Income surtax for Iowa cities makes sense, says Iowa think tank. School districts do it, why not cities?

A progressive Iowa think tank says it makes sense to let cities in the state do what Iowa’s school districts already can do – levy an income surtax.

The Iowa Fiscal Partnership says such an income surtax for cities would provide cities with a new source of revenue so they would not need to lean so heavily on their chief source of revenue, property taxes.

State lawmakers have been promising to do something about the state’s property-tax system for years. The promise has come in large part because the property-tax system hits the job-providing sector – commercial and industrial property owners – particularly hard. Those two sectors pay tax on 100 percent of their property’s value, while homeowners pay tax on only about 45 percent of value.

No one has done any more in the state of Iowa than Cedar Rapids City Manager Jim Prosser and the Cedar Rapids City Council to try to make the case for giving cities access to more diverse kinds of revenue so it can reduce property taxes and, at the same time, raise more money.

In an issue paper published late last week, the Iowa Fiscal Partnership said an income surtax is one new revenue option for cities and it is one that is simple to implement.

The group’s report notes that 82 percent of all Iowa school districts now levy an income surtax, which is computed by individual taxpayers on their state income tax return forms. The taxpayer figures out his or her state income tax and adds the percent surtax to the figure. The state then returns the amount collected via the surtax to the school district. Iowa law allows districts to collect a surtax up to 20 percent of a person’s state income tax bill, but the average levied by school districts is between 6 and 10 percent, the Iowa Fiscal Partnership reports.

A person with a $1,000 state tax bill pays an extra $50 with a 5-percent surtax.

According to the Iowa Fiscal Partnership, the city of Cedar Rapids could raise $5.8 million a year with a 5-percent state income tax surtax, Iowa City could raise $2.72 million and Marion, $1.53 million.

By way of comparison, the city of Cedar Rapids, which does not now have a local-options sales tax, figures a 1-percent local-option sales tax could bring in between $18 million and $23 million a year.

Iowa lawmakers would have to change state law to allow cities to collect an income surtax whereas they now can collect a local-option sales tax with voter approval. Counties now can collect the income surtax, but only for emergency medical services.

The Iowa Fiscal Partnership – which is a joint policy effort of the Child & Family Policy Center in Des Moines and the Iowa Policy Project in Iowa City – says the income surtax is attractive because it does not disproportionately impact low-income and middle-income taxpayers.

The group’s report points out that an income tax surtax has the ability to help one city more than another depending on the size of one city’s income tax base.

In contrast, a state formula is in place to make larger cities that are retail centers share revenue taken in via a local-option sales tax with smaller communities around them that also put the tax in place.

Every county seat city in Iowa has a local-option sales tax in place but six –- Cedar Rapids, Iowa City, Des Moines, Adel, Indianola and Ida Grove.

The Cedar Rapids City Council said it wants to put a local-option sales tax vote on the ballot, perhaps as soon as March 3.

Part of the revenue that a sales tax would raise in Cedar Rapids, no doubt, would be used to lessen or at least contain an expected significant increase in property taxes as the city works to recover from the 2008 flood.