In 1934, Iowa enacted the first sales and income taxes to provide property tax relief. Today, nearly a century later, Iowa taxpayers still face the challenge of high property taxes. Between 2000 and 2017, Iowa property taxes increased by more than 100 percent, according to research from Iowans for Tax Relief. This increase is more than inflation and population (56 percent), Social Security cost of living adjustments (46 percent), and the growth of the state general fund (60 percent). The American Legislative Exchange Council’s Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index exposes Iowa’s property tax burden as the 16th highest in the nation. Concern about the reality of these escalating property tax bills supersedes the urban-rural divide and impacts all Iowans. The best method to provide long-term property tax relief is to stop the overspending at the local level through a property tax cap and establish a strong truth in taxation measure.
In 2018 the Iowa Legislature thankfully began the process of lowering the state corporate and individual income tax rates to enhance economic competitiveness and job creation. It’s encouraging to see legislative leaders now turn their attention towards Iowa’s costly property tax burdens.
Iowa has a complex property tax system. Many local governments have shrewdly avoided taking votes on property tax rate increases, instead relying on increased property assessments to drive property tax revenue higher. These assessment-driven tax increases enrich local government coffers but lack the transparency that hardworking taxpayers deserve.
The objective of property tax reform should not be to single out certain classes of property, but rather it should ensure all Iowans receive tax relief. Therefore, reform should focus on spending and accountability at the local level. A property tax revenue limit would not interfere with the assessment process, but it could control the growth of property tax bills while ensuring local governments have enough revenue to fund key priorities.
Iowa should look to policy examples from New York and Utah – perhaps America’s most liberal state and its most conservative. Even New York—an extremely high-tax state recently established a property tax revenue cap which limits the annual growth of taxes levied by local governments and school districts to two percent, or the rate of inflation, whichever is less. If a local government wants to exceed the cap, the governing authority must approve by a supermajority vote. New York’s property tax cap has successfully saved taxpayers billions.
Since 1985, Utah’s Truth in Taxation law has effectively controlled the growth of its property taxes. The law requires an extensive public notification and hearing process which notifies citizens of the intent to raise taxes and explains why additional revenue may be needed. If a local government decides they want to increase spending, the Truth in Taxation process requires a justification of the increase–and perhaps more importantly, it requires local elected officials take votes to authorize the new rates or assessments. The purpose of truth in taxation is to provide “notification, disclosure, and the elimination of automatic property tax increases.” In describing the importance of truth in taxation the Utah Taxpayers Association argues that “local governments should not receive an automatic 12 percent revenue increase simply because property valuations increased 12 percent.”
A property tax cap, along with a strong truth in taxation process, would provide relief for hardworking taxpayers across Iowa and empower citizens by making local governments more accountable. If a local government wants to spend beyond a reasonable the limit, they should have to justify that spending before taxpayers and go on record with votes that increase property taxes.
Both New York and Utah provide examples of sound property tax reform. Spending limits combined with the truth in taxation process would provide property tax relief and reverse the massive increase in property taxes in many localities across Iowa.
Jonathan Williams, Chief Economist and Vice President, Center for State Fiscal Reform, American Legislative Exchange Council also authored this piece.