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Ups and Downs

Here's the Balance Sheet on School Infrastructure Sales Taxes

The Gazette

February 5, 2007

[Note: This material is copyright by The Gazette, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of The Gazette.]


Voters in Linn and Johnson counties go to the polls Feb. 13 to decide on collecting a 1 percent school infrastructure local-option sales tax for the next 10 years. If approved, the tax would begin July 1.

 The issue:

The pros

•• Local-option sales taxes, especially in retail-rich counties like Linn and Johnson, bring in revenue from people living outside the trade center.

•• That ‘‘pull factor’’ in the Iowa City/ Coralville metro area is 3.1 — meaning for every sales tax dollar generated by city residents, an additional $2.10 is collected from non-residents.

•• The Cedar Rapids/Marion metro area pull factor is 1.97. For every dollar paid by city residents, another 97 cents comes from people outside the cities.

•• The sales tax is a lucrative and predictable tax, allowing schools to budget accordingly. It is easy to administer and costs little to collect.

•• The more affluent pay more in sales tax annually, making it somewhat progressive.

•• Sales tax is not collected on groceries or medicine, which represent major expenses for people on fixed incomes. It is collected on retail items, like clothing and furniture, where some buyer discretion is possible.

The cons

•• A sales tax reduces the spending power of lower-income people by the amount of tax they pay.

•• Property taxes — the other funding mechanism for school infrastructure — are deductible from state and federal income taxes if you itemize your taxes (generally those with higher incomes).

•• The average family would pay more in a 1 percent sales tax in a year than it would to pay off a bond issue. Example:

•l Property taxes: The owner of a $100,000 home in Cedar Rapids is paying about $48 a year on the $46 million bond issue voters approved in 2000.
•l Sales taxes: The Institute for Taxation and Economic Policy in Washington, D.C., estimates a non-elderly family with an annual income of $54,000 would pay an extra $200 to $230 a year for a 1 percent sales tax; a family earning $35,000, an extra $135 to $165 a year; and a family earning $8,000, an extra $40 to $50 a year.
Citizens for Tax Justice estimated in 2002 that a non-elderly Iowa family earning between $44,000 and $65,000 spends $2,202 a year on sales tax, meaning a 1 percent tax would cost an extra $440 a year. That seems high, in that much family spending — house payments, utilities, groceries, medicine — is not subject to sales tax.

 Depends on your outlook

•• Sales taxes are collected on a pay-as-you go basis and can finance school building projects without paying the millions in interest required by school bond issues.
•• Bond projects are a tough sell, requiring 60 percent approval from those voting. A sales tax requires the approval of 50 percent of the voters plus 1 for enactment, making it easier for school districts to pass.
•• A 1 percent sales tax is relatively invisible because you pay the extra pennies as you go and not a lump sum, as with property taxes.
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Sources: Dave Swenson, an economics professor at Iowa State University, Ames; Peter Fisher, professor of urban and regional planning at the University of Iowa, Iowa City.