The Sales Tax — A Complex Issue with Plenty to Think About
even if you have already decided how you're going to vote 

by Helen D. Gunderson, Gazette editor
September 14, 2002

During the last few days, I've given the upcoming sales tax election considerable
thought. The process began when I attended the forum for candidates running for the
Gilbert school board. Then I talked to the superintendent at Pocahontas which is my
home county (my alma mater high school at Rolfe no longer exists.) I asked the
superintendent about a lawsuit I had heard the school is supporting that asks for
changes in the sales tax. He referred me to another superintendent, then I did some web
research and talked to people from the Iowa Department of Education and the Iowa
Association of School Boards.

In some cases my preconceived notions about the sales tax were incorrect or only
partially true. In other cases, my research reinforced what I already knew. Indeed, the
process was a learning experience.

Even if a person has already decided how to vote in the election, it would be wise to
consider the full spectrum of issues related to the sales tax measure and the health of
our schools. The matter is sufficiently complex that I have not tried to write a succinct
or well-woven essay. Instead, I have prepared segments of thought that hopefully will
be helpful and have at least a modicum of continuity. 

Regressive taxes put unfair burden of cost of education on the poor:

Let's say a family making $20,000 a year spends $10,000 on taxable purchases. That
means it is taxed on 50 percent of its income. Take another family making $55,000 a
year that spends $20,000 on taxable purchases. It is therefore taxed on 36 percent of
its income. Take yet another family making $150,000 a year that is able to save much
of its income and spends only $30,000 on taxable purchases. The family is therefore
taxed on only 20 percent of its income. The result is that the heaviest burden of a sales
tax plan is on low-income tax payers.

On the other hand, according to Margaret Buckton of the Iowa Association of School
Boards, the Iowa sales tax law is unlike some states and exempts several basic
commodities — things such as food, medicine, and heating bills. Because of this, she
says, the sales tax in Iowa is less regressive than property taxes.

It is also important to note that low income people are hit hard by property taxes, even
if indirectly. Many of these families live in rental properties, which by Iowa law are
categorized as commercial property and taxed at 100 percent of their accessed value.
The landlord may be the one writing the property tax check to the county treasurer, but
the cost is passed on to the renter. People who own their homes are taxed on only 60
percent of the assessed value of their homes. 
  

Gradual sales tax increase vs. in your face property tax hike:  

There's the old analogy that if you put a frog in cool water and gradually bring the water
to a boil, the frog will be oblivious to the danger and die. However, if you throw a frog
into boiling water, the frog will leap out and not be injured. A sales tax is like the first
option. It starts out comfortable but is gradually increased with hardly anyone noticing
any burden from the tax. The reason people rail at property tax hikes is because the
increases are blatantly in their faces when they open their annual assessment envelope
from the court house. 

One benefit of property taxes is that people who itemize their federal and state income
tax returns can deduct property taxes. Let's say that the family making $55,000 a year
who spends $20,000 on taxable purchases lives in a county with the one percent
special sales tax for schools. The family would then be paying $200 for the one cent
levy. If the state instead had allowed schools to generate the extra revenue by raising
property taxes, causing the family to pay an extra $200 in property taxes, the family
could deduct the $200 from its federal taxes. Subsequently, if the family was in the 30
percent tax bracket, it could save $60 in taxes, and the federal government would
indirectly supporting the school district to the tune of $60.
  

Sales and property taxes are both inequitable in supporting education:  

The public elementary and secondary schools of Iowa have traditionally been
supported by property taxes. It has only been since 1998 that the state has allowed the
citizens of a county to adopt a special, one cent sales tax for schools. 

Across the state, 55 percent of the students are part of schools that receive income
from the tax. The cities of Ankeny, Urbandale, Johnston, and Saydel bring in $916 per
student per year via the plan. Meanwhile, 45 of Iowa's students percent receive zip
because their counties have not authorized the sales tax.

One economist at Iowa State estimated that Polk County alone will bring in $250-300
million over the next 10 years from the local option sales tax.

Even if all the counties in the state adopted the plan, there would still be vast inequities.
There is a chart that projects the amount of money per student that would be available
to schools if the every county were part of the plan. Iowa City would be at the top with
$937 per student, and Wapello would be at the bottom with $102. We recently talked
with an economist at Iowa State who says that recent estimates show an even broader
disparity between the top and bottom recipients of the tax.

