Iowa lawmakers are facing competing visions for property tax reform after two separate bills passed out of committee in the state House and Senate this month. Gov. Kim Reynolds has also proposed her own property tax relief plan.
All of them promise new challenges for local governments.
The House version,
It would also limit the amount of unassigned reserves and prohibit local governments from paying employee salaries or operations costs from bond proceeds.
The bill would require that beginning July 1, bonds for essential county purposes and essential corporate purposes be approved the same way as general purpose bonds, and eliminate the option for counties and cities to issue such bonds without an election. That change does not apply to revenue bonds or loan agreements, however.
For school district bond referendums, the bill would require a petition signed by 25% of eligible electors voting in the last election of school officials, asking that an election be called and stating the amount of bonds to be issued.
The House bill and the governor's proposal contain exceptions for debt service to the proposed property tax limitation, said Isabella Romano, lead analyst of public projects and infrastructure finance for Moody's Ratings. There are also exceptions for school funding, so Moody's does not expect school districts to be affected.
However, "limitations on revenue-raising authority are credit negative for local governments because they reduce financial flexibility," Romano said by email.
"The proposed property tax revenue growth caps in Iowa would add a new constraint on raising property taxes, comparable to restrictions that exist in some other states, including Colorado, Michigan, Massachusetts, North Dakota, Oregon, New York, Texas and Wisconsin," she added.
If either of those proposals is enacted, "the immediate financial impact would likely be minimal for local governments that have strong net new construction or untapped areas of financial flexibility, such as local option sales taxes or franchise fees," Romano said.
"Conversely, communities with minimal new economic growth and fewer alternative revenue levers to pull could be more exposed, though strong liquidity and flexibility to cut expenditures could mitigate the impact on credit quality," she said.
The version of the House bill that passed out of the Ways and Means Committee incorporated some elements of the governor's plan, said Rep. David Jacoby, a Democrat and the ranking member on the committee.
Jacoby said representatives have not brought the bill to the floor yet, "and it doesn't appear likely that we're going to do it this week."
House Democrats proposed their own plan for property tax relief, which did not advance. It would have capped annual property tax growth at 4%, frozen property taxes for seniors and tripled the homestead tax credit, among other things.
Republicans have wide majorities in both houses of the Iowa legislature.
The House Democrats' plan was "much simpler, much more certain. Theirs is so complicated and messes with so many levies," Jacoby said.
"We don't seek to mess around with people's property values and assessment," he said. "We look at limiting the possible increase to your property tax liability — the residential tax liability cannot go up more than 4% per year, period."
Democrats would also have given a $1,000 rebate to every homeowner and a $500 rebate to every renter. "People need money in their pocket now," Jacoby said.
Meanwhile, the Senate Republicans' plan "tried to revise the whole rollback system" in favor of limiting levy rate growth. Senate Republicans are also calling for two-thirds approval for any bonding, he said.
"Most of what they've proposed is not workable," Jacoby said.
While there are exemptions for debt service in the House Republicans' plan, Jacoby said, the time and levy restrictions make it more difficult to issue GO and revenue bonds. Lawmakers should "leave it up to city councils and school boards to know when they need projects completed," he said.
"The bill really hurts community colleges," he added, noting it affects three of their levies.
"I think the biggest trigger (for the property tax reform push) is, it's an election year," Jacoby said. "It's also to tell people, 'Wait, look over there.' ... Our state budget is in such a world of hurt."
He pointed to a recent bill that would create a new healthcare tax on insurance companies and HMOs — which, he said, will likely pass those costs along to customers. "It does capture money for their shortfall in the state budget," he said.
As for the property tax debate, "The easiest and best way to do it is with the rebate," he said. "And for another year we can sit down and hammer out what those levies look like.
"It never works if you don't have everyone at the table," he added. "Many of these policies are being worked out with no one else at the table."
Ways and Means Committee Chair Carter Nordman did not respond to multiple emails and phone calls requesting comment.
The governor's vision for property tax relief includes a 2% cap on local government revenue growth; a property tax freeze for seniors in homes valued at $350,000 or less; and a change to property tax assessments, conducting them every three years instead of every two.
It would also change the appeal process for large property tax increases, requiring assessors to defend them rather than homeowners to appeal them, and place new constraints on tax increment financing districts, limiting them to public purposes for 20 years.
According to a
"The rate at which property taxes are rising is unacceptable, and Iowans expect legislation that delivers meaningful relief to be passed this year," Reynolds said in a Jan. 14 statement announcing her plan. "Spending drives taxes, and because property taxes are driven by local government, the most reliable way to protect taxpayers is to limit local spending."
The Senate's plan,
Sen. Dan Dawson, R-Council Bluffs, said at a press conference that under the Senate's plan, "when valuation on your property — home — inflation goes up more than 2%, the rates automatically come down," according to the
To offset lost property tax revenue, the Senate plan gives city and county governments the option of raising the local option sales tax or indexing the state gas tax to inflation.
State senators also want to split the taxing systems for owner-occupied residential property and rental property.
Iowa already
In a May commentary on North Dakota's property tax law, Moody's warned that the reforms in that state, which include capping annual property tax increases at 3%, are "credit negative for cities, counties and school districts" because they limit revenue-raising flexibility.
"Although most local governments were increasing their levies by less than the new limit, a handful of municipalities will need to reduce the pace at which they increase property taxes," Moody's said.
Iowa is rated triple-A by Moody's, Fitch Ratings and S&P Global Ratings.
