Iowa City Council finalizes 1% local-option sales tax language

IOWA CITY — The Iowa City Council unanimously approved a resolution Tuesday that will put a 1 percent local-option sales tax on the ballot this November. The proposal is part of an effort to diversify the city’s revenue sources in light of property tax reform at the state level that limits the amount of revenue the city can collect.

A simple majority vote is required to pass the tax, which would go into effect July 1, 2026. Under state law, 50 percent of the revenue must be put toward property tax relief. How the rest of the money is used is up to the city.

The Iowa City Council has proposed the other 50 percent be split, with 25 percent directed toward affordable housing initiatives, 10 percent toward public infrastructure and 15 percent toward community partnerships. The tax would not have a sunset date, meaning it would need to be repealed by voters.

Iowa City’s language reads, “50% of such revenues to be allocated for property tax relief; and the specific purpose(s) for which the revenues shall otherwise be expended is: 25% of such revenues to preserve existing affordable housing stock, increase shelter, transitional, and permanent housing supports, and increase access to and the supply of affordable housing for households with low incomes. 10% of such revenues for maintenance and construction of public streets, sidewalks, trails, parks, and facilities as designated by City Council. 15% of such revenues for community partnerships, including, but not limited to, partnerships that support intergovernmental, economic development, arts and culture, and social service priorities as designated by City Council.”

Even though the council unanimously approved taking the tax to voters, the majority of council members have expressed concerns about the regressive nature of the tax, meaning it will have a greater impact proportionally on people with lower income.

“While this is a regressive tax, we're going to call it what it is, it does have large benefits for the most vulnerable in our community. And let's face it, funding is being reduced all around and this is one way that we can really help to keep the services that we currently have as well as enhance opportunities for more services for those most in need,” Mayor Bruce Teague said at the city council meeting.

Potential for millions in annual revenue

City staff estimate the tax could bring in as much as $8-10 million in annual revenue. However, that estimate could change, as the number of cities within a county participating in a local-option sales tax can affect the revenue each city collects.

Local-option sales tax revenue is collected at the county level and then distributed to participating cities using a formula from the Iowa Department of Revenue that takes into account population and property valuations.

In Johnson County, voters in Swisher, Solon, Lone Tree and Hills passed local-option sales tax measures in the mid-2010s. Tiffin passed a local-option sales tax in fall 2023, and University Heights in fall 2024.

North Liberty residents will vote on a local-option sales tax this fall and Coralville is looking to do the same and could approve ballot language at a city council meeting later this month.

Iowa City and Ankeny are the only two Iowa cities with a population of more than 50,000 that do not have the 1 percent local-option sales tax in addition to the statewide 6 percent tax.

Past local-option sales tax initiatives in Iowa City

Iowa City previously used local-option sales tax from 2010 to 2013 to collect $34 million for flood mitigation projects. Those projects included Dubuque Street reconstruction, work on the south wastewater treatment facility, and Riverfront Crossings Park.

In 2014, due to state laws at the time, the cities of Iowa City, Coralville, North Liberty, Tiffin and University Heights voted on a local-option sales tax as one bloc.

The measure was rejected by 54 percent of voters. However, within Iowa City, voters gave the tax narrow approval with 50.3 percent of the vote.

The city has not put a local-option sales tax in front of voters since the 2014 effort.

Comments: megan.woolard@thegazette.com

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