Ames would rank 30th of the 371 school districts on the chart with $796 per student,
and Gilbert would rank 43rd with $781 per student. The average amount each district
across the state is projected to receive per student is $437, meaning both Ames and
Gilbert would be among the elite.

However, a person could do a similar analysis to determine the property tax capacity
per student per district and find great disparities in that tax scheme, too.

There has been a lot of outcry from Iowans lately — from citizens, the media, and
politicians — about the unfair reimbursement of Medicare funds by the federal
government. Iowa is last on the list, and it's easy to understand the chagrin and desire to
change the system. It is also easy to understand any chagrin resulting from the
disproportionate way in which the local option sales tax will benefit students across the
state.
   

Sales tax leakage from one school district to another:

If a Gilbert resident traveled to West Des Moines in recent years to buy clothes, a camcorder, or cabinet  — say to the tune of $1000 — he or she would have shelled out $10 in local option sales taxes. That ten dollar bill could have benefited many things in the Valley West Des Moines school district. But get this, the West Des Moines superintendent ear-marked $8 million of the funds the district received from the local option tax to pay for his district's new and extravagant football stadium that opened this fall. That's an example of sales tax leakage — when a citizen makes retail purchases outside his or her own district. It's also an example of questionable use of tax dollars. It wouldn't be surprising if Gilbert folks cringed at the idea. Indeed the amount of funds that West Des Moines spent on a football stadium could just about provide Gilbert with its dream of a new middle school. (Fortunately, the administration of the Gilbert schools has been wise and drafted a plan that specifically spells out how it will use its sales tax revenue — if the measure is passed — and the projects on the list, including the middle school, are clearly educational in nature.)

Now let's look in another direction. Say that Story County adopts the special one percent sales tax measure. Then let's say a family from Pocahontas County in northwest Iowa drives its truck down for a Cyclone football game. It goes shopping before the game, because of the excitement of going shopping out of town but also because there are few retail opportunities back home. The family gets $200 worth of pocket T-shirts and Lee jeans at the Story City outlet mall, $300 worth of Nike shoes at North Grand Mall, $1800 worth of wood for a new deck from Lowe's, a $250 computer printer from Staples, a $30 bag of dog food from Sam's Club, and $50 worth of CD's from Hastings. That's a total of $2630 with $26 in sales tax — from just one family on one trip to the area — and it will go toward the education of Story County students. Currently, Pocahontas County has not adopted the sales tax, but even if its citizens voted for the measure, the students in the district there would benefit to the tune of only $226 apiece compared to $781 for each Gilbert student. 

Many outlying, rural areas are losing their population and prosperity and need every drop of revenue they can generate. Will the Gilbert school administrators, parents and student feel proud to see their school prosper at the expense of the less fortunate districts?

It's not as though the prosperity of the Gilbert school district is the result of any righteousness on the part of the town or area citizens in terms of economic development. Nor are the less fortunate districts responsible for their dilemmas. Frankly, there is little in terms of retail activity in the Gilbert district, and the main reason it would prosper  — and have a significant amount of sales tax revenue to build its new middle school and auditorium — is because of its proximity to Ames and the retail activity there. 

There is a demographic movement going on in Iowa, and whether pleasant or not, it will continue its course. The agricultural economy that undergirds rural neighborhoods and towns is, for the most part, in trouble. People are moving from those areas to the oasis's of the state — places such as Ames, Des Moines, and Iowa City. The people left in the dying areas of the state do what they can to maintain a decent culture, develop industry, and encourage retail business, but it is a daunting task that possibly cannot be won. Gilbert instead benefits from being near Ames and Iowa State and being part of one of the few oasis's of the state.

(For a full story about the new football stadium in West Des Moines see the September 13 edition on the Des Moines Register's sports section.)
   

Coalition for a Common Cents Solution files lawsuit against state:

There is an organization called a Coalition for a Common Cents Solution with the sub-title: "Iowans for an Equitable Statewide One Cent Sales Tax." The coalition's stated mission is, "to improve education for all Iowa students and to correct the educational and taxing inequities found in the current local option sales tax through the passage of a state-wide sales tax for school infrastructure and property tax reduction." 

The group has initiated a law suit against the State of Iowa over the inequities of the local option tax with more than 160 school districts joining in the suit. According to a news report on WHO TV on April 4, 2002:

The state filed a motion to dismiss the suit, but apparently a judge has agreed to rule on it on October 4, 2002. That's four days before Story County's election.

