After Iowa tax reform, cities scramble to fill budget gaps

The approximately $5,000 a year the city of Swisher devotes to replacing old Christmas decorations is among the expenses axed from the city’s upcoming budget.

It wasn’t the only spending choice Swisher leaders are making, and the city is not alone. Many Iowa cities and counties are struggling to find efficiencies to comply with a state law signed last May intended to give taxpayers some relief from increasing property assessments that are driving their tax bills up.

The bill passed in the Iowa Legislature with bipartisan support after property assessments — what the property you own is worth — increased by an average of 22 percent statewide in 2023, dramatically increasing tax bills for some.

The law limits the amount that local governments can capture by taxing a growing tax base. While the law was meant to prevent cities and counties from seeing a tax windfall from rising assessments, those with growing populations and new housing and industries are left figuring out to how extend public services to more people without being allowed to fully tap into that same growth.

As a double whammy to local governments, the state-set residential rollback rate — the percent of your home’s value that can be taxed — is the lowest it has been in 45 years. While that’s good news for homeowners paying taxes, it’s bad news for local governments because now more than half a home’s value can’t be taxed.

Swisher City Clerk Tawnia Kakacek said her Johnson County community of 914 residents had a $75,000 budget hole to fill in a proposed general fund budget of $607,127 for the fiscal year starting July 1. The city is planning to slash $7,000 for park improvements, $16,000 for future vehicle improvements, $10,000 for bridge improvements and $2,000 for disasters.

The city also will do away with planned improvements to its properties. That leaves its recently completed shop building — a new facility housing most city equipment after the roof fell in on the old one — without a fence around its perimeter to secure it, and without concrete out front. Also gone from the budget: more than $40,000 the city typically sets aside in reserves for capital equipment.

The projects either will be delayed or eliminated entirely.

“They want to look good to cut taxes up there,” Kakacek said of Iowa lawmakers. “Any time you cut taxes, what are you going to take out?”

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The new law

Simply put, property taxes in Iowa are determined by a three-legged stool: the tax rate set by local governments; the assessed valuation of property determined by the assessor’s office; and the state rollback figure, which changes every year, that determines how much of that value can be taxed.

Under the new law, cities won’t be able to capture significant growth in their property valuation. The law does this by addressing the largest single tax rate that cities set — the one that supports the general fund. If valuation growth meets certain triggers, a city will have to scale back what can be captured by that general fund levy, which will be capped for all cities in fiscal 2029 at $8.10 per $1,000 of taxable value:

In addition to that general fund levy, cities also charge levies for such things as debt service, pensions, transit, self-insurance and emergency services and more.

The law makes for difficult math in communities that are growing and attracting new workers and developments. And this was compounded by the effect of the residential rollback that this year had its largest drop — 8.3 percentage points to 46.3 percent — since 1979.

The rate, set by the state each year, is applied to the market value assessment of a property to determine the taxable value of the property. The rollback percent is directly correlated to market value increases in residential property valuations, based on sales, according to a spokesman for the Iowa Department of Revenue.

“As sale prices continue to rise it causes the ‘rollback,’ or assessment limitation, to decline to keep the statewide aggregate taxable valuation from growing more than 3 percent,” the spokesman said.

Gap ‘to make up somewhere’

For now, urban centers like the Corridor’s metro areas say they can get by despite the double whammy as long as they find efficiencies. But in some cases, the changes threaten their ability to raise city staff pay and make community amenity investments that lure people to live and work there.

Take Linn County, for example, which faces a $1.162 million shortfall from its approximately $150 million budget when it’s adopted in April. The county is scaling back community grant programs including one for events and groups that promote county history or culture and draw residents and visitors.

In Coralville, city worker pay increases are slated to cost more than the property tax revenue gains the city is allowed to keep in the upcoming fiscal year.

The city is “at about the worst position you could be,” Coralville City Administrator Kelly Hayworth said. It had a 3.06 percent taxable valuation growth — meaning it is subject to a 2 percent rate reduction.

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Under the new law, the city is allowed to keep about $120,000 of its increase in property tax revenue, Hayworth said. Salary increases alone for its general fund employees including police, fire and parks and recreation departments — all employees except for utilities workers — would cost upward of $800,000.

“There’s a distinct difference there that we have to make up somewhere,” Hayworth said.

