The rollback refers to the statewide percentage of residential or agricultural property assessed value that is taxable. Once the Iowa Department of Revenue determines the rollback for any given year, it is used by all local governments to determine their taxable value. For assessment year 2013 (used in FY 2015 budgets), the percentage is .54002 for residential property (up from .528166 this year).
The rollback has a huge impact on local budgets, but has always been something that local governments have viewed as a wild card – out of their control, and beyond their ability to predict. While it will continue to be out of their control, it is not necessarily unpredictable.
The rollback is calculated by looking at statewide taxable value for that class (which for residential is always going to be 3 percent more than the prior year through at least assessment year 2020) divided by actual assessed value, statewide. The resulting percentage is then applied to assessed value in each jurisdiction to “roll back” the percent of assessed value that can be taxed.
Here are several examples, using a starting rollback of .50, or
$50 taxable value
$100 assessed value
(1) If there is no growth in statewide residential assessed value:
$50 taxable value x 1.03 = 51.5 = .515
$100 assessed value x 1.00 = 100
Taxable value = .515 x $100 = $51.5
(Rollback x assessed value = taxable value)
(2) If there is a 3% decline in statewide residential assessed value:
$50 taxable value x 1.03 = 51.5 = .531
$100 assessed value x .97 = 97
Taxable value = .531 x 97= $51.5
(3) If there is 3% growth in statewide residential assessed value:
$50 taxable value x 1.03 = 51.5 = .50
$100 assessed value x 1.03= 103
Taxable value = .50 x $103 = $51.5
Notice that in any case, the total statewide taxable value is going to grow by 3 percent, in this example from $50 to $51.5. In the first two cases the growth comes through the operation of the rollback. In the third case the growth comes entirely from growth in assessed value. But in all cases there’s going to be a 3 percent increase in taxable value, and the taxpayers will see a 3 percent increase in residential taxes for a given tax rate. Under current law, there will be three percent growth in residential taxable value statewide every year, no matter what, until at least assessment year 2020 (which is fiscal year 2022).
The rollback was established during the 1970’s during a time of high inflation. (In fact, the original limit was 6 percent, which at that time seemed relatively low!) It was designed to moderate increases in property taxes during times of high inflation, and to preserve some growth in taxes for local governments in times when property values are not rising. Just as the above example showed, the rollback generated growth in taxable value for local government when there was no growth in assessed value, and it moderated the growth for taxpayers when property values were growing.
The rollback has operated effectively for many years. The portion of residential value that could be taxed was as high as 80 percent in the late 1980’s, but it has now fallen to around 54 percent. With a 3 percent statewide limit, it is expected to stabilize around 55 percent.
Another way to look at it is that if even if every government in Iowa experienced no growth, they would still see a 3 percent increase in residential taxable value due to the operation of the rollback. Whatever happens to assessed value, the rollback will always compensate in a way that results in a 3 percent growth in taxable value.
The actual growth in taxable value for any individual local government can vary greatly, however. It will depend on what happens in the local market, and the share of property that is residential, commercial, etc. Once determined, the rollback is applied universally statewide. But the growth in local assessed value to which it is applied can be different for each community. If the growth is exactly the same as the statewide growth percentage, then there will be a three percent increase in residential taxable value in that community. Where growth is higher, there will be more, and where it is lower, there will be less. Also, communities with a higher share of residential property will see higher growth in overall taxable value than communities with less residential.
In years past (pre 2007), the rollback was holding down the portion of residential property values that could be taxed to less than 4 percent growth per year (the statewide limit prior to this year). This is because agricultural and residential classes are tied together for purposes of determining the rollback. If the rollback is already at 100 percent for either residential or agricultural classes of property (as it was for agriculture for many years), then the allowable growth in taxable value for the other class is the lower of the growth rates of the two classes, up to the limit (now 3 percent). During years of low agricultural growth, this limited the growth in residential taxable value. Now, agriculture is below 100 percent (and will be for many years to come) and is no longer acting as a limit, so residential is reaching its 3 percent statutory level.
If an individual community believes its growth in residential property will be at least as great as the state average, it can project a 3 percent annual increase in residential taxable value, plus whatever it projects for new residential construction. Otherwise, a community can project its annual change in residential assessed value (including new construction) in conjunction with the statewide rollback projections that are available from the Legislative Services Agency. For more information about the rollback and for projections of the rollback, click here.