In 2013, Iowa lawmakers passed a reform bill that promised to reduce commercial property taxes and fully reimburse local governments for any lost revenue. An investigative report by the Des Moines Register shows it has failed on both counts.
Tax Break Doesn’t Measure Up
The tax reform legislation centered on lowering Iowa’s high commercial property tax rate to make it more competitive with neighboring states. The law lowered the level at which commercial, industrial, and railroad properties were taxed from 100% valuation to 90% over two years.
Projections from the Legislative Services Agency estimated tax savings would reach $254 million in fiscal year 2017. About $218 million of the savings were expected to benefit commercial properties alone.
However, the tax savings have only been about half of what was expected. An agency review issued in January put the estimated savings at $157.6 million with commercial properties getting $125 million of the tax break.
New Classification Also Impacts Revenues
The tax reform legislation also created a new property tax class for multi-family residential that reduces taxes for apartments, nursing homes, and assisted-living facilities.
Last fiscal year, multi-family was taxed at 86.25% of value, down from 100% in previous years. The level will continue to decline in increments of 3.75% each year until these properties are taxes at the same level as residential in fiscal year 2022.
Local Government Payback Falls Short
Government losses have been much greater than what was projected. In three years, the state paid $391 million to cities, counties and local school districts. But that reimbursement has not kept pace with the reduction in tax revenue. As a result, local governments have missed out on a combined $107.2 million.
The loss in tax revenue has left tax entities weighing whether to raise property tax rates, cut services, or both. Amid the state’s budget shortfall, officials admit the situation could get even worse.
"I want lower taxes for our citizens, but I want a responsible and sustainable commitment from the state too," Des Moines City Councilman Chris Coleman told the Register. "As they play ping pong with policies and tax rates, it creates real problems for the citizens of Des Moines and residents all over the state."