Iowa City Council gives initial approval to take 1% local-option sales tax to voters this fall

IOWA CITY — The Iowa City Council is moving forward with plans to put a 1 percent local-option sales tax on the general election ballot this fall. If a majority of voters give their approval, the tax could raise millions of dollars each year.

At least 50 percent of the tax revenue would go toward property tax relief. Details about how the rest of the funds would be used -- and whether the tax would have a sunset date -- are still to be determined.

The council has indicated it would like to use some of the revenue for a mix of housing initiatives, public facility improvements, and community partnerships with area nonprofits.

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.

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.

All local-option sales taxes are 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.

Coralville and North Liberty also are in the process of exploring potential local-option sales tax votes.

Property tax revenue pressures

The city is continuing to face a loss in property tax revenue, historically a large source of funding for municipalities, following changes at the state level.

The state’s “backfill,” which was intended to compensate for the loss of property tax revenue from changes to the state’s rollback system, is being phased out. Additionally, the city has been limited in the amount of property tax valuation growth it can collect.

“We've been facing some recent financial headwinds that have really brought this to the forefront as an important strategy that we need to be considering in terms of the things that we are facing that really boost the need for revenue diversification away from property taxes,” Assistant City Manager Kirk Lehmann said at a council work session this week.

In terms of the property tax relief portion of the local-option sales tax, it can be achieved either through property tax reductions or “avoidance.” For example, the city could use the revenue from the tax to invest in improvements to sidewalks or roadways that the city otherwise would need to borrow money to fund.

“If you are forgoing the possibility of debt that would otherwise be funded by a property tax debt levy, that is a form of property tax relief through property tax avoidance,” said Lehmann.

While the city council ultimately decided to move forward with the process of taking a local-option sales tax to voters, the majority of council members also expressed concerns about the regressive nature of the tax, meaning it will have a greater impact proportionally on people with lower income.

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“Public policy should say we see you, we hear you and we will help you to get ahead, not just we need to tax your needs to balance our budget. While I understand the need to raise revenue I feel taxing poverty to fix poverty does not work,” said council member Mazahir Salih.

Salih said that she does not believe the tax is the best solution, but she will support moving the tax forward.

Council member Megan Alter echoed Salih’s concerns, but brought up the fact that the tax also would apply to visitors who do not live in Iowa City.

“I know of its regressive nature, and yet I think that the conditions right now are such that this is a way that we actually can feed into the community, and that there is money that is coming from outside the community that we are not able to tap into right now” said Alter.

City council members indicated they’d like to spend the tax’s revenue to help low income individuals across the city.

“I think the regressive aspects of this tax suggest that we want to ensure that the uses are supporting those who are impacted by it and I think that the categories that we have will help do that,” council member Laura Bergus said of how the tax revenue will be used.

Initial proposal from city staff

City staff presented an initial proposal that would put 20 percent of the revenue toward housing initiatives, 20 percent to public facilities, and 10 percent to community partnerships. They also proposed no sunset, which means the tax would be in effect indefinitely. The proposal was developed in part based on council priorities as well as results from a community survey.

“In economic downturns you do see a decrease, often in sales, and so it is a relatively stable funding source but that volatility does need to be considered as we're looking at uses and as we start to talk through some of those things. For example, it can be challenging to rely on LOST for operational expenses. it tends to be better suited to things like capital projects or things like that,” said Lehmann.

City council members generally agreed with the spending categories proposed by staff, but they still plan to discuss what percentage of the tax revenue should be allocated to each priority, as well as specific ballot language, prior to formally voting on a resolution.

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“I think broader language will be in the best interest of this city, and when we come back to vote on what projects we do, that's where the council responsibility is. We don't want to miss out on the opportunity that we wish we had the funds for because it was too restrictive and we couldn't do it, when it would actually really make a huge impact in our strategic plan …,” said Mayor Bruce Teague.

Past LOST initiatives in Johnson County

Iowa City previously used local-option sales tax from 2010 to 2013 to collect $34 million for flood mitigation projects. Those projects included the 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 approval.

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

Next Steps

The Iowa City Council will look to pass a resolution with finalized language before Aug. 19 so the issue can be added to the ballot in the November general election. If a local-option sales tax were to pass, it would go into effect July 1, 2026.

“ … the fact that it's a ballot initiative, I want to educate working class people of Iowa City as much as possible about this, and then they can make their choice. Because people are not going to feel the same about it, and I'm just looking forward to these discussions,” said council member Oliver Weilein.

Comments: megan.woolard@thegazette.com

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