GOP property tax bill focuses on school levy, assessed values and transparency

Republican legislators want to reduce Iowans’ property tax costs with new rules on how cities, counties and schools determine value and fund projects. But some of the proposed restrictions would throw Iowa’s property tax system into “chaos,” representatives of local governments said.

Republicans in both chambers highlighted property tax changes as a top goal for the 2023 legislative session. But as the state government does not have direct control over administering or receiving these funds, Iowa legislators cannot directly set new rates for taxpayers.

What they can do is change and introduce new rules to set limitations on increases local entities can make, House Speaker Pat Grassley said, as well as introducing new transparency measures. House Republicans introduced House File 1, a property tax reform bill, with their first batch of legislation of the session.

“Our focus in the House is going to be not only on providing relief, but changing the narrative from certainty always existing on the government taxing authority entity side, and shifting that over to making sure there’s certainty for the taxpayer,” Grassley said. “And the thought behind that is we can continue to provide relief and provide relief. But if Iowans aren’t genuinely seeing it in the form of relief … there’s a problem here.”

Lobbyists representing local entities said while they supported efforts to relieve the stress of high property taxes, the legislation could have major impacts on infrastructure and projects in Iowa communities. Lucas Beenken, a public policy specialist with the Iowa State Association of Counties, said the proposed changes would make it more difficult for counties to provide services residents enjoy and expect.

Property taxes are levied by the government entities of the jurisdiction where the property is located. There are more than 2,000 levying authorities in Iowa, which include entities like cities, counties, school districts, and hospitals. Property taxes are the largest revenue stream for many Iowa localities, Beenken said, and changes to that system could mean cuts to services Iowans rely on.

“So where do you cut, right?” he said. “Do you take law enforcement off the road? Do you put off resurfacing a road or replacing a bridge that’s in disrepair?”

Gov. Kim Reynolds did not bring up property tax legislation in her Condition of the State message last week, nor were any potential effects of changing property tax collections factored into her proposed budget. But Senate Majority Leader Jack Whitver said he wasn’t concerned by Reynolds not weighing in.

“As long as I’m majority leader, we’re going to continue to look at tax reforms or tax cuts,” Whitver said.

The legislation includes three major components:

Reducing the levy for school district property taxes

Iowa currently has a uniform levy set for school foundation property taxes across Iowa, of $5.40 for every $1,000 of taxable valuation is set. That means if you own a home assessed to value of $100,000 in the Des Moines Public Schools district, you owe $540 through the school foundation property tax, which will go to the school district.

There are currently exceptions to that $5.40 levy rate, in recently reorganized or dissolved school districts. People with property in affected areas have lower rates for two years following the change, with a rate of $4.40 for the first year and $4.90 for the second, before returning to the $5.40 rate from the third year on.

The legislation House Republicans have proposed would reduce all applicable school foundation property tax rates by $0.50. If the bill becomes law, most property in Iowa would be taxed at a rate of $4.90 for every $1,000 of assessed value. It also means those who own buildings or land in recently changed school districts would have two years of a $3.90 and $4.40 foundation property tax rate.

Dave Daughton, the government relations director for School Administrators of Iowa said while this proposal would lower individuals’ property tax costs, that money was not being taken from schools. The 50-cent deficit in levy rate, which he said would total about $102 million, would be made up in state aid, he said.

Lawmakers have not yet received a fiscal analysis of the bill from nonpartisan legislative staff.

Even if lawmakers agree to replace or “backfill” property tax revenues to local governments, those measures are often only temporary. In 2021, the Legislature voted to phase out repaying local entities for about $152 million in property tax revenues. The backfill had been in place since a 2013 bill cut property tax revenues.

Capping value assessment changes

Property tax rates are often determined by the assessed value of the property owned, calculated by city and county assessors. To find that value, assessors look at market value, defined as the amount a buyer would pay for the building or land in that year, provided both parties are willing and informed on the property. Assessed values also consider other factors, including the sales history of that property and recent prices of homes sold in the surrounding area.

Current Iowa law limits the amount a residential or agricultural property value can increase. The limit allows increases of no more than 3% annually in aggregate taxable value. That applies to property where land or buildings are designated as residential, agricultural, commercial, industrial, railroad, or utility properties. The 3% limit applies to the total category, not to individual properties.

