Property Tax Reform

I think everyone can agree that Iowa's property tax system is complicated. Here are a few examples that confound the general public whenever this topic comes up: Taxable valuation isn't the same as assessed valuation. TIF (Tax Increment Financing) districts are economic development tools that incentivize development while suppressing the increased property value of that development until expiration of the TIF district. Depending on what kind of property you own: residential, commercial, industrial, or agriculture; you may be subject to a 'rollback'. Then to confuse everyone a little more, just last week we all received new assessments for our property that didn't match anything that we have been discussing over the last several weeks. That is because those assessments are what will be used for FY2027.

Your property taxes are subject to multiple taxing authorities: school, city, and county; and not all taxing authorities are equal. Taxing authorities that are considered 'property rich' are those with more valuable property such as commercial or industrial. Oftentimes property taxes in those taxing districts are lower because commercial properties have expanded the tax base in way that has brought down property taxes for everyone. On the other hand, a 'property poor' district is not a measure of socio-economics. Quite the contrary. It simply means that taxing authority has a smaller tax base without a lot of valuable commercial property. A smaller tax base simply means it takes greater 'rate' effort to generate the revenue needed to fund the program. Think about our case here in Hudson. Sometimes people will look at their tax bill for Hudson, compare it to surrounding areas and wonder why it's higher in Hudson. Well, there are a lot of reasons for this (hence the complication in our property tax system). Yet in keeping with this idea of 'property poor' we are geographically very small: only 57 square miles. And, our property tax base relies heavily on residential property owners. Compared to many around the state, we have few commercial enterprises to help ease the burden. And those that have come to our community in recent years are in TIF districts so it will be awhile before we are able to benefit from the increased valuation of this property.

Think about this: there are currently 325 school districts in Iowa. If you were to rank them 1-325 with '1' begin the highest property valuation and 325 being the lowest, Hudson would rank 300. But if you include the TIF districts in that same ranking, it would improve our position to 273. I'll concede that's not a lot, but it would absolutely make a difference in the property taxes we all pay. 

If you are confused at this point, you are not alone. That is one of the reasons why the Iowa General Assembly is proposing to simplify the property tax system with an end goal of lowering property taxes. Two identical versions of a property tax reform bill are currently working their way through both the House and Senate. The legislators sponsoring the bills have approached this work collaboratively, asking for feedback and input from the public. At this point, they have taken that feedback seriously and the versions of the bills that are currently being discussed are different from the original proposals. I am grateful they are taking a thoughtful approach to this work. There is a keen understanding that while property tax relief is needed it is paramount they get it right. With that stated, it is unclear (and perhaps unlikely?) this legislation will be enacted during this legislative session. 

Because the proposal continues to be modified based on the feedback our legislators are receiving, I'll avoid getting too deep in the weeds. This is because the legislation continues to evolve. However, I'll start with just one quick observation and theme that everyone will need to keep in mind. If the idea is to provide property tax relief and lower property taxes, we must be clear eyed of what the by-product of this work will be: if the taxing authority is generating less in revenue, it will need to be balanced on the expenditure side of the ledger. I suppose that is a technical way of stating the obvious: budget cuts will be necessary in many taxing authorities. The top news of the day will include even more stories about school districts (big and small), communities, and counties making budget cuts. 

With that context, I'll give you three big ideas to think about with these proposals: the elimination of the rollback, reduction of the uniform levy, and revenue restriction instead of rate restriction. Keep in mind there are other concepts in the property reform proposals that are also incredibly important, but for the sake of this discussion I want to focus on just a few concepts. 

From previous posts, I have explained to you that each year, the property taxes each of us pay are dependent on 3 separate variables: the rate, the rollback, and the value. (See 'Understanding Your Property Tax Statement' from March 19th for a detailed explanation.) In that article, I shared that even if the property tax rate remained exactly the same from one year to the next; the rollback does not. In fiscal year 2025, property owners' taxable valuation was calculated on 46.34% of the value, whereas in fiscal year 2026, taxable valuation is calculated on 47.43% of the value. So, your property taxes will go up even if the rate is the same. Under the proposed legislation, the rollback is eliminated. In short, you will pay property tax on 100% of the value, less the homestead credit. Now logic would suggest this would cause a spike in property taxes, and it would, unless you consider the other two big ideas that are part of this proposal. 

Reducing both the uniform and additional levy in the school funding formula would definitely lower property tax. It's called a uniform levy because its uniform across every school district in the state. Currently, the uniform levy of $5.40 is applied to all property and is the first layer of funding for a school district's annual budget. The second layer is school foundation aid, and it funds up to 88.4% of the capacity, and the remainder, or what is needed to get to 100% is funded through an additional levy. Under this proposal, the uniform levy would be reduced to $2.97 and the additional levy would all but be eliminated with the exception of some special purpose general fund levies like instructional support and dropout prevention. By reducing these levies, it shifts that burden from local property tax to the state. Estimates put that shift north of $400 million. While this would definitely lower property taxes, the unknown variable is affordability. We have already put a lot of stress on the state budget with other priorities, and as such I am skeptical this is sustainable. One unintended side-effect would likely be continued or even compounded underfunding of SSA. Underfunding that fails to keep up with inflationary costs. 

Finally, the property tax reform shifts from a 'rate limited' property tax to a 'revenue limited' concept. Essentially, what this would do is limit the growth of school district special revenue levies to 2% per annum. In so doing, this would appear to suppress the tax base while forcing the levy downward. Think about this. Assume you have a year with a lot of tax base growth. When you apply a rate limited tax to that tax base growth, it will capture the benefit, and revenue of that growth. However, if you limit that growth, regardless of how much the tax base grows to 2%, it will suppress the taxing authorities ability to fund facility improvements and capital projects. It may also impact the bond rating of the authority and make it more difficult to pay off debt quicker. Yet on the other hand, it will force that rate down. 

I agree with the position that our property tax system is in need of reform. I'll even go so far as to say that it is entirely appropriate to justify and explain to the public why property taxes are going up or going down. It is also incumbent on us to be able to share with our stakeholders how those tax dollars are being invested on behalf of the public good and to share a coherent strategy in terms of long term planning. For too long, taxing authorities have looked the taxpayer in the eye and shifted the blame elsewhere; with a shrug of the shoulders would say, 'our tax rate is exactly the same as it was last year, so our taxes didn't go up'. Making this claim illustrates ignorance on the part of the authority at best; malpractice at it's worst. I am grateful the legislature is taking its time on this. We all just need to be prepared that, if we reduce the revenue side of the ledger, we act in concert when it comes to the expense side.