Iowa can serve as a property tax reform leader
In 1934, to provide property tax relief, Iowa levied the state’s first sales and income taxes. Iowa was struggling with the economic impact of the Great Depression, and a sales and income tax provided two new sources of revenue to offset the reliance on property taxes and provide some relief to homeowners and buisnesses. Eventually, the creation of the sales and income tax only led to higher tax rates across the board, which offers a valuable lesson for policymakers today.
While Iowa is making tremendous progress in lowering income tax rates, it’s a different story when it comes to property taxes. Over the past 20 years, property taxes have increased almost 110 percent in Iowa, which far surpasses the growth of inflation and population. From Fiscal Year 2024 to Fiscal Year 2025 Iowa’s counties are increasing their property tax collections by more than 7 percent, cities more than 6 percent, and school districts more than 5 percent. This means that taxpayers will pay more than $6 billion in property taxes to fund local governments.
The root cause of high property taxes in Iowa remains local government spending. For too long, local governments have been on autopilot as government spending has increased and cities and counties have taken advantage of assessment windfalls.
High property tax rates not only impact property owners, renters, and businesses but stunts economic growth. Iowa’s property tax system is complex and reforms over the years fail to address the root cause of the problem — government spending.
In trying to address high property tax burdens, some states are considering offsetting or “buying down” property tax rates by broadening their sales tax base, increasing the sales tax rate, or a combination of both. Broadening the sales tax base can be beneficial, but it also can have consequences if not done correctly.
Often the blame for high property taxes is placed on the assessment process, which then increases calls for a California Proposition 13-style limitation.
Assessment limitations are popular because people tend to blame the property valuation for their high tax bill, but these types of limitations have unintended consequences. They interfere with the market value of property, especially for new buyers, and they can make an already complex system even more complex. Assessment limits even prevent homeowners from making improvements and when a property is sold it often leads to skyrocketing costs. California is an example of this with Propisition 13. As the Tax Foundation explains:
Although well-intentioned, assessment limits create sizeable inequities over time without truly keeping property taxes in check. Under an assessment limit, an ever-increasing share of property tax revenue must be generated from newer properties, or (depending on when assessments reset) those that have changed ownership more recently or have been substantially improved. This can create highly unequal tax burdens across similarly situated properties, often penalizing the younger and lower-income homeowners that these limitations were designed to benefit. It can also create a lock-in effect, discouraging homeowners from selling or even improving their properties.
Iowa already has an assessment limitation called the “rollback,” which helps property taxpayers, but it is not sufficient to offset the growth in property taxes over time. Focusing on assessments also serves as a distraction from the real problem. In Iowa, local governments pass the blame for high property taxes onto the assessor, another local government, or even the state legislature. As a result of high assessments, the legislature focused their reform efforts on preventing local governments from capturing windfalls from the increased assessments.
In 2023, the Iowa legislature passed a comprehensive property tax reform measure. The property tax law consisted of several provisions, which included levy consolidation, direct notification, November-only bond elections, adjusting levy rates as valuations rise, and some limited reforms to urban renewal practices.
To prevent assessment windfalls and to force local governments to ratchet down property taxes, the measure creates a “soft cap” that is applied to assessment growth. The objective of this soft cap is to prevent cities and counties from collecting windfalls from assessment increases. After cities and counties complained that this was too restrictive, the legislature reformed the soft cap during the 2024 session.
However well-intentioned, this new formula failed to address local government because many cities and counties continue to increase their spending.
Another poor fiscal policy is utilizing the state budget or General Fund to “buy down” property tax rates. This occurred with the property tax reform measure (which established a 90 percent rollback for commercial and industrial property) that the legislature passed in 2013. As part of the tax reform measure that provided commercial property tax relief, the legislature would provide a payment, or “backfill,” to make up for the lost revenue for cities and counties.
Starting in Fiscal Year 2017, the backfill payment was limited to $152 million. Although the legislature created the backfill payment as a standing appropriation, it was never intended to be a permanent funding source for local governments. Legislators, as well as local government officials, understood that the legislature could repeal the backfill at any time. However, local governments soon considered and expected the backfill to be a permanent form of local government aid.
As a result of growing property tax revenues and local government spending, many cities and counties did not even need the backfill payments. This resulted in the legislature phasing out the backfill in 2021 — it will be phased out over a four-to-seven-year period, starting in Fiscal Year 2023, depending on the growth of the city or county tax base.
In 2022, the legislature eliminated the county mental health levy, which meant that the state General Fund would now absorb the cost of funding mental health. This should have provided some property tax relief, but many counties increased their rates instead. The examples of the property tax backfill, and the elimination of the mental health levy demonstrate that shifting more to the state General Fund and “buying down” rates is not only a poor policy, but it seldom works.
In comparison, with prudent budgeting and government reform, Gov. Kim Reynolds and the legislature were able to substantially lower income taxes. Starting in January 2025, Iowa will have a 3.8 percent flat tax rate. Iowa’s income tax system was transformed from a multi-bracket system with a high rate that was close to 9 percent, to a low flat tax. Iowa once had the highest corporate tax rate in the nation at 12 percent; the rate has now been lowered to 7.1 percent and is scheduled to be lowered until it reaches a flat 5.5 percent.
Applying a 2 percent property tax cap would force real spending limitations on local governments.
Gov. Reynolds has stated that Iowa is not finished with reducing income tax rates. Nevertheless, Iowa is succeeding in these efforts because it has coupled prudent spending reform with tax rate reductions. In addition to conservative budgeting, Gov. Reynolds has also been proactive in reforming state government by focusing more on efficiency. Limiting spending, conservative budgeting, and reforming government has been a successful formula for Iowa’s historic income tax reforms. Local governments should follow the same approach to address escalating property taxes.
This is why reforms such as a levy limit or budget limit will help restrain local government spending. Applying a 2 percent property tax cap would force real spending limitations on local governments. If a 2 percent cap were currently in place, it would save taxpayers $250 million. This would be a commonsense fiscal policy reform, which would begin to provide property tax relief.
Regardless of the tax, the root cause of high taxation is government spending. This is why applying a levy limit or even a local government spending limitation is vital for achieving true property tax reform. This is why examples like Utah’s Truth-in-Taxation law are so effective. They focus on the revenue side that directly addresses overspending.
Iowans are demanding property tax relief and the budgets of too many local governments are growing beyond the taxpayer’s ability to pay. Addressing spending is never easy because the incessant noise clamoring for more is often louder than taxpayers. Policymakers need to realize and learn from history that past reforms that rely on tax shifts, “buy downs,” assessment limitations, and shifting more burdens to the state budget seldom work.
The solution for true property tax relief remains simple: creating more accountability and curbing spending at the local level.
John Hendrickson serves as policy director for Iowans for Tax Relief Foundation.
