By Sarah Curry, DBA
At the end of the 19th Century, Iowa levied property taxes on just about everything. Yes, real estate and homes like we do today, but also jewelry and other personal property, household goods, and intangibles such as mortgages, bonds, and stock holdings. Taxes were widely felt to be burdensome, unequal, and unfair, leading many Iowans to hide their belongings and avoid the tax collector.
To remedy the situation, the State of Iowa enacted a tax inquisitor law in 1900 that allowed cities or county boards of supervisors to hire private tax investigators to assist with the collection of property taxes and to find more property on which to collect them. These contractors became known as “tax ferrets.”
Tax ferrets were typically recruited from distant places, so they were unencumbered by local ties. Their payment system also motivated them with hefty shares of any taxes they managed to collect. Iowa law allowed tax ferrets to be paid based on commissions ranging from 15 to 60% of their takings. Iowa, along with nine other states and several large cities, authorized the use of tax ferrets to seek out undeclared tax liabilities.
Many Iowa counties employed tax ferrets. Historical newspapers from across the state reported on these ferrets and their investigations. On November 30, 1901, for example, the Dubuque Telegraph-Herald reported that Edwin Albee had been ordered to pay $5,000 in back taxes, which was equivalent to around $175,000 today. Reports from Polk County found that, between 1869 and 1909, the county added $7.7 million (around $250 million today) to the county tax rolls thanks to ferrets.
Unsuccessfully challenged in the courts, Iowa did not repeal its tax ferret law until the historic 1911 tax reform. Unsurprisingly, the Association of Iowa Tax Ferrets argued against the repeal.
Prior to this episode, in the 1890s, some Iowan voices called for the General Assembly to overhaul the state’s system of taxation, but those in power at the time opted for tax ferreting as the simpler solution. With an eye on the growth of government during an expansive era of the Industrial Revolution, officials sought more money rather than a more-rational tax regime. For their part, taxpayers felt they were being taken advantage of and, therefore, poorly represented, so they found ways to avoid paying what was demanded. Tax ferrets created a system of coercion and fear and exacerbated this civic friction.
Voluntary compliance is both a key principle of a reasonable tax system and a hallmark of a healthily representative government. Consider how the engorgement of the IRS is currently amplifying the divisiveness of our national politics. When taxpayers don’t buy into government’s claims of fairness and good intent, they are less inclined to comply. In turn, officials conclude that stronger enforcement is needed, which makes taxpayers distrust government even more.
As it was at the beginning of the 20th Century in Iowa, this cycle is a sign that a tax code needs fundamental reconsideration to make it simpler, fairer, and more transparent.
Iowa has done an outstanding job on this front since the 1900 tax ferret law. The reforms of the last few years have shown that simplifying the tax code improves the relationship between government and the taxpayer. Nationally, the federal government should learn a lesson from Iowa’s experience, and within the Hawkeye State, local governments should take a closer look at their own history.