levy = $5.40/$1,000 of Taxable Value
As TIF Values increase, State Aid increases because the uniform levy brings in less revenue. Creates the illusion of more State Aid.
FY 2017: $58.5 million
FY 2007: $37.1 million
Increase of 57.8%, or 4.7% compounded annual growth rate
Shift to all other taxpayers, as $750 Additional Effort/Student requires higher property tax rate. Also goes for Mgt. Levy and Cash Reserve Levy. PPEL and Debt Service Exempt.
Counties, Cities, and all other Taxing Authorities impact.
Sometimes it’s a rate shift.
Sometimes it’s a loss in local government resources.
Growth has been staggering
$42 million in FY 1996
$192 million in FY 2006
$295 million in FY 2016

34. Considerations
Predictability – use modeling to forecast changes and think ahead about using cash reserve levy and management levy to smooth things out.
Use this information to explain to stakeholders why their taxes are going up, even though your schools’ revenues are not. (Someone squeezed the balloon).
Understand other local governments’ plans: when is the best time to float the bond issue or renew the PPEL? With election law changes, city and school special election dates are the same.
When it comes to more property tax relief, be careful what you wish for.  The state’s share of the formula is already significant, and the data suggests there will be a cry for help from homeowners in the short run, and a cry for help from commercial in the long run. We run the risk of a race to the bottom.

35. Contact Information
Jon Muller, Partner
ISFIS, Inc.
Ext 7