Iowa City local-option sales tax ending

IOWA CITY - A special sales tax being collected in Iowa City to help fund flood-related projects ends this month, but it may not be gone for good.

The 1 percent local-option sales tax, narrowly approved by voters four years ago, expires Sunday after generating more than $34 million for the city for two high-priority public works projects.

City officials are interested in exploring the possibility of bringing the tax back at some point for other purposes, such as property tax relief, especially given the property tax reform approved by state lawmakers this spring that could cost Iowa City tens of millions of dollars

They emphasize, however, that no one is calling for that to happen yet.

“But there is a willingness to include it on the list of possible revenue sources for the future,” Mayor Matt Hayek said.

Of Iowa's 936 cities, 865 will have a local-option sales tax on Monday, according to the Iowa Department of Revenue.

For now, though, the sales tax rate in Iowa City will drop to 6 percent from 7 percent on that date.

The Iowa City Council called for a countywide election on the sales tax increase in early 2009 to get money for projects following the 2008 flood.

The sales tax passed in Iowa City by just seven votes in May 2009. It also passed in several small towns in Johnson County, which also will see it sunset this month. It notably failed in Coralville by eight votes.

Iowa City is expected to collect nearly $34.4 million from the local-option sales tax, said Dennis Bockenstedt, Iowa City's finance director. Of that, $24.7 million is still to be spent.

Iowa City projects

All of the money is going toward two projects: the elevation of Dubuque Street and Park Road bridge, known as the Gateway Project, and the expansion of the south wastewater treatment plant.

Dubuque Street is prone to flooding, including this year, and the bridge acted like a dam in 2008 with 52 tons of debris removed from its upstream side. The project will cost $40 million, with construction scheduled for 2015-16.

The north wastewater treatment plant, which flooded in 2008, is to be decommissioned and the south plant expanded. Construction on the $54.8 million project is under way and is to finish next year.

City Manager Tom Markus said if not for the $34 million in sales tax funds, the city probably would have had to issue bonds to borrow money for the projects, which would have increased property taxes.

When the tax failed in Coralville, there was some concern about Iowa City stores having a disadvantage with the higher sales tax rate, but businesses have reported that the difference ultimately had little effect, said Nancy Quellhorst, president and CEO of the Iowa City Area Chamber of Commerce.

The chamber endorsed the tax in 2009 because the flood projects would benefit retailers by protecting them, and roads used by shoppers, from flooding.

Terry Dickens, a City Council member and co-owner of Herteen and Stocker Jewelers in downtown Iowa City, agreed the tax has played little role in sales, saying he can't think of any shopper ever mentioning it.

Dickens, other council members and Markus said they are interested in discussing bringing back the local-option sales tax.

Property tax worries

A major reason is the new state law that will decrease the amount of property taxes paid by the owners of commercial property and apartments.

The state has promised to backfill some of the losses to local governments, which rely heavily on property taxes to fund operations, but local officials are doubtful that will happen.

In Iowa City, the estimated reduction in property taxes over 10 years is $51.7 million, Bockenstedt said. The state is expected to backfill $14.7 million of that.

“Obviously, you're either going to end up cutting some services, which is not a good thing, or you're going to have to fund those services another way,” said council member Michelle Payne.

The City Council, at Markus' urging, has made it a point to decrease the property tax rate the past two years. Hayek said the state tax reform “will threaten that progress.”

“And this will require careful budgeting and forecasting and will force us to consider all revenue sources, whether property tax or otherwise,” he said.

Hayek and Markus said they expect the local-option sales tax to be part of the discussion when work begins this fall on the city budget for next fiscal year.

Voters must approve the tax, so any case would need to be made to them. Using the tax to keep the property tax rate lower than it otherwise would be, known as property tax relief, is receiving the most attention right now.

“It's kind of a win-win for everyone, and the 1 percent is very minimal,” Dickens said.

Quellhorst said she could not speculate on the business community's stance on something that hasn't been proposed, but she said retailers are “pleased to have a level playing field and proud to have been a part of the (flood) mitigation effort.”