Key Iowa property tax reform commitment now on chopping block
State's historic 2013 cuts came with promise to aid cities and counties
DES MOINES — When Iowa lawmakers passed a massive commercial property tax cut in 2013, they promised to backfill city and county coffers to partially compensate for the loss of revenue used to pay for roads, police and fire, libraries and other public needs.
But the state’s lackluster tax revenue growth may cause legislators next session to consider altering or phasing out a $152 million yearly commitment to help local governments absorb the tax cut — a move that likely would elicit protests from communities where economic growth already is lagging.
“A lot of counties are starting to have concerns: ‘Will that always be around?,’” said Lucas Beenken, public policy specialist for the Iowa State Association of Counties. “We’re trying to remind our legislators that was their buy-in.”
Cities and counties protected the backfill last session with last-minute pleas to lawmakers and then-Gov. Terry Branstad, who advocated for it in the first place. But now that Branstad has left state government to become ambassador to China, some legislators say the tax replacement to cities and counties is fair game to reconsider.
“For fiscal year 2019 and going forward, I think that’s an open conversation that we ought to have with cities,” said Sen. Charles Schneider, R-West Des Moines. “If we do start paring back the backfill at all, then I think the best way to do that would be to work with the cities to make sure that we’re not doing so in a manner that would require them to peel back any critical services.”
The Senate Appropriations Committee chairman said he would not consider any backfill changes for fiscal 2018, which started July 1.
Record tax cut
Branstad and lawmakers bragged about Senate File 295 as the “largest tax cut in Iowa history,” projected to provide $4.4 billion in property tax relief over 10 years as well as $90 million a year in income tax savings.
The bill attempts to achieve that relief by providing a 10 percent rollback on commercial property tax rates over two years and a tax credit for commercial property owners. It also created a new class of property — multiresidential — that eventually would whittle by half taxes on apartment buildings.
Initial data from the state Department of Management indicates commercial property taxes assessed and paid since the law’s enactment have gone down 12 percent as a statewide aggregate, from $1.285 billion for taxes payable in 2013-14 to $1.125 billion for taxes payable in 2016-17.
However, taxes payable for industrial, residential and agricultural property all have gradually increased over that same period.
The new multiresidential property class resulted in tax payments topping $155 million for the 2016-17 fiscal period.
State budget experts say it’s too early and property taxes are too complicated to say definitively whether the record tax cut is “working” to lower taxes or if it will generate economic growth as its architects claimed in 2013.
Property taxes are the product of rate shifts, fluctuations in housing cycles and new construction, and varying economic activities and property valuations, among other things.
“Good luck untangling that,” said Ted Nellesen, who tracks property tax numbers involving cities, counties, school districts, community colleges and special taxing districts for the state Management Department.
Several provisions of Senate File 295 are being phased in gradually, with the full impact of at least one provision not felt until 2022. Cities and counties with different mixes of property classes — including agricultural, residential, commercial and multiresidential and industrial — will feel the break differently.
In Iowa City, for example, nearly 10 percent of the city’s $3.5 billion total taxable value for 2016 came from multiresidential properties, a new property tax class created by the sweeping 2013 legislation. This is nearly four times the 2.5 percent multiresidential properties made up of statewide taxable valuation in 2016.
This mix isn’t surprising given the large number of apartments in Iowa City for housing University of Iowa students.
The multiresidential class, which includes apartments, mobile home parks and assisted-living centers, was carved out of commercial — previously taxed at its full assessed value — and given a progressively larger rollback each year until 2022. That year and onward, multiresidential units will be taxed at the same rate as residential property, which was about 57 percent in 2016.
Iowa City’s multiresidential properties brought in about $13.4 million in taxes in 2016 to be divvied up among government and school entities to pay for public services. The same list of properties would have brought in $16.2 million if the rollbacks had not been enacted. That $2.8 million gap in 2016 grew to $3.9 million in 2017 and is expected to increase again because the backfill is capped at fiscal 2017 levels.
“The difference between what they were going to get and what they will get is widening every year,” Nellesen said. “As they grow, their services get stretched thinner and thinner in new areas. When revenues don’t grow with value, you’d will see a reduction in services.”
Impact on LOCALITIES
The Iowa League of Cities estimates Iowa cities will lose $37.3 million in commercial property taxes this year, with the backfill covering $34.6 million of it. But that difference of less than $3 million for Iowa cities this year will become $15 million by fiscal 2024, League projections show.
“If that backfill goes away, counties and cities would be nowhere near being whole,” League Executive Director Alan Kemp said.
In theory, cities and counties could increase the tax levy rate to bring in more revenue. But most are already at the maximum rate allowed by the state.
Ninety-four of 99 Iowa counties, including Linn and Johnson, are charging the maximum general service levy of $3.50 per $1,000 of taxable assessed value, the Management Department reports. With special exceptions, counties can exceed the $3.50 and 26 counties are doing that for this year, with the highest rates in counties on Iowa’s southern border. Decatur County has the highest rate at $7.50 per $1,000.
Of Iowa’s 943 cities, 808 are at their maximum general fund levy rate of $8.10. Cities can add an emergency levy of up to 27 cents per $1,000, and 367 cities are using that to the full extent for fiscal 2018.
City and county officials who don’t want to cut public services will need to make up the difference somewhere.
“I do believe residential property owners will have a higher tax burden because of it,” Johnson County Assessor Tom Van Buer said.
Backfill at risk
Because Iowa’s tax revenues have been lower than expected, the state’s fiscal 2017 budget may have finished at least $50 million short. This is after lawmakers already made nearly $118 million in cuts and transfers last year and borrowed $131 million from state reserves.
This shaky budget picture makes it hard for Gov. Kim Reynolds and the GOP-controlled Legislature to lobby for income tax cuts — a cherished priority.
Reynolds said, as a former county treasurer who came from local government, she wants to honor the backfill commitment in the near term because local governments build their budgets on the expectation the money will be there.
But she added, “we can’t be afraid of putting everything on the table as we move forward” in making comprehensive overhauls that make Iowa’s tax structure more competitive.
Sen. Randy Feenstra, R-Hull, said the variability of communities and their economic situations makes it difficult to deal with the backfill issue on a statewide basis, given it likely would hurt areas with declining growth disproportionately and could actually result in higher taxes for some Iowa property owners.
“I think buyer beware that if we want to hold property taxes down, is cutting that backfill the wisest thing to do? Because there could be a direct effect of seeing increased property taxes in some communities,” said Feenstra, who is chairman of the Senate Ways and Means Committee.
Time likely isn’t on the side of backfill proponents, Feenstra noted. The farther away from 2013 policymakers get, fewer will feel beholden to the commitment.
Rep. David Jacoby, D-Coralville, ranking Democrat on the House Appropriations Committee and an outspoken critic of the 2013 tax legislation, said proponents promised that in three years growth would far offset the revenue reduction “and that obviously has not happened.”
Looking at his own situation, Jacoby said his small business leases its building so the relief he experienced equated to “a pizza and a beer.” He said he has not heard from other business owners that their property tax reduction caused them to expand operations or hire more.
The Coralville Democrat also noted the backfill is being funded primarily by Iowans paying state income or sales taxes — and therefore should be part of a bigger discussion of revamping and simplifying Iowa’s property tax system by decoupling property tax classes while gradually rolling back rates and examining valuations.
“Just like other tax credits,” Jacoby said, “we need a simple review of that bill and say if it ain’t working, let’s not continue to do it.”
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