Sir Isaac Newton compiled three laws of motion. The third is relevant here. As you recall from your high school physic class, a “body in motion will stay in motion.” This law also applies when studying politics, particularly when it comes to Republicans and taxes.
When it was disclosed the new Iowa Legislature, now once again under firm GOP control, was considering residential property tax relief, it is safe to assume there will be tax reductions. Once the majority party starts talking about tax cuts, they do not stop until they are accomplished. Our history will prove this with just a cursory review of the past legislative sessions. Governor Branstad’s last full term brought a $4.5 billion cut in property taxes, primarily on commercial interests, coupled with an executive order for another $100 million in business equipment credits. The last session saw the largest reduction ever in state income taxes that, when done, will reduce state coffers by another $1.5 billion.
Democrats, who it is rumored have never met a tax cut they didn’t hate, will instinctively oppose it. But since they can’t stop it, this opposition is futile. I suggest a different course. They should support it because it will reflect the contrast between the parties on this issue.
To understand why this is suggested, it is necessary to remember how residential property taxes work. A home’s value is determined by what is the fair market value of the residence. Then, with the rollbacks (state mandated reductions in value) and credits, like homeowner’s or disabled veterans’ homestead exemption, the taxable value is set.
Our county assessor’s office, either online or by pamphlet, uses the example of a home determined to have a retail value of $150,000. After the state mandated rollbacks, the taxable value is $83,000 and the tax, after further credits, is approximately $2,990 annually.
Before projecting what should be the Democrats response, it should be made clear wealth in and of itself is not evil or ill-gotten. In fact, to my book, some of the greatest heroes of the American economy are sales representatives, like your financial adviser, the insurance salesperson or your small business owner.
Those individuals with their own talent and industry go out, earn a living and become wealthy. For that achievement they should be admired, not simply taxed because of their success.
But when it comes to tax relief, I don’t think at this time if you can afford a $1 million home you need a tax break. Not an increase, but not a reduction. If Democrats are smart, they will propose a tax break for homeowners with a value not exceeding $250,000. Here is why.
First, all the tax cuts we have experienced have been top heavy. That means those with the most, who need it the least, get the most. This is true whether it is income taxes, capital gains, dividends or property. Those who need it the most
receive the least.
High income earners who receive the cuts, we now know, don’t spend it. The money is used for stock buy backs, mutual funds or other investments and does not spill into the economy. Individuals at the lower earning scale simply spend the tax break, mostly to simply meet ongoing monthly expenses.
We also are aware middle income earners are no longer purchasing houses. This is despite the current relatively low mortgage interest rates. The causes of this are several, but probably include income stagnation and student loan debt. Trends indicate we are more and more becoming a nation of housing renters, but healthy home ownership is vital to a strong domestic economy.
By proposing a targeted “little guy” tax cut, Democratic legislators set up a sharp contrast with the supply siders of the Republican majority. A step in this direction frames a significant contrast between the two parties for next year’s election.
The first step in this process is to accept Newton’s third law.