Iowa’s property tax reform: Focus on the spending
The following is a guest post from John Hendrickson, Policy Director of the Iowans for Tax Relief Foundation.
In 1934, Iowa levied the first sales and income taxes. The objective of creating these new taxes was to provide property tax relief. Overtime, property, sales, and income tax rates increased. A lesson can be learned from this because creating a new tax or increasing an existing tax to help lower another tax may not necessarily be the best policy. Iowa has been a national leader in state tax reform. Since 2018, Iowa has enacted pro-growth income tax reforms.
Iowa has been successful at income tax reform because it has balanced prudent budgeting with tax rate reduction. In addition to conservative budgeting, Governor Kim Reynolds has also been proactive in reforming state government and making it more efficient. Limiting spending, conservative budgeting, and reforming government has been a successful formula for Iowa’s historic income tax reforms. This is the same approach that can be used to address escalating property taxes.
Across the nation states are struggling to address high property taxes. Several states have called special legislative sessions to address property tax reform. Property taxes may be the most difficult to reform. Although each state is unique, property tax structures are usually complicated and complex. Taxpayers are growing more frustrated with high property taxes, and they feel as if they are renters rather than owners of their property. This frustration is forcing state legislatures to address the problem of high property taxes. Iowa has made some positive reforms in recent years, and it is on the path to make additional reforms. To ensure that Iowa taxpayers receive lower property tax bills, the solution is to address local government spending.
Property taxes have surged over the past two decades in Iowa, increasing by over 110 percent. This growth has far outstripped both population growth and inflation, placing a heavy burden on taxpayers, particularly those on fixed incomes, such as retirees. The primary driver of this increase is not merely rising property values but unchecked local government spending. As local governments have increasingly relied on property taxes to fund their operations, the disconnect between revenue growth and taxpayers’ ability to pay has widened.
In 2023, the Iowa legislature passed a comprehensive property tax reform measure. The property tax law consisted of several provisions, which included levy consolidation, direct notification, November-only bond elections, adjusting levy rates as valuations rise, and some limited reforms to urban renewal practices.
The first major component of the property tax reform measure is consolidating property tax levies and creating a new formula, which establishes a “soft cap” to control the impact of valuation growth. Numerous county and city levies will be consolidated into the general fund levy with exceptions such as debt service, EMS, flood and erosion, law enforcement, and natural disaster, among others.
To prevent assessment windfalls and to force local governments to ratchet down property taxes the measure creates a “soft cap” that is applied to assessment growth. The objective of this “soft cap” is to prevent cities and counties from collecting windfalls from assessment increases. After cities and counties complained that this was too restrictive, the legislature reformed the “soft cap” during the 2024 session.
The revised formula will be applied to cities and counties based upon their assessed growth. If a city or county’s total assessed property value grows by more than 3 percent, then some of the revenue must be used to reduce the city or county general fund levy. This formula is set to sunset in 2028 unless it is renewed by the legislature.
The second major provision of the reform measure is requiring local governments to comply with a direct notification provision. Direct notification requires cities, counties, and school districts to send each property owner a specific notice that provides detailed information about their individual property taxes and the annual budget hearing.
The objective of direct notification and the taxpayer statements is to create more transparency and accountability. In addition, it is to encourage taxpayers to participate in their local government budget hearings. Iowa’s direct notification policy was adopted from Utah’s Truth-in-Taxation law, which is considered not only the most taxpayer friendly property tax law in the nation, but also the gold standard. Kansas, which replicated Utah’s law, also has direct notification. Other states have direct notification requirements.
Finally, the law requires multiple taxing authorities to hold bond elections in November. One problem at the local level is that Iowans are aware that elections take place in November each year, but they do not have the same awareness about the many special elections that may occur throughout the year. Many special elections include financial questions that directly affect property taxes and determine some of the most-important decisions affecting local property taxpayers, yet the voter turnout for these questions is a fraction of the turnout achieved during general November elections.
By moving bond elections to the November general election, it will encourage greater participation and hopefully encourage local governments to rein-in the debt they are willing to heap onto taxpayers.
Although the 2023 law made some important reforms to Iowa’s complex property tax system it failed to address local government spending. Even the “soft cap,” which is sunset, does not fully address spending. Local governments in Iowa continue to increase their property tax collections, which means increasing their spending. From Fiscal Year 2024 to Fiscal Year 2025 Iowa’s 99 counties are increasing their property tax collections by more than 7 percent, cities more than 6 percent, and school districts more than 5 percent. This means that taxpayers will pay more than $6 billion in property taxes to fund local governments.
Going forward it will be imperative for the next property tax reform measure to address local government spending. One policy option that will force local governments to address spending and provide property tax relief would be to establish a levy limit. Most states have some form of a property tax levy limit.
Applying a strict 2 percent property tax cap on the growth of property taxes would force local governments to restrain spending. If Iowa had a 2 percent property tax cap this year it would have saved taxpayers $250 million. Establishing a property tax cap would not be controversial. If local governments wanted to supersede the cap it would require a vote of the people. This would force local governments to justify why they need additional spending, and it provides taxpayers with greater opportunity to participate in the local government budget process.
A more aggressive approach to address local government spending would be implementing a spending limitation that would be applied to the entire budget. This approach would be similar to Colorado’s TABOR or Taxpayer’s Bill of Rights. Many states have a spending limitation. Iowa has a state spending limitation, and the legislature can only spend 99 percent of estimated revenue. Whether it is a property tax cap or a spending limit that applies to all sources of revenue, it is vital that no exemptions be permitted. A levy limit or a spending limit can become ineffective very quickly when exemptions or complicated formulas are applied to allow for greater spending.
Iowa can serve as an example for other states for property tax reform. The Hawkeye state’s approach to property tax reform centers on avoiding tax shifts, tradeoffs, and using state dollars to “buy” down property tax rates. The reforms so far have centered on making the property tax system more transparent and working to reduce local government spending. Iowa is far from finished with property tax reform, but the solution can be found in limiting local government spending.