Property tax ratios need right balance
The flip side of the business property tax discussion is the homeowner property tax status. Managing the balance between the two is critical to the overall success of our citizens. If business taxes are too high, they will not open new facilities and hire new workers. If residential taxes are too high, families will not be able to buy homes.
We must compare the business and homeowner taxes and effective tax rates internally and with others nationally. The Minnesota Taxpayers Association’s (MTA) “50-State Property Tax Comparison Study” provides a useful overview.
The basic analysis compares the tax rate for a $1 million commercial property to the median value of a “homestead” property for each state. A ratio is generated, dividing the $1 million by the median home value. This shows whether or not a homeowner’s taxes are subsidized by commercial taxes. It is also possible that homeowner taxes are subsidizing commercial taxes. A one-to-one ratio reflects no subsidy on either side.
In FY 2010, Iowa urban commercial taxes were subsidizing homeowners by a 2.25 to 1 ratio on a median home value of $156,200 in Des Moines. This ranks 12th in the nation. The national average is a ratio of 1.64 to 1.
The five urban areas where businesses provided the highest subsidy to homeowners were New York City, Honolulu, Boston, Denver, and Columbia (South Carolina). There are seven urban areas with a one-to-one ratio: Bridgeport (CT), Manchester (NH), Newark, Charlotte (NC), Portland (OR), Seattle, and Cheyenne. In four urban areas the homesteads actually subsidize commercial businesses. Those are Baltimore (0.99), Las Vegas (0.99), Wilmington (0.85), and Virginia Beach (0.81). These ratios are affected by not only the assessed value of properties, but importantly by the rollback on the assessed value. For example, in New York City residential property is only assessed on 6 percent of the value, while commercial is assessed at 45 percent.
Additionally, when looking at the apartment property tax classification, Iowa apartment owners also subsidize Iowa homeowners by 2.25 to 1. This is fifth highest in the nation, after New York City, Columbia, Indianapolis, and Providence (Rhode Island).
According to the MTA, in the 13 states where there is little or no homeowner subsidy, overall property taxes have increased by less between 1998 and 2008 than in other states. This would appear to reflect a stable, in-balance tax system, where governments are satisfied with the money they receive and both business and residential property owners appear to be satisfied with the amount they are taxed. In states where tax rates are out of balance, either one side or the other is advocating for reform.
This is not to advocate for higher (or lower) property tax rates for either business property owners or homeowners. However, if Legislators, county supervisors, and city council members are to make decisions about our tax structure – working to ensure appropriate and fair taxation of both business and residential property – they need to know how the various categories of taxes compare, and how Iowa compares to other states.
Where the proper balance is between business and residential property tax rates, and between Iowa and other states, is yet to be decided. Iowans are interested in seeing that the tax structure is logical, easy to understand, and crafted in a thoughtful manner which considers the interests and needs of all taxpayers – whether business or individual. We are interested in ensuring that the taxes collected are used in appropriate and efficient ways. In general, neither homeowners nor business owners are interested in paying higher taxes.
The views expressed in this column are those of the author Deborah D. Thornton, Public Interest Institute research analyst, and not necessarily those of the Public Interest Institute of Mount Pleasant.