Iowa Adds Truth and Transparency to Property Taxes

Iowa lawmakers and Governor Kim Reynolds delivered a bipartisan win for Iowans this week, as Truth-in-Taxation became the latest free market policy solution signed into law in the Hawkeye State. Iowa now joins Utah, Tennessee, Kansas and Nebraska in enacting one of the most taxpayer-friendly laws in the nation.

ALEC Board of Directors member and Iowa House Speaker Pro Tem John Wills commented, “Property taxes are often hard to understand by the taxpayer and easy to abuse by the local government. That’s why Iowa implemented Truth-in-Taxation that shines the light on these taxes, so they are more easily understood and harder to abuse.”

One of the ALEC Essential Policy Solutions for 2023, Truth-in-Taxation aims to reduce the growth of property taxes – a common taxpayer complaint – through transparency and accountability. With the passage of House File 718, local governments in Iowa will now be more accountable to taxpayers.

Property taxes are the single largest source of revenue for local governments. For most states, property taxes are tied to the assessed value of property. As assessment values increase, property taxes will increase on autopilot. Taxpayers end up paying higher property taxes to get the same quality and quantity of public services as before the property tax increase.

Even in states with property tax caps, local governments can increase taxes by increasing the assessed value of property. Let’s say a city caps property tax rates at 1% of the assessed value of property. A house is assessed at $385,000 in 2021. In 2022 the house’s assessed value increases to $400,000. While the homeowner is still paying 1% of the assessed value, the homeowner’s property tax bill went from $3,850 to $4,000. Thanks to property taxes being tied to assessment value, the homeowner is faced with a $150 tax increase. Meanwhile, local politicians can claim they “held the line” on property taxes because the rate never moved.

Truth-in-Taxation rejects the status quo of property taxes in favor of increased transparency and accountability. It is a revenue-driven system, not a rate driven system. Under the new Iowa Truth-in-Taxation law, property tax levy rates are capped for cities and counties. Cities will have a general fund levy, consolidated from 15 existing levies, capped at $8.10 per $1,000 in taxable value. Counties have a cap of $3.50 per $1,000 for general services and $3.95 for rural services. Local governments are placed into three tiers based on their revenue growth with different formulas to determine how much of the excess revenue must be dedicated to lowering property taxes, and the process for bringing existing property tax rates down to those set maximums.

In addition, Iowa already has a “rollback” rate that limits the amount of property taxes can increase in a given year. Under the current “rollback” rate, a house valued at $100,000 would only pay property taxes on $54,000 of the house’s assessed value under the current rollback rate.

If local governments want to exceed the cap, the Truth-in-Taxation notification and hearing process is triggered. Under this process, all citizens will be automatically notified of the property tax increase and its potential impact on their property. Local officials will also have to hold a broadly advertised public hearing and recorded vote, where citizens can communicate their concerns about the proposed tax increase. This makes local officials think twice about voting to increase property taxes.

Iowa has set the pace for free market state policy in recent years. In 2022, Iowa was the first state to kick off the 2022 State Flat Tax Revolution, with Arizona, Mississippi, Georgia and Idaho making the switch in the following months. Though the Education Freedom Movement started in West Virginia and Arizona a few years ago, Iowa set the pace for implementing universal school choice in 2023, followed by Utah, Arkansas and Florida.

Could a nationwide property tax reform movement be next? Taxpayers in many other states sure hope so.