Iowa Legislature Approves “Soft” Property Tax Cap

The Iowa State Legislature last week approved legislation to enact a “soft cap” on property taxes. The bill would require local governments to take extra steps before approving budgets that include more than a 2% increase in property tax revenues from the current year.

A levy that generates property tax revenue increases of 2% or less could be approved by a majority vote of the board or council. Anything higher than 2% would require a two-thirds majority vote.

The legislation would also mandate that local governments alert the public, including on platforms like websites and social media, about budget proposals. Local governments already are required to hold a public hearing on their budget and vote publicly three times to approve them.

Earlier ideas such as requiring voter approval to raise property taxes more than 2% or placing a 3% cap on annual property tax revenue growth were struck from the final bill.

Described as a “soft cap” on property taxes by its supporters, the bill would have allowed Iowa voters to overturn property tax increases that exceed 2 percent from one year to the next by calling for a referendum.

Proponents say some kind of cap is needed to address complaints from Iowans frustrated when they see their tax bills go up even when local property tax rates remain constant or decline.

According to the Tax Foundation:

Interestingly, while the amended legislation is less restrictive than the introduced bill in most respects, the 2 percent soft cap now includes newly valued properties, whereas the introduced bill kept new valuations outside the cap. This means that increased collections due to new construction (as opposed to rising property values) count toward the cap…

A limit on overall collections (often called a levy limit) is intended to constrain such an increase in overall collections when circumstances have not changed.

When, however, property is newly developed, this new construction does impose additional costs—which is why that newly valued property is often kept outside the levy cap. That was how the initial bill was structured, but while other provisions were softened, this one was tightened.

In 1977, the Maryland General Assembly passed legislation that requires county governments to hold public hearings regarding proposals to enact a tax rate that exceeds the constant yield rate. The constant yield rate is the rate that, when applied to the current assessable base, yields the same amount of property tax revenues as in the prior year. New construction and annexed land are not included in the calculation of the constant yield rate.

When there is growth in the assessable base, localities may still be able to generate additional property tax revenues while reducing their property tax rates. This may result in an overall property tax increase for homeowners even though the property tax rate has been reduced. When the assessable base is increasing, the constant yield rate is generally below the current tax rate.

The Iowa bill now awaits action by Governor Kim Reynolds.

Useful Links

The Tax Foundation: Iowa Adopts a “Soft” Property Tax Cap