Under the House bill, beginning in 2024, the assessed value of a property could not exceed 103% of what the property was valued at in the previous year. That would apply a 3% increase limit to individual homes and properties if there haven’t been changes made such as new additions to a building or an expansion of land boundaries.

If the bill passes, for a home valued at $100,000 in 2023, assessors could only increase its value to a maximum of $103,000 in 2024, no matter what’s happening in the local housing market.

Beenken said putting an artificial limit on assessed market value “throws the whole system into chaos,” as the property tax system is based on assessing value. There are ways to mitigate property tax costs for the individual without limiting assessors’ ability to determine value for the unique property, he said. Those ways include tax credits or a rollback, which reduces a property’s taxable value to a percentage of its assessed value.

“There are opportunities to address the actual tax asking along the way without messing with assessments,” Beenken said.

The limitation would also prevent counties from keeping up with inflation and rising costs associated with the services they provide, Beenken said. In the current fiscal year, 46% of county funds go toward public safety, legal services, roads and bridges.

“So that’s, the deputies out on the road and the county attorney’s office prosecuting, as well as making sure those roads are safe in the sense that, you know, people can drive to work,” he said.

Transparency measures

While state lawmakers cannot control whether a local entity decides to take on debt, Grassley said one of the goals in this year’s property tax reform is to create more transparency on why property tax rates change and how those funds are used. The proposed legislation would require entities to post notices about plans to take on debt, as well as solicit more voter feedback in starting these projects.

School districts, cities and counties would have new requirements on posting notices and informing taxpayers within their jurisdiction when making moves to take on debt through bonds to finance projects, such as new construction and infrastructure improvements.

As these entities take on new projects, lawmakers proposed requiring the governments to send out a statement of the amount and purpose of the bond. The notices would have to include a statement of the estimated total cost of the project and how much money the entity has saved up to pay for the project’s completion.

For bonds that need voter approval, the bill would require mailing information about the bond to individual property owners between 30 and 45 days prior to the election. The mailed notice would include information on the estimated property tax amount due each year within that property’s designated category if approved.

Logistically, Daughton said, it would be difficult for some school districts to meet these standards. Most school districts already try to provide their communities with information on upcoming projects and associated debt, through local newspapers, the district website, social media and brochures around town, he said. But the new requirement of mailing all property owners would require much more staff work, in addition to having school districts address complications like figuring out which property owners are residents.

“If that’s what’s passed, that’s what they’ll have to do,” Daughton said. “But I don’t think that that’s necessarily realistic.”

When school districts, counties and cities take on bonds, regardless of whether it requires voter approval, the law would require the entity to designate and deposit 10% or more of the project’s total cost.

This new requirement would mean that if a school district wanted to build a $20 million construction project, they must show they have $2 million saved up and put aside already. It’s unclear which school district funds can be put towards those savings deposits required to start bigger projects, Beenken said, and could delay plans.

Beenken said counties would also have to delay projects under the 10% requirement. Under the current system, county officials are able to take on bonds to address a need that the public has called for action on, he said — but the new proposal could add potentially years of waiting on the process.

It could also end up making the project more expensive in the long run, he said.

“We don’t know from month to month, sometimes what the bond market might look like. … if (a project) has to be pushed out a few years, cost of materials, cost of labor, all of those expenses are going up,” Beenken said. “And those expenses, obviously, ultimately, rests with the taxpayers. And so it’s really not a great deal for the taxpayers, when you consider what those delays could mean.”

While this bill was one of the first pieces of legislation Republicans proposed this session, Beenken said he expects property tax reform to be an ongoing discussion in 2023. He said while providing tax relief is important, he hopes the Legislature will have a larger discussion on how local government entities are funded.

Property taxes account for nearly 50% of county revenue on a statewide average, he said, and without diversification, it can be difficult to keep providing essential services while cutting costs.

“There’s a whole host of things that the legislators could look at where we have the conversation about what our property taxes paying for, and where are opportunities where different revenue streams could pay for it, so it doesn’t always fall on the property taxpayer,” Beenken said.

The legislation has been referred to the House Ways and Means Committee. The committee meeting scheduled for Thursday has been canceled.