Putting Local Property Taxes in Context

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On Sunday Sept. 17 The Des Moines Register kicked off what we can expect will be a continuous refrain from local governments over the prospect of losing state property tax replacement funds.

In 2013 the legislature cut back the portion of commercial property assessed value that can be taxed from 100 percent to 90 percent, with multi-family residential property being scaled back even more. The State compensates local governments for the commercial property tax revenue they are foregoing, as a result of this change, to the tune of $152 million per year, statewide.  This compensation is also known as “backfill.”

In view of the state’s poor fiscal condition, there is discussion of scaling back or eliminating these payments to local government.  Local governments are trying to head this off by painting a picture of cuts in services and/or increases in property taxes.

Without commenting on whether it’s right or wrong to renege on an agreement, it’s still important to have a clear understanding of what the impacts would actually be on local government budgets.  The information that has been presented so far tells only a part of the story, and in most instances, suggests a far more negative impact than is likely to be the case.

Property taxes growth is often a function of growth in assessed values.  If assessed values go up, local governments collect more property taxes with the same tax rate.

Lately, assessed values have increased, so local governments have been collecting more revenue even with constant rates.  In fact, 12 of 16 central Iowa cities are collecting so much more property tax revenue that even if the backfill had been eliminated this year, they would still have been working with a net increase in revenue for budgeting purposes. For some, the increase would have been substantial, but for others, losing the backfill would have meant a smaller increase in revenue, not a reduction.

Looking ahead to next year, central Iowa cities will be in even better position to weather a reduction or elimination of the backfill, should that come to pass.  While last year’s budgets were based on assessed value increases in the range of 3-4 percent, this year most properties saw an 8-9 percent increase in assessed value.  While not all of that increase translates into property tax growth, the increases will yield enough new revenue to far more than offset any losses in backfill.  Moreover, cities now have greater control of their spending due to changes in collective bargaining.  With healthy net revenue growth and better control over spending, it’s hard to imagine why service cuts or rate increases would be necessary.

Next time a story about the backfill is written, it will be important to place these “losses” within the context of the bigger picture of revenue growth.  If the backfill is eliminated for next year, it does not mean local governments will be cutting their budgets; it means they will be managing with smaller increases than would otherwise have been the case.

Tax Collections Comparison to Backfill

 

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