Local governments take a hit in Statehouse property tax deal

At first sight, a property tax reform deal is like a unicorn.

It's astounding, really. You figured you might not live to see one. But there it is, with enough votes to actually pass the Iowa Senate and House. A strong gust of bipartisan compromise ripples dramatically through its snowy mane.

Then, you note its razor-sharp horn. And you worry that someone may get gored.

Turns out it's local governments.

The bill approved as the Legislature adjourned Thursday contains $3.87 billion worth of property tax relief over the next 10 years, according to the non-partisan Legislative Services Agency. Commercial property owners, homeowners, farmers and the owners of “multi-residential” properties, such as apartments and nursing homes, all get potential tax benefits. State leaders get to campaign on the remarkable compromise they crafted after decades of futility.

Local governments, still dependent on property taxes, get a very big state I.O.U., and likely will lose revenues.

IS PROMISE GOOD?

Lawmakers are promising to “backfill” $3.13 billion of that tax relief over the next decade using state dollars, offsetting some of local government revenue losses. Even if that promise is kept, cities, counties and schools would still lose $741 million, with roughly half of that loss absorbed by cities and urban counties, according to the LSA.

But a promise is a promise, right?

“I just don't believe it will be backfilled,” said Linn County Supervisor Brent Oleson, a former top legislative staffer who has seen plenty of previous state promises broken.

“I just think that property taxes are not going to get reduced. And there's not going to be any backfill. And I just think it's a bunch of empty promises going forward,” Oleson said. “But that's just me being either cynical or realistic, as I like to say.”

Oleson points out that although the bill limits the growth of property value assessments to 3 percent annually, it doesn't limit tax rates. It also doesn't cancel any of a myriad state-mandated duties and services performed by local governments.

So while state leaders tout tax relief, they'll be leaving local officials in a position where they might actually have to raise tax rates. “So where's the real relief?” Oleson said.

The limit on assessment growth could penalize growing cities. On WMT radio, Cedar Rapids Mayor Ron Corbett pointed to Westdale Mall, which plunged in value but is now poised for major redevelopment.

“The way we're interpreting the bill, its (taxable) value can only grow at 3 percent. We don't think that's right,” Corbett said.

Lawmakers looked at raising the state's gas tax, which would have provided more money to local governments for road projects now being paid for with property taxes. Fuel prices rose and skittish lawmakers dumped the idea.

But look on the bright side, it could have been worse.

Gov. Terry Branstad's original property tax plan called for a massive series of property tax reductions and tight local budget limits. In fact, in this compromise, the governor gave up three-quarters of the commercial tax relief he wanted.

“Clearly, it's come a long way from initial discussions,” said Cedar Rapids City Manager Jeff Pomeranz. He acknowledges the challenges posed by lost revenue, but also understands why lawmakers tried to fix the system.

FAIRER, NOT BETTER

“There's no question that the commercial property tax system in Iowa is unfair,” Pomeranz said.

Lawmakers, to their credit, did make the property tax system somewhat fairer. The problem is, they didn't make it better.

Making it better would have meant taking a hard look at state mandates on local governments. It would have meant rethinking the way local governments are funded, trading property taxes for other sources of revenue while giving local officials and voters the freedom to choose other options. It would have meant realizing that although tax relief can be an economic help, job growth also relies on healthy cities and counties with the resources to provide basic services and maintain critical infrastructure.

It would have required Statehouse leaders to think more like partners and less like parents when it comes to dealing with the needs of local governments. The tax deal is an impressive work of political negotiation, but it could have been a lot better.

Maybe future legislatures will tackle those fundamental issues. Once you've seen a unicorn, anything's possible.