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Lower taxes for commercial and rental properties could hurt homeowners

BY CARTER CRANBERG | MARCH 04, 2014 5:00 AM

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County officials are trying to plug the dam; however, the need for increased taxes appears imminent.

Senate File 295, a property-tax-reduction bill signed into effect last year, is causing backlash in Johnson County. The bill’s intention of gradually lowerinf the taxability of businesses and rented properties in an effort to make Iowa more business friendly will adversely affect revenue sources.
A hefty portion of Iowa City’s taxes derives from rental properties.

County Finance Administrator Dana Aschenbrenner said the bill will put Johnson County in a dilemma.

“For Johnson County and Iowa in particular, they are scaling back the portion of taxable value for rentable real estate,” he said. “A large piece of Iowa City’s revenue comes from these rentals, and this is going to really hurt our revenue from taxes.”

The taxability of these rentals will reduce by 5 percent annually for the next 10 years, an economic practice known as “rollbacks.” To combat pressure this imposes on taxpayers, the Johnson County Board of Supervisors recently withdrew a loan in a maneuver that will allow for temporary access to property taxes they could not draw from unless the budget possessed a loan.

While this has proven to help alleviate financial stress, Aschenbrenner said it is simply a quick fix. As interest rates rise, the feasibility of using this method for assistance will drop significantly.

Another strategy County Assessor Bill Greazel has implemented is an assessment tactic called “income approach.” With income approach, the county assesses taxability based on how profitable a business is. Bill 295, which will give commercial properties a 10 percent rollback on taxes, will cause for an increase in profitability. As the business’ profits rise, so will its tax value.

While this will help to equalize the tax flux on commercial real estate, Greazel points out it will most likely have little effect on rental properties.

“I doubt landlords will lower the rent, though,” he said. “If you’re using an income approach, your income will go up from the bill, so that means the property’s value will go up. Landlords have more to profit from this, and I don’t see them lowering prices just out of charity.”

Aschenbrenner said there are currently properties with imposed freezes on their taxability, which will expire in two years. He anticipates this will make for an additional source of revenue, but expects it not to cover the full gap in revenue expected.

Johnson County Supervisor Janelle Rettig said it appears inevitable for these reductions to lead to tax increases or program cutting, unless new legislation is passed.

“I think if these rollbacks were to happen one at a time, or if they were reduced, we’d be able to handle it without a problem,” she said. “But it’s too much at once. In the long-run, homeowners may suffer from this.”


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