Iowa Senate passes a bill to avoid property tax increase, raising concerns about local budgets

The Iowa Senate unanimously passed legislation on Wednesday that would avoid a looming homestead tax hike of up to $127 million and leave local governments with less money than expected.

Lawmakers said the Iowa Department of Treasury made a mistake that lawmakers must now fix to avoid an unintended property tax hike, leading cities and counties to scramble to adjust their budgets or raise local taxes. However, a spokesman for the department said the DOR complied with the law to calculate assessment limits and publish the results.

Sen. Pam Jochum, D-Dubuque, proposed an amendment to the bill that would use state funds to fill the gaps in local budgets.

“She takes responsibility for a mistake made by the state government,” said Jochum. “It’s not taking it off the backs of our cities and counties, and our taxpayers will get that reduction in their property tax bill.”

The Republican majority rejected the change.

Sen. Dan Dawson, R-Council Bluffs, said he doesn’t want to take responsibility for all the decisions local governments make, saying some are wasteful.

“This is a mistake and I absolutely condone the process,” Dawson said. “But the policy is we have to live with our means. And we cannot take responsibility by stuffing the local governments here with money that could otherwise be used for better structural reforms for our state.”

Sen. Molly Donahue, D-Cedar Rapids, said the local guides worked within the numbers given to them by the DOR.

“It’s not about them living within budget because they were given the wrong budget,” Donahue said. “It’s kind of a disaster for her, and [there’s] not much time to fix it.”

She said this would limit local governments’ ability to hire and retain police officers and firefighters.

On Monday, Pleasant Hill Mayor Sara Kurovski asked senators to delay property tax assessments by a year.

“We all know that in these inflationary cost times, it’s very difficult to keep up with those costs while still providing those services,” she said. “And if that bill can’t be fixed, or doesn’t give us even a year to properly prepare, it means for us, our city, a $200,000 cut from our general fund, leaving us with just $47,000 revenue growth over last year remain.”

Kurovski said that as a tax conservative, she doesn’t want to use reserves to cover current expenses.

Republican senators also rejected this request. Dawson said he doesn’t want to penalize taxpayers with an unintended increase this year. The bill would extend local governments’ budget deadline from March 31 to April 30 to give them more time to make changes.

How the legislature came up with this bill

The problem stems from a law passed in 2021, proposed by the DOR, that combined residential and multi-family homes into one property class. The legislation did not change a separate portion of Iowa statute that establishes the formula for calculating the property tax “rollback” rate.

The DOR released this “rollback” rate in late October, which local governments use to create their budgets for the next fiscal year. And in early November, an analyst with the Legislative Services Agency told DOR that their calculation would result in a significant nationwide property tax increase.

The LSA analyst released a memo on Nov. 16 detailing its findings.

Democratic senators said the whole problem could have been prevented if the DOR had admitted its mistake soon after its discovery.

Instead, Gov. Kim Reynolds’ office introduced the Property Tax Prevention Bill on Jan. 18, when local governments were deep in their budget process, which included public hearings and pronouncements.

The DOR spokesman did not respond to IPR’s questions about if and when the department was taking steps to notify local governments of potential revenue changes.

Dawson said at a subcommittee hearing Monday that there should have been better communication.

IPR asked him who should have made this communication.

“I would say there’s probably, you know, even from a legislative standpoint, you know, maybe we could have communicated that more,” Dawson said. “I mean, probably a multitude of people.”

Dawson said discussion of this bill is a preview of future discussions of broader changes to the property tax system aimed at providing relief to taxpayers, a priority the Republican legislature has set for this legislative session.