Did you know that in 1934, Iowa implemented the first sales and income taxes to reduce property taxes? It is never a good policy to create new taxes or raise existing taxes to reduce another tax and today the people of Iowa suffer from property taxes and taxes on sales and on high income.
Property taxes in Iowa are primarily the primary source of funding for local governments, with school districts tending to be the primary driver of property tax bills. Residents of Iowa are asking for property tax relief. However, their appeals for relief are being ignored by local governments who prefer to blame the county assessor or shift the blame onto another tax authority.
Fortunately, the obstruction and the blame game can be stopped by taxpayers with strong truth-tax legislation that will help “lower” property taxes and ultimately bring relief to taxpayers.
Tax Truth refers to strict transparency and accountability requirements that local governments must follow to raise property taxes. Truth-in-Taxation provides “sunlight” to the local government budgeting process. It forces local governments to be more accountable to taxpayers, bridges the “honesty gap” created by the increase in contributions.
Too often, local governments claim a windfall from increased assessments, and the taxpayer wonders why their tax bill is higher. When asked, local government officials argue that they are not to blame for not raising property tax rates. If the contributions increase by 10%, that does not mean that a taxpayer has 10% more in his bank account. Truth in tax matters requires local governments to be honest.
Utah is the best example of a tax truth law, and it is considered the gold standard. In 1985, the Utah Legislature passed Truth-in-Taxation to remedy their high property taxes. Before Truth-in-Taxation, Utah property taxes increased faster than the rate of population and inflation. Today, their property tax rates have increased in step with inflation and population growth.
The Tax Foundation ranks Utah the seventh lowest property tax. Iowa has the 10th highest tax burden. Something must change. Other states are following the Utah property tax solution. This year, the Kansas legislature passed a Utah-style tax truth bill. Currently, more than 200 local governments in Kansas have decided to keep property taxes at the same level or reduce rates due to tax truth.
A fundamental aspect of Truth-in-Taxation is direct notification. Under Utah and Kansas laws, local governments must send notices to taxpayers, providing information about the proposed tax increase and its impact on their tax bill. It includes the date, time and location of the Tax Truth Budget Hearing. This extensive process of public notification and hearing was successful. It also forces local governments to take a recorded vote after the tax truth hearing, forcing politicians to think twice before raising taxes to justify the increased spending.
While direct notification is an essential aspect of truth in tax matters, perhaps more importantly, the law focuses on income rather than rates. The advantage of a revenue-driven system is that it creates an “automatic reduction in property tax rates”.
The truth about taxation helps “lower” property tax rates. As assessments or appraisals increase, tax rates are automatically reduced to provide local governments with the same amount of property tax they received the previous year. If local governments want to increase spending by raising property taxes, then it triggers a hearing on the truth about taxation.
A significant difference between Kansas and Utah is that while Utah allows new growth, Kansas does not; there are no exceptions or loopholes.
In 2019, the Iowa legislature passed a measure of property tax transparency and accountability, sadly referred to as tax truth. However, it bears very few similarities to a Utah-style tax truth law. The Iowa reform only applies to cities and counties, while school districts are exempt.
Cities and counties are required by law to publish their budgets, and they must pass a resolution that identifies the maximum amount of property taxes they will collect in the next fiscal year.
Cities and counties are to publish a notice (websites, social media, and newspapers) and hold a public budget hearing on the proposed budget resolution. In an attempt to control spending, the law established a “soft cap” of 2 percent on local budgets. New growth is not excluded. If a city or county wants to exceed the 2% “soft cap”, it takes a qualified majority vote to approve it.
As part of tax truth, direct reporting ensures transparency and accountability, while the revenue-driven system keeps local government spending and rates low. The two work in tandem to help control and slow the growth of property taxes.
Iowa law needs to change to reflect the income-driven system in Utah or Kansas. Iowa’s public notification requirements must also be strengthened to include a direct notification requirement. To be effective, it must apply to all local governments, including school districts.
Spending is at the heart of high property taxes. The truth about taxation can help “lower” property taxes in Iowa. The voice of the taxpayer is often stifled by vested interests that demand that local governments spend more money on their respective causes. Some of these causes may be noble, but tax truth protects the taxpayer. A strong tax truth law will amplify the voice and serve as a watchdog for property taxpayers.
John Hendrickson is the policy director of the Tax Education Foundation of Iowa.