Iowa lawmakers' scramble to fix property tax overcharge could leave cities holding the bag
Iowa lawmakers are working under a deadline to fix a state error that's left property taxpayers on the hook for higher bills than expected — but their remedy could leave cities and counties scrambling to make up a budget shortfall.
Property tax cuts in 2013 and 2021 changed the way multiresidential properties such as apartment complexes are taxed to bring them in line with all residential properties.
But in October, the state discovered it had erroneously included multiresidential properties with other residential properties when calculating what's known as the "rollback" rate — an adjustment the state makes to hold down taxes by limiting the annual growth of property assessments.
The result is that residential property owners across Iowa would pay about $127 million more in taxes than they should have under the law's original intent, unless lawmakers pass Senate File 181.
Exactly how much a typical property owner would save under the legislation is impossible to say because property tax rates are set locally by the city, county and other taxing districts.
While state officials discovered the error in October, no one told cities, counties and school boards, which continued with their budgeting process unaware.
Now, if the Legislature passes Senate File 181, local governments face the possibility of having to quickly make cuts in their budgets to make up for an unanticipated shortfall. The Iowa Senate is set to debate the bill Wednesday.
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Local officials tell lawmakers they need more time
Des Moines could face a loss of an estimated $3.5 million, which is about 2% of its annual operating budget, City Manager Scott Sanders said. The loss would impact a budget that is ready to be presented to the public and is due to the state by March 31, he said.
“That is not sufficient to maintain existing service levels … so we would be forced to either make cuts or raise our tax rate,” Sanders said.
Alarmed local elected officials showed up at the Iowa Capitol Monday for a subcommittee hearing on the bill, asking that lawmakers delay its implementation one year to give them time to prepare.
"If this bill cannot be fixed, or even give us a year to prepare correctly, what this means to us, our city, is a reduction of $200,000 from our general fund, leaving us with only $47,000 in revenue growth from last year," Pleasant Hill Mayor Sara Kurovski said.
She said Pleasant Hill has worked to lower its property tax levy while still providing services for residents.
"As I’ve been having conversations I’ve heard, 'Well, just pull it from your reserves,'" she said of the shortfall. "And as a fiscal conservative, I would never use reserves for operational funds that occur year over year. And I know that many members of the Legislature would not do the same thing."
But Sen. Dan Dawson, R-Council Bluffs, said lawmakers need to protect property taxpayers, who will face higher bills than they should receive if the legislation is not passed.
"We’re always advocating on behalf of the taxpayers," Dawson said. "A delay would be a tax increase to the residential property taxpayers."
An amendment to the bill will extend the deadline for local governments to certify their budgets from March 31 to April 15 in an attempt to give them more time to redo the budget process, Dawson said.
Republicans, who hold majorities in the Iowa House and Senate, have been clear that they intend to hold broader conversations this year about lowering property taxes. Dawson said his goal is to change the way people think about property taxes so they consider the taxpayer first.
"How do we fundamentally change the budgeting process here in Iowa to make sure it actually works for the taxpayer, as opposed to works for the government?" he said.
Cities and counties prepare to adjust for budget shortfall
The legislation has been on the minds of city councils and boards of supervisors across the state as they weigh how the change could affect their budgets.
The Iowa City Council heard from City Manager Geoff Fruin last week about how the bill would affect the budget the city is getting ready to pass after months of preparation.
“For Iowa City (it) would be about a $1.7 million impact, primarily to the general fund,” Fruin said.
He said the state is advising Iowa City to proceed but said the city has to recognize that if this bill is passed it will blow a hole in the budget as soon as it goes into effect July 1.
The city will have to consider increasing its maximum property tax levy or dipping into its reserves to make up the difference if the bill passes, Fruin said.
Iowa City is coming off an 11-year streak of decreasing its levy rate, which is down to $15.63 per $1,000 of taxable value. The city has proposed keeping the rate flat this year because taxable valuations of property in the county are slowing after years of strong growth.
Fruin said Iowa City created its now-$5.2 million emergency reserve in 2013 after the Legislature passed property tax changes that year in anticipation of a scenario like this playing out.
Using reserves "may not be exactly how we want to handle this, but if push comes to shove, we could absorb that,” Fruin said.
After learning of the bill, the Coralville City Council opted last week to delay a public hearing for Feb. 14 on its maximum property tax levy — a step cities are required to take as they create their budgets. The city was planning to keep its property tax levy rate flat at $12.19 per $1,000 of taxable value.
City Administrator Kelly Hayworth recommend the City Council hold off on increasing the maximum proposed levy until more is known about the bill.
“It's not like it’s just Coralville … so I would assume whatever they decide to do there would be some language in it that would allow for cities to have some flexibility, otherwise you’d be screwing over every municipality in the state,” said Mitch Gross, a Coralville City Council member.
Kim Norvell contributed to this article.
Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at email@example.com or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.
George Shillcock is the Press-Citizen's local government and development reporter covering Iowa City and Johnson County. He can be reached at (319) 214-5039, GShillcock@press-citizen.com and on Twitter @ShillcockGeorge
This article originally appeared on Des Moines Register: Iowa lawmakers work to fix property tax error, upending local budgets