As fall approaches and local governments in central Iowa begin to put budgets together for the coming year, they will have to decide what to do with the extraordinarily high property tax assessment increases that homeowners and businesses received in April 2019. Recall, on average, property assessments in Polk County rose from seven to 20 percent, depending on the type of property (e.g. residential, commercial, etc.). Because property taxes are basically a function of a rate times the assessed value (as modified by state law), assessed value increases will drive property tax increases unless decisions are made to drop the rate.
Now is the time for citizens to ask, how do local governments plan to deal with the increase in assessed values in their budget development? Will property tax rates be reduced to moderate the impact of high assessments on property taxpayers, or will local governments default to a constant rate, meaning a huge increase for taxpayers?
Fortunately, a new Iowa property tax transparency law has taken effect that will make it easier to keep track of the budget decisions that are so important to property taxpayers. The law applies to cities and counties. In essence, the law changes the starting point for budget development.
Rather than starting with a constant property tax rate (often the default assumption) and using whatever revenue it generates for budget purposes, the law instead provides a new starting point: What is the rate that would generate the same amount of revenue as was generated last year? Then, what increases are necessary and why?
The best way to understand the impact is to look at an example, in this case the City of Des Moines, where FY (Fiscal Year) 2020 is the current year and FY 2021 is the upcoming year.*
|Total Taxable Value||Total Rate ($ per $1,000 Taxable Value)||Property Tax $$|
|FY 2020 Budget (Current Year)||$8,439,193,435||$16.64||$128,954,316|
|FY 2021 – What Rate Will Generate Constant Property Tax Dollars?*||$9,308,430,4359||$15.08||$128,954,316|
|FY 2021 Budget – What if the Rate Stays the Same as This Year?||$9,308,430,4359||$16.64||$142,236,610|
|How Much Would a Constant Rate Generate Above the Base||$9,308,430,4359||+$1.38||$13,293,322
Base Rate vs. Constant Rate
This year, the City of Des Moines generated $129 million using a levy rate of $16.64 per $1,000 of taxable value.
Given the projected increase in taxable value (due to 2019 assessments), Des Moines could raise the same amount of property tax next year ($129 million) with a levy of only $15.08. This is referred to as the “base rate.”
Note how this approach is different from a starting point that uses the current levy rate. If instead the City were to default to the current rate ($16.64), it would generate over $142 million or an increase of $13.3 million or 10.3 percent.
The new law does not limit what Des Moines can do with its property taxes. One should expect some increase in property taxes. However, if Des Moines intends, in its upcoming budget, to raise even $1 more than what is generated from the base rate, it will need to do the following:
- Provide notice of a public hearing in the newspaper and on social media;
- Hold a public hearing to disclose the current rate, the new base rate, and the proposed rate;
- Provide an explanation of why the increase is needed.
If Des Moines (or any city or county) then proceeds to a budget that generates more than two percent more property tax revenue than the prior year, it must be approved with at least a two-thirds vote by the local body. In other words, local officials must clearly go on record for increasing taxes.
The Taxpayers Association of Central Iowa believes the law change is subtle, but it will have a substantial long-term impact on local property taxes.
It will certainly make it easier for citizens to understand what is happening with their property taxes, and to hold their local officials accountable for key budget decisions.
However, the new law will only work if citizens use it.
Go to the Tax Transparency Coalition website and find out what kind of property tax increase you could see in the event no change is made in your tax rate. Then, contact your local city and county officials and ask them how much they intend to reduce the tax rate for the upcoming budget year. Now is the time!
Watch for next month’s message when we’ll look at how to make sure the promised property tax reductions from the local option sales tax are not cancelled out by increases in assessed value!