He said staff were working to fill a remaining $500,000 gap by making relatively small spending adjustments among city departments.

Marion City Manager Ryan Waller said the city’s taxable growth last year was 9 percent, so Marion’s levy growth was reduced by 3 percent.

Waller said Marion uses zero-based budgeting, which means operating departments start at zero and build budgets from there to reflect community needs and priorities based on a survey.

Operating departments in a city’s general fund budget affected by this state-imposed levy growth cap generally include police and fire, community development, parks and recreation, finance, human resources and the city manager’s office.

While lots of new valuation came online last year — a sign of the city’s growth — Waller said “we are in the category where, because of the growth, it actually pushes us down and limits us more than if we didn’t grow as much.”

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If the city needed to reduce spending, Waller said the cuts would be more likely to come from the operational side. Items such as street projects funded by the local-option sales tax or road use taxes, or major capital projects funded through the debt service levy, would be less likely to be affected.

The city also regularly looks at the rates for user fees — for items such as building permits — to make sure they’re covering costs of staff time, Waller said.

Iowa City’s overall assessed property values increased about 18 percent, but the taxable value raised only 3.6 percent. Still, that set off a trigger under the new law and forced a 2 percent reduction in the taxable value that could be captured under the city’s general fund rate.

The city’s total property tax rate — which includes the general fund levy, as well as other levies that pay for things like debt service, pensions, self-insurance and emergency services — is proposed to remain flat at $15.63 for the second year, following 11 straight years of an overall property tax rate decline.

Meanwhile, in Cedar Rapids, Assistant Finance Director Heidi Stiffler said the city’s taxable growth was 0.98 percent — a combination of the low rollback and new property tax exemptions for military veterans and Iowans age 65 and older.

This taxable growth is down from 2.25 percent growth the city saw in fiscal 2024, the budget year that ends June 30. There was an approximately $640,000 property tax impact overall from the legislative changes and new exemptions.

The law Gov. Kim Reynolds signed into law last May provides a $3,250 exemption on the taxable value of a home owned and lived in by Iowans 65 and older as of Jan. 1, 2023. It applies for the 2023 assessment year that would have associated taxes due in fall 2024 and spring 2025. The exemption increases to $6,500 for the 2024 assessment year.

For veterans, the new law more than doubled a property tax exemption — increasing it to $4,000 in taxable value from $1,852. The exemption reduces the taxable value of the property.

Another factor influencing Cedar Rapids’ modest valuation increase was the number of property owners — more commercial and multifamily property owners than single-family homeowners — who appealed their 2023 assessments to reduce their tax bills, decreasing taxable revenue available to the city.

In the 32 inactive Cedar Rapids Property Assessment Appeal Board and District Court assessment appeals — where a decision has been made — the processes reduced assessments by about $10 million, from $139.6 to $129.6 million.

The city stands to lose more revenue depending on how the active appeals are decided. Of nearly $225 million in assessed value among 46 properties, petitioners are seeking to reduce their assessed values to $157.9 million.

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In the city’s ongoing efforts to be efficient and find cost savings, City Manager Jeff Pomeranz said Cedar Rapids has been able to cut costs by, for example, changing the city’s pharmacy provider for employee health benefits — saving about $1.5 million.

“We think, based on where we are in the budget process, that we’ll be able to handle it and maintain our existing level of service,” Pomeranz said.

Communities seek predictability

Marion’s Waller said he has spoken with area state lawmakers about advocating for a way to offer more predictability in the rollback rate to better help cities forecast financial scenarios several years out. That could mean a range where cities know the rollback will never get below a certain point, but not raised above a certain point.

“When you listen to Statehouse conversations, a lot of the businesses and others also want to have that predictability so we could better understand what the tax bill’s going to be,” Waller said.

State Sen. Dan Dawson, R-Council Bluffs, chair of the chamber’s Ways and Means Committee, said there is a long history when the state rollback is released, and local assessors already have a good sense of what the valuations will be and could help cities in their budget process. But he said he “would be interested to hear some of their feedback on that.”

It’ll be a challenge to maintain current operations and services without adding new items as the rollback and new state legislation compound budget woes, and as insurance premiums and other costs rise, Hayworth said.

“There’s not a lot of planning you can do because you don’t know what these numbers will be until the last minute,” he said.

Erin Murphy of The Gazette’s Des Moines Bureau contributed to this report

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