Cities plead for delay in fixing erroneous property tax formula

DES MOINES — Representatives for Iowa’s cities, counties, school districts and community colleges urged lawmakers Monday to delay for a year changing the property tax rollback rate for residential properties to fix an oversight from a previously passed property tax reform package.

What would be an unexpected relief for taxpayers could mean local governments have to scramble to find money to support the public services they planned for the next budget year, mayors, city managers and lobbyists told lawmakers.

City, county and school officials asked for the delay to allow local governments to absorb the financial blow with more time to plan for adjustments and soften the impact.

“Our members feel a little bit like Charlie Brown and the football,” said Noah Tabor, a lobbyist representing the Metropolitan Coalition that represents Iowa’s largest cities, including Cedar Rapids.

“The goal post moved,” Tabor said. “The change proposed in this bill are logistically just unworkable. They go the wrong direction in terms of transparency. They force things to be rushed. We would love to see a delay, kicking this out a year to allow this process to unfold in a more methodical manner.”

Lawmakers in 2013 passed a property tax cut package that, among other provisions, gradually lowered property taxes on multifamily residential units like apartments, nursing homes, mobile home parks and manufactured home communities to where they would be taxed at the same rate as all residential property by 2022.

And in 2021, Gov. Kim Reynolds signed a law including multi-residential properties in the residential property class beginning in the 2022 assessment year for taxes due in fall 2023 and in spring 2024. The bill eliminated multi-residential as a classification.

No corresponding changes, however, were made to the section of Iowa Code that defines the mathematical formula used to calculate the number used to establish the statewide taxable value for each property class subject to taxation by cities, counties, school districts, community colleges and other taxing entities.

The result: A higher percentage for residential property as a whole.

The Iowa Department of Revenue didn’t catch the oversight until October, when staff calculated the property tax “rollback” rate. The rate is set annually by the department and is designed to cap the total taxable value for homes and farms from increasing more than 3 percent. If aggregate property values for them increase more than 3 percent, their taxable values are "rolled back" so the increase statewide is 3 percent.

With former multi-residential erroneously included, staff calculated a rollback rate of 56.5 percent — compared to what should be 54.6 percent.

“So the consequence is residential property owners … will be paying a penalty, or effectively a property tax increase” contrary to what lawmakers intended, said Sen. Dan Dawson, R-Council Bluffs, who chairs the Iowa Senate’s committee on tax policy.

To fix the oversight, the governor’s office filed a bill in the Senate that carves out all former multi-residential properties from calculating the property tax rollback rate for 2022 residential property tax assessments.

But with local governments now in the throes of setting their budgets to take effect July 1, the error by the state has thrown the process into disarray and may cause some to lose millions of dollar they planned on — or raise tax rates more than they wanted.

Cities and counties are required to have their budgets approved and certified to the state and county auditor by March 31. School districts are required to have their budgets set by April 15. Dawson proposed amending the bill extending the budget deadline for cities and counties to finalize their budgets from March 31 to April 15.

But 603 of Iowa’s 938 cities already have set their maximum levy based on the rollback rate published by the state, said Daniel Stalder with the Iowa League of Cities.

Iowa City could lose out on $1.7 million in planned revenue under the bill, according to city officials. Marion City Manager Ryan Waller told The Gazette he estimated the city could lose out on more than $437,000 of revenue.

Tom Cope, a lobbyist representing Coralville and Cedar Falls, noted the only communication cities and counties received about the rollback rate was the 56.5 percent number published by the Department of Revenue in October.

“Every city finance person then started the budget process … and reasonably relied on that number,” Cope said, adding there was no correction from the department.

As a result, the city of Coralville passed a resolution Jan. 24 setting its maximum tax levy and a Feb. 14 public hearing on its proposed 2024 fiscal year budget.

“They had gone through all of the hard work of the budgeting process,” Cope said. “All of those hard decisions have been made. … Don’t move the football. At least give us a year to plan.”

In the end, the subcommittee advanced the bill for further discussion by the Senate Ways and Means Committee. Sen. Pam Jochum, D-Dubuque, declined to sign off.

“As much as we’d like lower property taxes, at the same time our citizens want safe communities, good schools and quality of life back home,” she said. “So we’re caught between a rock and a hard place in many ways in trying to navigate these waters right now. I certainly don’t see a problem in trying to delay it, and, personally, I’d even like to see us maybe do some kind of backfill to help keep everybody whole in the meantime.”

Dawson acknowledged there should have been better communication by state officials.

“To delay is likely a property tax increase for property tax owners,” he said, however. “This is why the property taxpayers struggle … (because of) one formula calculation all these taxing entities come here advocating to keep it higher, and the property taxpayer is wanting to know who is going to advocate for them.”

Comments: (319) 398-8499; tom.barton@thegazette.com