If the coalition wins it's suit, the state will be forced to re-write the sales tax law. Presumably, then, the sales tax would become a state-wide levy with all students across the state benefiting equally. However, counties who have already adopted the tax and schools who have already begun planning to pay for new structures with the tax would be "grandfathered." It is not clear if Gilbert would qualify for "grandfathering" if the judge ruled in favor of a statewide tax on October 4, then on October 8, the citizens of Story County passed a local option measure.

Perhaps some school leaders and citizens in Story County will push to pass the vote so the districts in the county will get in "under the wire" and be "grandfathered." Ames would have an estimated $796 per student per year for the next ten years and Gilbert having $781. That's a lot of revenue and significant projects. Then after the ten years, both schools would have to ease back from those levels to the state-wide average, which perhaps would be $437 per student. However, to push too much simply for a district to get in under the wire seems a little greedy.
  

The role of the state legislature in funding education: 

It was clear at the the forum for candidates running for the Gilbert school board, that the biggest issue facing the district is that of increased enrollment and finding the money and space to maintain the quality of education people expect from the district. The best argument for the local option sales tax that we heard at came from Jim McKean who has served on the board since 1993 and was re-elected last week. He admitted he has had his reservations about the one percent sales tax. Some of his reservations were similar the points we have discussed above. However, Jim also said the sales tax plan is the only tool the state legislature has given schools to generate funds above what they receive through property taxes. And therefore, he concluded, Gilbert needs to use that tool. After the official forum was over, Jim used the game of bridge as an analogy and said that a player holding a single ace or trump card needed to play it.

A question could be asked, though, regarding what our local school leaders and citizens have done to influence the state legislature to support education in other ways. Most likely, Gilbert constituents have gone to great lengths to influence their state senators and representatives. If not, they should do more lobbying.

It appears that significant players in the Iowa legislature are unwilling to risk voting to raise taxes at the state level in order to benefit the elementary and secondary students of Iowa. According to one person we spoke to today from a state agency, "The legislators are taking the cowardly way out. They are putting the monster (of finding ways to fund education) on the shoulders of the citizens — county by county — and even when and if all the counties pass (the sales tax), there still will be inequities."

Margaret Buckton at the Iowa Association of School Boards told us of her views regarding the upcoming election. She said Gilbert voters need to ask what the needs of their school are and determine the tools that will meet those needs. She added that, although she is pushing for a change in legislation to adopt a statewide sales tax for education, she would not sacrifice the needs of her own students when entering the voting booth. Therefore, if she were in Story County, she would vote for the special one cent local option tax for school infrastructure.

However, Margaret also talked about the need for citizens to think broadly and consider the health of other districts. We asked her what specific steps could be taken toward that end. She suggested that school leaders and citizens:

1. urge their school board to pass a resolution in favor of the law suit filed by the Coalition for a Common Cents.

2. urge their school board to pass a resolution in favor of the state wide penny tax for schools.

3. contact their state lawmakers to report how significant of an asset the one cent sales tax will be for the Gilbert students and ask that legislation be changed so all elementary and secondary students across the state can benefit equally from the tax.
     

Benefits of doing away with sales taxes and raising income tax rates:

In doing our research, we became aware that some research has recently been
completed at Iowa State regarding the relative effectiveness of an income
tax versus sales. 

The study shows that if all sales tax plans in the state were revoked and funding were
based solely on increased income taxes, the state would have an additional $100 million.

The hypothesis of the study is based on the fact that Iowans cannot list a deduction on
their federal income tax returns for the money they spend on sales taxes. However,
Iowans can claim a deduction on their federal forms for what they pay in state income
taxes. 

A shift from a sales tax plan to increased income taxes may have merits for the reasons cited by the study. The shift would also put the burden of financing education more equitably on the whole spectrum of tax payers — the poor to ultra-rich. But it will be tough — if not impossible — to get state lawmakers to take the risks to make the changes.

(Editor's note: the study will be posted on the web site for The Center for Agricultural and Rural Development. Look for the working paper, Are All Taxes Equally Bad? How Replacing Iowa's Sales Tax Could Save Iowans More Than $100 per Year. The authors are Harvey Lapan, GianCarlo Moschini, and Brad Caruth.)
  

Gazette recommendation:  

We will not urge you to vote for or against the sales tax on October 8. There are plenty of factors to consider, and we trust you to use your judgment. However, whether you vote for the measure or not, thank you for sifting through all the issues and please consider finding ways to make funding more equitable for all of Iowa's elementary and secondary students.