This legislation delivers more transparency and spending restraint for taxpayers. However, future property tax reform must be pursued and include strong budget or spending limits applied to entire local government budgets.
A wide-ranging package of property tax reforms were approved inside the Iowa State Capitol this week, as a compromise bill (HF 718) passed both legislative chambers with overwhelming bipartisan support. Property tax reform was a high priority for legislators throughout the 2023 session, as concerns about escalating property taxes were one of the most common issues that legislators heard about from their constituents. During this year’s session both the House and Senate introduced several different property tax reform measures, with the final version estimated to deliver $100 million in direct tax relief, while providing additional transparency and enhanced taxpayer protections.
Prior to the start of the legislative session, ITR Foundation published Property Tax Toolkit: Solutions to Iowa’s Growing Property Tax Problem. The toolkit provided a history of the property tax in Iowa, a recap of recent changes to the system, and, most importantly, a number of reforms that could be considered to make Iowa’s complex and burdensome property tax system more taxpayer friendly. When legislators approved HF 718, they enacted several policy solutions that align with the ITRF Property Tax Toolkit. Some of those recommendations include levy consolidation, direct notification, November-only bond elections, adjusting levy rates as valuations rise, and reducing the State’s cost for urban renewal practices.
Levy Consolidation and Rate Reductions as Valuations Rise
The first major component of the property tax reform measure is consolidating property tax levies and creating a new formula, which establishes a “soft cap” to control the impact of valuation growth. The soft cap and growth recalculation will be implemented starting in fiscal year 2025 and then sunset out in fiscal year 2028. Numerous county levies will be consolidated into the general levy with exceptions such as debt service, EMS, flood and erosion, law enforcement, and natural disaster, among others. A handful of city levies will be consolidated into the general levy with similar exceptions.
The consolidation of levies will not only add more transparency, but the new formula created by the reform will help control the growth of property taxes. For counties the general basic county level will have a max of $3.50 per $1,000 of taxable value and the rural basic county levy will be $3.95 per $1,000 of taxable value. The city general fund levy rate is set at $8.10 per $1,000 of taxable value.
The “soft cap” is then applied based upon valuation growth. This is reflective of the various levels of economic growth of cities and counties across Iowa. Under the measure, if taxable valuation grows more than 6 percent or higher, the growth rate would be reduced by 3 percent. If taxable valuation grows from 3 to 5.99 percent, then the growth rate is reduced by 2 percent. And if the taxable valuation grows less than 3 percent no reduction will occur. In addition, this new formula allows counties and cities that are below their general fund levy cap to increase rates, whiles those that exceed the max levy can bring the rates back down to the maximum level.
The second major provision of the reform measure is requiring local governments to comply with a direct notification provision. Direct notification requires cities, counties, and school districts to send each property owner a specific notice that provides detailed information about their individual property taxes and the annual budget hearing. Under the measure county auditors must send the notices no later than March 20 of each year. The direct notices must contain the following information:
Further, the measure requires local governments to establish a budget hearing where taxpayers can provide oral or written testimony in regard to the budget. Cities, counties, and school districts must follow certain requirements of posting the local budget hearing notices in newspapers, on their respective internet sites, including social media, and posting the notices in public areas.
Direct notification is an important taxpayer victory because it not only requires local governments to be more transparent, but it forces them to justify potential new spending. It also will help taxpayers navigate the complex property tax and local government budget process by personalizing the information so they can see how a potential increase will impact their own property tax bill.
November-only Bond Elections
Another aspect of this year’s property tax reform measure requires multiple taxing authorities to hold bond elections in November. One problem at the local level is that Iowans are aware that elections take place in November each year, but they don’t have the same awareness about the many special elections that may occur throughout the year. Many special elections include financial questions that directly affect property taxes and determine some of the most-important decisions affecting local property taxpayers, yet the voter turnout for these questions is a fraction of the turnout achieved during general November elections.
By moving bond elections to the November general election, it will encourage greater participation and hopefully encourage local governments to rein-in the debt they are willing to heap onto taxpayers.
Urban Renewal Reforms
Finally, the reform measure changes some of the provisions of Iowa’s urban renewal process. While ITR Foundation still questions the effectiveness of the multiple urban renewal practices at the disposal of local governments, what is not in question is the cost to the State’s budget, which is forced to backfill abated property tax dollars to local school districts. Now urban renewal districts that offer abatements will no longer apply for exemption from tax levies imposed by the school district, which means that the State will no longer backfill that lost revenue back to the school district. It also provides some additional scrutiny to commercial property, which requires developers to enter into agreements with the city or county.
Other Relief Items
In addition to the reforms outlined above, HF 718 includes additional relief measures, some of which include:
Perhaps one of the highlights of the property tax reform measure is what was not included in the final compromise. The original House property tax reform proposal called for a reduction in the school tax levy from $5.40 to $4.40, which would shift that portion of the education funding formula to the State’s General Fund, with the Taxpayer Relief Fund serving as the means to pay for this additional cost to the State. Iowa has a 90-year history of trying and failing to offer property tax relief by shifting expenses from the local level to the State, as our income and sales taxes were enacted in 1934 with that very goal in mind. Unfortunately, generations of policymakers have enacted similar shifts, with little lasting impact on property taxes. It was important that this round of reforms focused on prudent restraints and transparency measures, and not simply moving more dollars to the State’s budget.
Additionally, any property tax plan that would have tapped into the Taxpayer Relief Fund would have been a mistake because if enacted, it would violate the original intent of the Taxpayer Relief Fund, which was created for the purpose of income tax relief. In addition, this would have violated sound budgeting principles by using one-time money for an ongoing expense. Finally, legislators need to remember that the dollars flowing into the Taxpayer Relief Fund are a direct result of over-collecting income and sales taxes from taxpayers and should be returned to those taxpayers in the same way.
Other items in earlier versions of property tax legislation this year included solutions that while well-intentioned, may have proved to be too complex or unworkable. Some of these reforms would have shifted more of the burden to commercial and industrial properties, while adding complexity to an already complex property tax system. Still more proposed changes to the system could have had the unintended consequence of stifling new development by capping bills for existing properties while leaving newer construction unprotected from the spending whims of local governments. Avoiding the raiding of the Taxpayer Relief Fund, as well as sidestepping any changes that would have left collateral damage or unintended consequences, were policy victories themselves.
How Should This Be Viewed?
The legislation Iowa’s House and Senate agreed to achieved important taxpayer victories, especially regarding direct notification and levy consolidation; delivering more transparency and spending restraint is a win for Iowans. Citizens will now be given more information and more opportunities to engage in the process of local governance. But HF 718 also leaves the opportunity to tackle additional property tax reform in the future. It is imperative that the next round of property tax reform further attacks the source of high property taxes, local government spending, with a strong budget or spending limit that would be applied to the entire local government budget.