Policymakers need to learn from history that reforms relying on tax shifts, “buy downs,” assessment limitations, and the state swooping in seldom work.
At one time, Iowa relied entirely on property taxes to fund state government. In 1921, the state levied its next major tax—a two-cent-per-package “sin” tax on cigarettes. Then, in 1934, as a response to the economic struggles of the Great Depression, Iowa introduced its first sales and income taxes to provide property tax relief. While these new revenue sources helped offset property taxes, over time, they led to heavier tax burdens across the board—a lesson policymakers should remember today.
Currently, like many states, Iowa is grappling with high property tax bills. Raising or creating new taxes to lower others is not sound fiscal policy. Some states are considering broadening their sales tax base or increasing sales tax rates to reduce property taxes. While broadening the sales tax base can be beneficial, it must be approached carefully to avoid unintended consequences.
Iowa’s property tax system is complex, and past reforms haven’t yet provided sustained relief because they didn’t address the core issue: government spending. Often, high property taxes are blamed on the assessment process, leading to calls for limitations like California’s Proposition 13. However, assessment limits also have unintended consequences, such as distorting property values and complicating the system further. These limits can also discourage property improvements and lead to skyrocketing costs when properties are sold, as seen in California.
Another flawed fiscal policy is using the state budget or General Fund to “buy down” property tax rates. This occurred with the 2013 property tax reform measure that provided commercial property tax relief. The legislature created a “backfill” payment to compensate for lost revenue to cities and counties, capped at $152 million starting in FY 2017. Though intended as temporary, local governments came to expect the backfill as a permanent funding source. However, with rising property tax revenues, many cities and counties no longer needed the payments, prompting the legislature to phase out the backfill in 2021. Beginning in Fiscal Year 2023, the backfill has been undergoing a phase-out over a four-to-seven-year period, depending on the growth of a given city’s or county’s tax base.
The backfill exemplifies the problem of attempting property tax relief without restraining local government spending. In 2022, the legislature eliminated the county mental health levy, shifting the funding burden to the state General Fund. Although this should have provided property tax relief, many counties actually increased their rates instead. These examples show that shifting costs to the state budget is ineffective and unsustainable.
The root cause of high property taxes in Iowa is local government spending. Without spending control, tax rates will remain high, regardless of the tax. Over the past 20 years, property taxes in Iowa have increased nearly 110%, far outpacing inflation and population growth.
Addressing spending is the best mechanism to provide property tax relief. This is what Governor Kim Reynolds, and the legislature have done in order to lower income tax rates. With prudent budgeting and reforming government, Iowa’s income tax rates have been substantially lowered. Local governments can follow the same approach.
Reforms such as levy or budget limits can help control local government spending. Implementing a 2% property tax cap could save taxpayers $250 million a year. This would be a commonsense fiscal policy reform, which would begin to provide property tax relief.
Iowans are demanding property tax relief as the budgets of too many local governments are growing beyond the ability of the taxpayer’s ability to pay. Addressing spending is never easy because the voices demanding more spending are often louder than the taxpayers clamoring for relief. Policymakers need to learn from history that reforms relying on tax shifts, “buy downs,” assessment limitations, and the state swooping in seldom work.
The solution for true property tax reform and relief can only be found in limiting local government spending.
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