Iowa Senate passes bill to fix property tax error

The Iowa Senate passed a bill Wednesday to fix an error in a 2021 property tax law that gave local governments more money than intended.

Local government officials say the change will reduce total property tax revenues up to $133 million, blowing holes in their budgets.

The Senate unanimously passed Senate File 181, a measure fixing a state mistake so that owners of residential properties in Iowa will owe less in property taxes. But cities, counties and school districts, which receive funding through property taxes, have already started making their budgets using the incorrect information provided by the Iowa Department of Revenue.

The Iowa League of Cities estimated cities will have an annual revenue reduction of $39 million from the bill, and school districts will see $21.4 million less than expected through property taxes.

Lobbyists and local government officials told lawmakers in a subcommittee meeting Monday on the bill they would struggle to redo their budgets by a deadline of March 31. The Senate amended the legislation to give local entities an extra month to work on their budget.

“It seems like the range that a city or county entity would need to basically get back into the budget process is anywhere between say 55 and 75 days,” Dawson said. If the legislation is signed into law by Valentine’s Day, the new April 30 deadline “should allow for all of our cities or counties the proper amount of time to recalibrate their budgets.”

Democrats: State should pay for error

But Democrats said the Legislature should “own up” to the state government mistake and provide the millions local governments expected would be available for their budgets. Sen. Pam Jochum, D-Dubuque, introduced an amendment to fill that gap, warning that the decrease from expected funding could cause cities and counties to cut funding for law enforcement, road repairs or other essential services.

“It takes responsibility for a mistake state government made,” Jochum said. “It is not putting it on the backs of our cities and counties, and our taxpayers are going to get that reduction in their property tax.”

The amendment failed 32-17. Dawson called for Republicans to vote against the measure, saying the Legislature should not take responsibility for the decisions local governments make in their budgets. Iowa taxpayers expect their governments to spend within their means, he said, and cities and counties must also follow that rule.

“The reality is like, this was money they were never going to have to begin with, right,” Dawson said. “We are not cutting into anyone’s budget. This is just less money than what they were projected to have.”

While the bill addresses the consequences of a specific error, Dawson said lawmakers will have a bigger conversation this session about how local governments use taxpayer money. He said he’s spoken with constituents who are unhappy with how their cities or counties are wasting money, and said state lawmakers should not redirect state money to these entities that would otherwise be used on “structural reforms for our state.”

“This kind of goes to the larger topic we’re going to have as we talk property taxes later on here: We have to fundamentally change how local governments budget,” Dawson said.

Republican leaders in both chambers promised to make changes to Iowa’s property tax laws this year. House Republicans introduced legislation in January changing how local entities can fund projects and determine property values. A Ways and Means subcommittee will meet to discuss the legislation, House File 1, on Feb. 6.

What happened?

In calculating taxes for the upcoming year, the Iowa Department of Revenue sets a “rollback” rate. The rollback is an adjustment the state makes to limit increases in the aggregate taxable value of Iowa residential property. It limits how much property tax costs can rise in a given year.

The error emerged from two property tax bills passed in the last decade, according to the Legislative Service Agency,

A 2013 property tax cut package created a new classification of properties, multiresidential properties, which include living spaces like apartments, nursing homes and trailer parks. These properties exist in a separate category from other residential properties. The legislation provided a system where taxes on multiresidential properties gradually decline through 2022 in order to match the taxation rates of other residential properties.

In 2021, a bill signed by Gov. Kim Reynolds amended that act, and eliminated the multiresidential property category. Those properties were then categorized again as residential properties, starting in 2022. But no changes were made to Iowa Code defining how the “rollback” rate would be calculated to account for the categorical changes.

The residential rollback rate was at 56.49% for the combined property class. It would have been 54.65% if the categories remained distinct. For a $200,000 home, the assessed value would be $3,684 higher under the combined property class than it would be if multiresidential properties had not been included, an LSA report found.

The LSA notified the Department of Revenue of the error in November, according to Jochum. But the state did not inform local governments of the lower rate to be used in their budget calculations.

That would mean a total of between $126 million to $133 million more owed in property taxes throughout Iowa. This funding was not distributed, but local governments made their budgets for the upcoming year based on this erroneous information.

The property tax issue has also become a point of contention in the debate over state aid for K-12 schools. Democrats argued in the Senate Education Committee Wednesday that a proposed 3% increase in per-pupil spending would not make up for the property tax error.