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Iowa’s error could erase millions that localities were expecting
Mistake could lead to lower property taxes — but at a cost in public services
DES MOINES — A rush is on in the Iowa Legislature to fix an oversight resulting from a previously passed property tax reform package that could mean potentially millions of dollars in lost revenue in the coming months for some Iowa cities.
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 property tax classification.
In doing so, however, no corresponding changes 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, because former multi-residential was included, said Julie Roisen, with the Iowa Department of Revenue’s local government services division. She said the department 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 homes and farms increase more than 3 percent, their taxable values are "rolled back" so that the total 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.
While that could be an unexpected relief for taxpayers, it could mean local governments have to scramble to find money to support the public services they planned.
To fix the oversight, the governor’s office and the Department of Revenue 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.
With cities and counties 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 cities, counties and school boards to either lose millions of dollar they planned on — or raise tax rates more than they wanted.
And the clock’s ticking to make a fix.
In order for the state and the county auditor to have the necessary time to administer the levying of property taxes, 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.
"The timing of (the bill) is frustrating as it changes the rollback percentage at the last minute in the budget process,“ Marion City Manager Ryan Waller told The Gazette. ” In its current form, (Senate Study Bill 1056) would eliminate more than $437,000 of revenue owed in FY 24 to our community because of our positive growth.“
Waller and Cedar Rapids Mayor Tiffany O’Donnell, who was at the state Capitol and met with lawmakers Wednesday, said they hope lawmakers will invite Iowa’s mayors to the table to help find a collaborative and sustainable solution.
“I am extremely hopeful that mayors are a critical part of this conversation,” O’Donnell said. “As a mayor of the state’s second-largest city, I am acutely aware of property taxes and the burden it can sometimes place on our citizens. I also know the expectations of our citizens in terms of the services they received and they frankly deserve.”
City Manager Geoff Fruin told the Iowa City Council this week the community would lose out on $1.7 million in planned revenue under the bill, which effectively sets a lower rollback rate of nearly 2 percentage points less. A majority of that — $1.2 million — would impact the general fund.
“At this point, all of the advice that we’re getting from the state is to proceed ahead with our hearing schedule, but we have to understand that this legislation’s been introduced,” Fruin said. “It may be entertained and passed, and if so, we will have that $1.7 million deficit, essentially, out of the gate with this budget.”
Fruin said the city has enough reserves, more than $5 million, to absorb the impact if the council decides to go that route. “We created that emergency reserve for a scenario just like this,” Fruin said. “It’s just unfortunate that it’s here before us today.”
At Tuesday’s City Council meeting, Fruin said he wasn’t ready to recommend any budget changes. He said city staff will work on analyzing options of how to overcome the challenges should the legislation pass, Fruin said.
“As you can imagine, cities across the state are sounding the alarm bells to their delegation,” Fruin said. “We’re hopeful that nothing will happen, and the rate that they advertised last fall to cities so that we could begin the budget process will be honored.”
Coralville City Administrator Kelly Hayworth said the Iowa League of Cities met with the governor’s office this week to talk about the ramifications this would have on cities. The legislation as proposed does not amend any deadlines of the budget process.
The Coralville City Council this week voted to table setting a public hearing date on setting the total maximum property tax rate until the council’s next meeting Feb. 14.
The bill is scheduled for a subcommittee hearing Monday.
“It is important for taxpayers and local governments to have clarity regarding the residential and multi-residential assessment rollback,” said Sen. Dan Dawson, R-Council Bluffs, who chairs the Senate Ways and Means Committee.
Dawson said the committee “will begin to evaluate the governor’s proposal and continue our work to protect the taxpayer.”
The bill, if passed, takes effect upon enactment and requires the Department of Revenue, within two business days, to issue an amended order certifying to the auditor of each county the percentages of actual value at which all property is subject to taxation.
"My initial take is this that it will be very detrimental to local communities,“ said Sen. Pam Jochum, D-Dubuque, ranking member of the Iowa Senate’s committee on tax policy. One county auditor, Jochum said, told her the bill would lead that county to increase is tax rate 29 cents to maintain current tax dollars. If not, county revenue would drop by $1.1 million.
Gage Miskimen of The Gazette contributed to this report.
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