The Register’s editorial • May 22, 2010
Iowa’s property-tax system has many bizarre features. For example:
It’s possible for three nearly identical buildings on the same street to have three different legal descriptions: One may be defined as an “apartment” building, one as a “condominium” and one as a “cooperative.” Although all three might operate the same way, with all units rented out to tenants, the owner of the first building will pay more than twice as much in property taxes as the owners of the other two.
Unfair? You bet. Simple to fix? Not a chance.
The difference is due to Iowa’s property classifications. Real estate is divided into separate classes based on its use – commercial, residential, industrial, agricultural, etc. Buildings with three or more rental units are classified as commercial property because they are considered business enterprises. This would not be a problem, except that residential property enjoys a huge tax break not available to commercial property due to what’s known as the “rollback.” The current rollback reduces the assessed value of residential property to less than half the value of commercial property.
This shifts some of the cost of local governments – schools, cities and counties – from residential to commercial property. That is an impediment to economic development in communities struggling to attract and preserve new businesses, including Main Street shops. Elected officials have made numerous runs at fixing this problem, but they inevitably run smack into brick walls.
Meanwhile, the inequities of Iowa’s property-tax system are exacerbated by property owners who exploit loopholes. In the case of apartments, owners discovered they could sneak a new multi-unit development into the residential classification by calling it a “condo,” even if they never sell any of the rental units. This left owners of existing apartment buildings with significantly higher tax bills than their new competitors, so they began converting their buildings into condominiums.
After local governments saw a stampede coming – and a loss of tax revenue – they got the Legislature to discourage such conversions by requiring that older buildings first be brought up to current building code, which requires installation of costly improvements, such as sprinkler systems.
Those who can’t afford upgrades seized on yet another loophole to fit the residential classification: calling their apartments “cooperatives.” Des Moines, West Des Moines and perhaps other cities have retaliated by requiring them to be brought up to code in an effort to stop another stampede.
It’s hard to believe the courts won’t eventually declare the inequitable tax treatment of similar properties unconstitutional.
It’s equally hard to believe a solution exists that everyone will like. A change that treats all multifamily rental housing equally – which is only fair – runs into a wall of opposition from building owners opposed to paying higher taxes, or from local governments that don’t want to lose tax revenue. The potential loss is not small change: Polk County officials calculate converting all commercial real estate would cost local governments nearly $19 million annually (Des Moines alone would lose $9 million).
Long range, the only solution is an overhaul of the tax system, including eliminating inequities created by the rollback. The only politically realistic way to do that, of course, is to lower taxes for all non-residential property, which means providing new sources of revenue to make up for what local governments would forfeit as a result. That would provide much-needed relief for all commercial property owners, and relieve taxpayers from scouring the law for loopholes.
The group's mission is to “Protect the property rights of private property owners in Iowa and to serve as a resource for those owners to more fully enjoy the privileges of property ownership.”