Iowans are demanding property tax relief. High property taxes continue to be a problem for Iowa. The Tax Foundation recently examined the “effective tax rates on owner-occupied housing” across the United States. Iowa ranked 12th highest in the nation.
Source: Tax Foundation
Iowa relies heavily on property tax to fund local government. In 1934, Iowa enacted the sales and income tax to provide property tax relief. Today, Iowans not only suffer from high property taxes, but also high sales and income tax rates.
When you pay your property tax bill, where does your tax dollars go? Here is a breakdown of property tax revenue in Fiscal Year 2020:
Source: Legislative Service Agency
Public education is a leading consumer of property tax dollars. This is also true for Iowa’s General Fund. State aid to schools consumes 44 percent of the state budget.
At the heart of high property taxes is local government spending. Unless spending is controlled, any property tax relief will be limited. County assessors are often blamed because people receive their property tax valuation bills in the mail and they immediately think that a valuation increase translates into a property tax increase. The blame truly falls on the local government taxing authority who decides how much tax revenue is needed to fund government.
Assessors, for the most part, are doing their job and following the rules. It is local governments who are taking advantage of increased assessments to justify collecting and spending more taxpayer dollars. Many local governments have shrewdly avoided taking votes on property tax rate increases. Instead, they rely on increased property assessments to drive property tax revenue higher. If assessments increase by 10 percent, it does not mean local government should automatically receive a 10 percent budget increase.
Property valuations in Iowa, especially for residential properties, have increased. However, just because a home may increase in value by 10 percent does not mean that the property owner has 10 percent more in their bank account to afford the increase in property tax.
Source: Legislative Service Agency
To bring more accountability and slow the growth of property taxes in Iowa, the state legislature could consider two policy solutions. The first would strengthen the 2019 property tax transparency and accountability law by requiring local governments to provide a direct taxpayer notification of a proposed increase in their property tax bill. Notifications must provide information regarding the potential increase in a property taxpayer’s bill as well as the date, time, and location of the local government budget hearing. A direct notice in which taxpayers can understand will allow for greater transparency and accountability.
The second policy solution would establish a local government spending limitation. The 2019 property tax law established a 2 percent “soft cap” on city and county budgets. It requires a two-thirds vote of the council or county board to surpass the cap. A stricter spending limitation would require voter approval for local governments to spend above a certain budget limitation.
By forcing local governments to obtain voter approval to raise spending, it forces them to be more accountable. It would also give taxpayers a voice in deciding whether an increase in government spending is justified. James Hohman, Director of Fiscal Policy at the Mackinac Center for Public Policy, argues that limitations help “ensure popular control of local government.” Tax and spending limitations serve as essential taxpayer protections. “Limits also give residents an important responsibility: to ensure that their government functions appropriately within them,” noted Hohman.
Iowans deserve property tax relief. Direct taxpayer notification and a stricter spending limitation would not only slow the growth of property taxes but would also serve as important taxpayer protections.