In 2013 the Iowa Legislature passed a property tax measure aimed at providing a tax relief for commercial properties. To compensate for lost revenue to local governments the Legislature would “backfill” by making up the difference. For Fiscal Year 2017 the State provided over $152 million to counties, cities, and schools. The backfill payments to local governments began in 2014 and because of lower than expected revenues, the Legislature may consider revising or ending the backfill.
Although there has not been anything specifically proposed, local governments are nervous that they may lose out on the backfill payments. When considering this issue, Iowans must keep in mind two important points. First, it must be understood the tight budget is not a result of declining revenues, but lower than projected revenues. This means we have a spending problem in Iowa. Second, many local government entities in Iowa are taking in more property tax dollars because of an increase in economic growth and property assessments than prior to the reform. Therefore, it may be appropriate to consider phasing-out the backfill payments.
Local governments in central Iowa, especially in the Des Moines metro area, are collecting more property tax dollars. As assessments on property and economic development increases, this often means these local government entities can collect more property taxes. Reviewing collected property taxes from all sources from Fiscal Year 2014-2017 reveals that many counties’ tax collections have actually increased even when the backfill is not taken into consideration. Dallas, Madison, Polk, and Warren counties all saw an increase even without the backfill. The central Iowa cities of Altoona, Ames, Ankeny, Johnston, Urbandale, Waukee, and West Des Moines also had an increase without the backfill. Outside of central Iowa, the cities of Bettendorf, Coralville, Council Bluffs, Dubuque, Iowa City, Marion, and Marshalltown saw a similar result.
Many of these cities and counties are benefitting from economic growth, which also leads to increased property tax revenues and higher assessments. Although some local government entities are experiencing growth in their property taxes even without the backfill, others are not. Without the backfill payments, they may see lower revenues. This is symbolic of the challenge of rural economic growth in Iowa. It is also why policymakers must be prudent when considering any revisions to the backfill payments the Legislature has been making.
It would be prudent for policymakers to review the property tax backfill, and make revisions to this policy if needed. It may be necessary for the Legislature to examine backfill payments on a case-by-case basis. Local governments should prepare for the possibility of reduced state funding. Fortunately, many taxing authorities will have greater flexibility on spending as a result of the collective bargaining reform measure passed by the Legislature in 2017. This reform will provide some additional cost savings for taxpayers.
It is said “everything” will be on the table for the upcoming legislative session in looking for solutions to resolve the less than expected revenue growth. The solution to Iowa’s fiscal challenges will be found in reducing the growth of state spending and working toward tax relief to create economic growth in our state. Wisconsin, North Carolina, and Indiana have recently implemented fiscal policies that lower taxes and provide incentives for economic growth. It is working for them and will work for Iowa.