Iowa Gov. Terry Branstad will sign a sweeping tax overhaul package into law on Wednesday.

Lawmakers recently passed in a bipartisan vote a tax relief package that one rating agency warned could strain local governments. Lawmakers passed small income tax credits, increased the earned income credit, and adopted a sweeping property tax reform package estimated to lower property taxes by $3.9 billion across the state over the next decade. The state would compensate local governments for an estimated $3 billion of the loss to their property tax coffers.

Moody’s Investors Service weighed in on the impact, warning they could curb local governments’ financial flexibility in the long run.

The package reduces the taxable value of commercial and industrial property. Local governments will see modest reductions in their property tax collections in fiscal 2015 and larger ones possibly beginning in fiscal 2018.

The near-term impact of the changes is muted because the state will compensate local governments through 2017 for much of the losses associated with the changes. After that, the Legislature will determine annually whether to continue the reimbursements.

The reform package also creates a new class for multi-residential units, gradually reduces the percentage of telecommunications properties subject to taxation, and limits growth in assessed value for residential and agricultural properties.

The state estimates those three measures will reduce revenues of non-school district local governments by just $5.1 million annually starting in fiscal 2015, but lost revenues could grow to $140.5 million annually in fiscal 2024. The state will not compensate for those losses.

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