Income taxes are paid at the state level and are used for state government functions. Property taxes, on the other hand, are paid at the local level and used for local government functions. There is not a connection between the two types of taxes.
In the complex world of taxation, blame for painful bills is tossed around like a scalding hot potato. Local governments blame each other, and together they blame assessors, the state government, and even taxpayers themselves. Assessors, in particular, are an easy target because property owners associate increased assessments with higher taxes, while other government officials allow the math to obscure the fact that they could simply reduce rates so as not to pass along large tax increases.
In private conversations and during public events, Iowa taxpayers have been asking whether the income tax cuts initiated by Governor Kim Reynolds and the state legislature are responsible for higher property tax bills. It might seem to be a natural question, as taxpayers wonder if a reduction in one tax would lead to an increase in another. But in Iowa, that is not the case. Income taxes are paid at the state level and are used for state government functions. Property taxes, on the other hand, are paid at the local level and used for local government functions. There is not a connection between the two types of taxes. Any time there is a suggestion that income tax cuts lead to property tax hikes, it’s only a myth being thrown about to discredit tax reform and shift the blame away from the true cause of higher property tax bills: local government spending.
Recent income tax rate reductions have made local officials believe they have a pair of scapegoats: the Republican-led state legislature and Governor Reynolds. Since 2018, Governor Reynolds and the legislature have placed a priority on reducing income tax rates; by January 2025, Iowa’s top rate will have fallen from 8.98 percent to a flat 3.8 percent. The corporate rate has also been lowered from the highest-in-the-nation 12 percent, to 7.1 percent, on its way to a flat 5.5 percent.
Activists, therefore, promote the simplistic myth of a straight line from lower state tax rates to higher local tax bills. One Iowa progressive editorial asserted, “tax cuts have consequences.” According to this fairytale, tax cuts lead to budget crises, and the burden is “shifted to property taxes as schools try to maintain, and the county assumes natural resource asset management and liabilities.” Trying to make matters personal, the editorialist writes, “You may still feel the sting of your last property tax bill. Ours went up 76 percent, for a metal building along the railroad tracks.”
In short, income tax cuts are not responsible for the “sting” of your property tax bill. What drives your property tax bill up is not the assessment, the rate, or the amount of state aid, but the spending of your city, county, and school district. When the state legislature levied the first income and sales taxes in 1934, advocates sold the measures as property tax relief. What local governments got, instead, was a license to spend.
But the recent income tax reform has not created a budget crisis, or even a “projected” budget crisis. Even with the income tax cuts’ being phased-in and the 3.8 percent flat tax starting in January 2025, Iowa’s revenue remains strong. The state has run multiyear budget surpluses, including $2.05 billion for fiscal year 2024 (FY24), with no end in sight. Furthermore, the Taxpayer Relief Fund has a $3.9 billion balance for FY25, with expectations that it will increase. Two reserve accounts, the Economic Emergency Fund and the Cash Reserve Fund, are both filled to their statutory maximum levels, amounting to $961 million for FY24 and $929 million for FY25.
Thus, even if a budget shortfall were on the horizon as a result of full phase-in of the 3.8 percent flat tax, the General Fund is cushioned by the Taxpayer Relief Fund, which was created for this very purpose. We shouldn’t stop there, though. Even if less money were to make its way into state coffers, the revenue is not lost; rather, it remains with taxpayers in the private economy. This result goes directly to the health of Iowa’s fiscal foundation.
What about the “sting” of your property tax bill? In fact, the state legislature has taken steps to alleviate pressure from property taxes, such as abolishing the county mental health levy and assuming that burden in 2021. Forty-eight Iowa counties declined to pass along the full amount of these savings to taxpayers. Twenty-three counties actually raised their overall rates.
Behind all these distractions, cities and counties do not want taxpayers to notice that their spending continues to increase. Over the last 20 years, property taxes in Iowa have increased almost 110 percent, which is far above the combined growth of population and inflation. This trend held before, during, and after the first income tax cut in 2018. Overall, local governments will consume over $6 billion in property taxes this fiscal year alone.
Even after the legislature placed “growth limits” from property assessments on cities and counties, which they have decried as “budget cuts,” spending continues to increase. On average city and county spending is growing over 6 percent for the current fiscal year, a far greater pace than the state budget. That differential does not mean local governments subsidize the state’s lower spending growth. Apart from aid for public education, which can affect property tax bills, Iowa’s state budget structure does not provide substantial transfers to local governments. The property tax is the primary source of their revenue.
For lower property taxes, local governments must follow the example of Governor Reynolds and the legislature, not blame them for their troubles. Conservative budgeting and spending restraint will result in tax relief. Local governments must get their spending under control, starting with a zero-based budget approach that does not simply take the prior year’s budget and increase it by some percentage.
When taxpayers ask why their property tax bills are so high, the answer is not that other tax bills are low, but that local spending is high. Regardless of the tax, it is spending that drives the level of taxation.
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