Lawmakers consider sales tax changes for local governments

Local government advocates say property tax reductions will mean cuts to the services and amenities Iowans rely on — but lawmakers are considering a proposal they say will help cities, counties and school districts pursue new means of funding.

Lawmakers discussed legislation to create one potential new revenue source Tuesday in a Senate Ways and Means subcommittee meeting. Senate Study Bill 1125 proposes changing local option taxes, which exist in a majority of Iowa communities, to a statewide tax.

Sen. Dan Dawson, R-Council Bluffs, said the proposal comes after discussions with local entities on how to diversify their revenues, and looking at how cities and counties in other states approach funding while keeping property taxes low.

He said two strategies stuck out to him: raising local option sales taxes and local income taxes.

“The income tax idea is probably not going to catch much fruit here within the state of Iowa, compared to what we’re trying to do from a statewide policy on income taxes,” Dawson said. “So the local option sales tax becomes the the most realistic, viable policy tool out there.”

Dawson introduced a similar measure in 2022. The bill also implements new property tax assessment limitations, makes changes to tax credits including the Homestead Property Tax Credit and provides funding for Iowa’s Water Land and Legacy program (IWILL), a natural resource trust created by a constitutional amendment in 2010.

Lobbyists and officials with cities and counties told lawmakers they were happy to see action on finding new ways to fund local governments, but that they were still determining the financial impacts of the bill on their communities. Daniel Stalder with the Iowa League of Cities said  swapping a higher sales tax for a local property tax will have different effects on cities based on their make-ups. Largely residential cities would see a boon, he said, but smaller communities could see less money.

The conversation on this proposal should be considered in the context of the other property tax proposals being discussed this session, Stalder said.

“Having a broader conversation on local government revenues is something that we think is a laudable goal, but reducing the burden on taxpayers should be considered as part of the quality of life and essential services that taxes fund,” he said.

Different property tax cut strategies

Republicans in the Iowa House and Senate have put forward different proposals on how to cut property taxes, which GOP legislative leaders named as a goal for the 2023 legislative session.

The Senate Ways and Means Committee moved forward Senate Study Bill 1124 on Monday. The bill would limit levy rates and assessment valuations, add new accountability measures and put in new transparency requirements for local governments.

Local government advocates have also criticized House File 1, the House Republicans’ property tax proposal.

City and county government advocates said the House proposal would throw the state’s property tax system into disarray. That issue wouldn’t happen with the Senate proposal, Lucas Beenken, a public policy specialist with the Iowa State Association of Counties said. But the bill still could hurt Iowa communities, he said.

Lobbyists representing property owners, small businesses and tax relief advocates applauded the Senate legislation, while local government advocates said it force Iowa localities to cut funding for law enforcement, emergency medical services and basic quality of life provisions.

“You’ll continue to hear a common theme of services,” Sven Peterson, Perry city administrator said. “Cities and counties are the places where citizens really have that everyday service level, and we really strive to provide the best that we can for our residents. Whether it’s parks and recreation or libraries, police, fire, all that kind of stuff. So really concerning that … we would have no incentive to grow, because we would not be able to keep up our level of services that our residents are happy with, and expect from us.”

Beenkin said the Senate proposal hurts communities both growing and shrinking in size and revenue. The proposal requires city and county governments to follow property tax assessment levy rate rules set in 1975, while providing a yearly growth rate to address inflation as well as some specific exceptions where local governments can exceed those limitations.

The bill’s changes would create a cut equal to 42% of Bondurant’s law enforcement budget, Bondurant City Administrator Marketa Oliver told lawmakers. The reductions would stop cities from ensuring Iowa communities’ safety and high quality of life, she said, factors people look at when considering to move. If local governments are unable to provide amenities prospective residents want, Iowa’s issues with declining population and workforce shortages will continue, she said.

But Dawson said some local government advocates were misrepresenting local entities’ spending and funding practices. He pointed to the mental health levy passed in 2021, which aimed to move funding for the state’s mental health services from property taxes to a state appropriation. Many Iowa localities did not lower property taxes because of that change, he said, which is why the Legislature needs to take action on property tax relief.

“But we are asking in the end for all governments, you know, in this particular bill here to look at what we do from the state: Ultimately, if we have revenues that go above and beyond what we’ve projected, that money is deposited with Taxpayer Relief Fund and that money is used only for the purpose of tax relief for Iowans,” Dawson said.

Dawson suggested local governments follow the state’s lead by earmarking any unspent revenues for tax cuts. “What we’re trying to find here with this bill is, there’s got to be some certain percentage of revenue that comes in and says ‘okay, anything above and beyond that has to be used to apply down to the levy, to give those taxpayers that relief.”

Changes discussed amid tax error fix

As lawmakers consider systematic property tax changes to go into affect in the next property assessment cycle, local governments are currently reworking their budgets for the upcoming year.

Gov. Kim Reynolds signed Senate File 181 into law Monday, which fixes an error in a 2021 property tax law. Local governments used incorrect information provided by the Iowa Department of Revenue when making their budgets for the upcoming year. Cities will see $39 million less in annual revenues and school districts $21.4 million less than shown in the erroneous property tax revenue estimates, which the new law corrects.

Democrats had called for the state government to pay for the loss in expected revenue from the error. In the subcommittee meeting on changes to local option taxes, Sen. Bill Dotzler, D-Waterloo, questioned whether cities and counties can rely on the state government to provide the funding through a statewide system if revenues change.

He said there were a lot of aspects of the local tax proposal — like the IWILL funding — that he liked. But recent tax cuts have pulled a lot of revenue out of the state government that could have been used for property tax relief, he said, and Iowa may soon face economic shortfalls from the loss of federal COVID-related funds which the state received in previous years.

“So that, in my way of thinking, is going to be put directly on the commitments being made in this bill, to what we’re going to do by changing the system, and I don’t know if we can honor those commitments down the road,” Dotzler said. “And then, after what happened with the commercial property tax commitment, it appears that our word isn’t good.”

Tax legislation approved in 2021 phased out a 2013 property tax “backfill” law which required the state to refund local governments for commercial property tax cuts.

Dawson said that any talk of “broken promises” needs to include the discussion of the mental health levy, and other instances where cities and counties did not lower property taxes when they had the opportunity.

“When we talk about, you know, ‘what’s the guarantee down the road’ when this model is actually used in Virginia, as well as California,” he said. ” … I would just submit to that some local governments out there, some of the rhetoric that you’ve used, I mean, what trust do we actually have the property tax relief will actually be guaranteed out there through any of these bills that we do?”

He said the bill was a first step toward finding alternatives to property taxes for local government funding, and that he will continue having conversations with cities and counties on how to best move forward.

“This bill is not perfect, just like the other one, it’s a framework,” Dawson said. “But I think it’s a framework that furthers the conversation will make Iowa better place.”