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Next September’s property tax bills will shock many central Iowa residents and businesses. A closer look at tax statements will show that even though the property tax rate may not have changed, the tax bill may be considerably higher. The reason for the discrepancy illustrates a flaw in the way Iowa’s property tax system works.

For a number of years, central Iowans have been seeing increases in property values and they will find an extraordinary increase this year. Property tax rates are applied to property value to determine an individual owner’s property tax bill (and a local government’s tax revenue).  When there’s huge growth in taxable valuation, even with constant rates, property tax owners will experience a large increase in their taxes and local governments will reap a windfall in revenue. Click To Tweet All the while, some local officials will take credit for holding the rate constant.

Historically, property taxes in Iowa, and especially in central Iowa, have grown faster than population, inflation, and state general fund revenues.  The nearly “automatic” increases that come from high valuation and constant rates are a contributing factor.

 

* Altoona, Ankeny, Bondurant, Carlisle, Clive, Des Moines, Grimes, Indianola, Johnston, Norwalk, Pleasant Hill, Polk City, Urbandale, Waukee, West Des Moines and Windsor Heights.

Under Iowa law, some adjustments are made to assessed values in order to control the growth in taxes.  These adjustments create “taxable value,” the portion of assessed value actually subject to taxation. Because of these controls (principally, the residential and agricultural rollback), taxable value is always less than assessed value, and it grows more slowly than assessed value.  For example, total non-agricultural assessed valuation in Iowa grew 7.3 percent in 2017, but total urban taxable valuation in Iowa grew 5.5 percent.

Of course, these numbers are still quite high, and they’re even higher in central Iowa.  Taxable value increased as much as 28 percent in Altoona, and even the City of Des Moines saw 7.7 percent growth in taxable valuation this year.  In both cases, valuation increases translated directly into property tax growth.  Des Moines actually raised its rate by 16 cents and will collect over 9 percent more property tax revenue this coming year.

Below is a summary of the increases in taxable value for central Iowa cities, changes in tax rate per $1,000 of taxable value, and the increases in property tax revenue in the budgets that begin July 1 this year.  The table also notes the effect of the new Dallas County local option sales tax.

 

Comparison of Growth in Taxable Valuation to Growth in Property Tax Revenue (1)

Fiscal Year 2019 vs Fiscal Year 2018

Selected Central Iowa Cities

Change in Change in Change in Property Change Including Dallas County
City Taxable Valuation Tax Rate Tax Revenue Local Option Tax

 

Altoona

28.9% NC 28.0%
Ankeny 15.4% -0.90 5.7%
Bondurant 16.6% -0.04 16.3%
Carlisle 5.6% NC 5.9%
Clive 6.5% NC 6.3% 11.1%
Des Moines 7.7% 0.16 9.1%
Grimes 21.4% NC 20.5%
Indianola 6.3% NC 6.0%
Johnston 7.6% 0.13 9.6%
Norwalk 8.9% -0.02 2.6%
Pleasant Hill 6.2% NC 6.4%
Polk City (2) 12.9% 2.01 43.2%
Urbandale 5.9% NC 6.1% 9.4%
Waukee 11.8% -0.10 5.5% 28.1%
West Des Moines 6.9% -0.21 5.5% 9.2%
Windsor Heights 9.6% -0.38 6.8%
(1) Does not include gas & electric nor tax increment financing.
(2) Polk City stood to lose substantial revenue had the local option sales tax passed in
      Polk County.  Its budget reflects a worst-case scenario and will likely be amended.

The table shows that in many cases, local governments opted to capture the entire increase in tax revenue that is generated from valuation increases.  There were some exceptions: Ankeny decreased its tax rate by a full 90 cents and Windsor Heights reduced its rate by 38 cents.

Four cities are receiving new revenue from the Dallas County local option sales tax that will take effect July 1: Clive, Urbandale, Waukee and West Des Moines.  They vary in how they are handling the new sales tax revenue:

  • Clive and Urbandale are capturing all of the increase in their budgets, resulting in 11.1 percent and 9.4 percent growth, respectively, in combined property and sales tax revenue.
  • Waukee is making a 10-cent reduction in its rate, but will nevertheless collect 28.1 percent more local property and sales tax revenue!
  • West Des Moines is making good on its promise to direct 50 percent of its sales tax proceeds to property tax relief through a 21-cent reduction in its property tax rate.

Every city is different; for example, they are in different stages of development.  Fast-growing cities will see valuation growth from new construction and may need the associated revenue to meet new service demands.  (Note, however, that the increase in residential property value in Polk County that was not due to new construction or reconstruction was more than 8 percent).

Large increases may also be due to a city having unique issues this year, such as in Des Moines where federal funding for ongoing expenses has run out and must be replaced with local revenue.

In any given year, no doubt, a unique case can be made for why such substantial increases in revenue are necessary.

There is no doubt that over the long run, however, ... when the pattern is repeated year after year, the result is property taxes that grow faster than inflation, population, and household income. Click To Tweet In other words, property taxes are becoming more unaffordable.

A more diversified local revenue base could reduce the extent to which taxpayer liabilities grow faster than ability to pay. This may be a good reason to consider alternative local revenue sources, such as the local option sales tax. Click To Tweet To the extent a local option sales tax replaces property tax, future growth in taxpayer exposure would be more limited and more consistent with growth in inflation, population, and income.  If signed by Governor Reynolds, individual cities in Polk County will have the opportunity to revisit the local sales tax vote as individual entities.

The long-term pattern of disproportionate growth in property taxes may also signal a need to revisit and possibly strengthen the current system of property tax controls and limits.

 

Spotting a Potential Flaw in Iowa’s Property Tax System

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