Iowa City Council proposes local-option sales tax revenue be directed to affordable housing, community partnerships

IOWA CITY — The Iowa City Council is continuing to move forward with plans to put a 1 percent local-option sales tax on the general election ballot this fall. 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 city council has proposed dividing the other 50 percent with 25 percent directed toward affordable housing initiatives, 10 percent toward public infrastructure and 15 percent toward community partnerships.

The proposed uses were developed by city staff based in part on council priorities, as well as results from a community survey and input from Greater Iowa City Inc. The city council has agreed on the uses.

“I think in all of these cases, we're funding good things. So one way of looking at it is there's no wrong answers, but we have to make an answer that sort of maximizes the benefit,” council member Shawn Harmsen said at a work session Tuesday night.

The city council still will need to vote on a formal resolution that finalizes ballot language and proposed revenue allocation percentages.

The council plans to do so at a meeting in August, leaving enough time to give proper notice to the county auditor’s office for it to be placed on the ballot in the November general election. Until then, council members have said they welcome public feedback on both the tax and percentage of revenue allocated.

“I also know that on the educational side, we can't bond for community partnerships … we have to think of this as a tool in our toolbox. I think those more creative and collaborative things are something we can use this money for, and the basic infrastructure, which is an obligation of the city government, can be funded in other ways,” council member Laura Bergus said of allocating a greater percentage of revenue to community partnerships rather than infrastructure.

A local-option sales tax requires a simple majority to pass, and would go into effect July 1, 2026. The tax would not sunset.

Potential for millions in revenue

While the city council has agreed to put the tax on the ballot, some members of the council have said a sales tax is not their first choice due to the regressive nature of the tax, meaning it will have a greater impact proportionally on people with lower income.

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.

“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,” council member Megan Alter said at a council meeting earlier this month.

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 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.

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

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.

Comments: megan.woolard@thegazette.com

Get a weekly roundup of Johnson County news by signing up for my Johnson County Update newsletter.