(The Center Square) – Iowa dropped a place in a business property tax ranking this year for the first time since at least 2019.
It now ranks 39th in the property tax component of the Tax Foundation’s State Business Tax Climate Index. The property tax component assesses state and local taxes on real and personal property, net worth, and asset transfers.
Tax Foundation Senior Policy Analyst Katherine Loughead told The Center Square in an emailed statement Tuesday that she anticipates Iowa’s tax competitiveness will improve as the state’s recently enacted tax reforms phase in. For example, while Iowa’s inheritance tax hurts its tax competitiveness, that measure will improve once the tax is fully phased out in 2025.
“Iowa’s property tax system is nonneutral in that it shifts a disproportionate share of the burden onto commercial properties while providing preferential treatment to agricultural and residential properties,” she said. “Despite this, Iowa has an above-average effective property tax rate on owner-occupied housing and above-average property tax collections per capita, which hurts Iowa’s score on the property tax component of the Index.”
Iowa fares more poorly in this category than most states in the Midwest. Indiana has the best business tax climate in terms of property taxes. Ohio ranks sixth. Missouri is eighth, and North Dakota is 10th. Iowa does better than Nebraska (40th) and Illinois (48th).
State and local property taxes are among the largest tax burdens for businesses across the nation, the report said.
“Although taxes on real property tend to be unpopular with the public, a well-structured real property tax generally conforms to the benefit principle (the idea in public finance that taxes paid should relate to benefits received) and is more transparent than most other taxes,” the report said.
Taxes on intangible property, wealth, and asset transfers are harmful, however, the report said.
“States that levy such taxes – including capital stock taxes, inventory and intangible property taxes, and estate, inheritance, gift, and real estate transfer taxes – are less economically attractive, as they create disincentives for investment and encourage businesses to make choices based on the tax code that they would not make otherwise,” the report said.
“Businesses with valuable trademarks may seek to avoid headquartering in states with intangible property taxes, and shipping and distribution networks might be shaped by the presence or absence of inventory taxes.”
The 2022 State Business Tax Climate Index report was released in December 2021. The property tax component accounts for about an eighth of the index’s score.