Des Moines, other cities say Iowa's tax changes have left budget holes, no room for growth
Des Moines city leaders say a decade's worth of property tax-cutting legislation has left them grappling with a crippling budget.
In the face of soaring property tax assessments across Iowa in 2023, lawmakers passed House File 718, a bill meant to keep those growing assessments from turning into dramatically higher tax bills for homeowners.
But in the efforts to keep money in taxpayers' pockets, the legislation limits the amount of revenue cities and counties can collect from property taxes, which Des Moines city leaders say makes it harder to balance the city's pocketbook — and leaves some services at stake.
Des Moines City Manager Scott Sanders said House File 718 is the proverbial cherry on top of the state's "detrimental" changes in the tax system that have been "compounding" over the last decade. For Des Moines, the impact of these legislative changes totaled $12.5 million in fiscal year 2024, which began July 1. That included a $3.5 million hit from Senate File 181, passed last year to correct a state property tax calculation error that would have put residents on the hook for millions of extra dollars in payments.
More: Iowa lawmakers vote to pass $100M property tax cut, with breaks for seniors, veterans
As the ways for cities to collect revenue shrink, residents' expectation for the city to expand services has grown — especially for social services meant to address homelessness, public safety and mental health, city officials say. Des Moines Finance Director Nick Schaul calls the situation a "Catch-22," and says if the city can't come up with alternative revenue sources, those services could be "disrupted or lowered," and the city manager and City Council will need to make hard decisions on budget priorities.
And Des Moines is not alone. Iowa League of Cities Director Alan Kemp said in an email that cities of all sizes are reporting "a loss or limitation of revenues and revenue options." Yet cities "face the same inflationary pressures that everyone in the economy faces," he said.
More than 200 of Iowa's 947 cities saw negative growth in revenue in the past fiscal year, according to the league.
Property taxes make up the bulk — between 50% and 60% — of Des Moines' revenue in its nearly $260 million general fund, which pays for city services such as public safety, streets and parks and recreation programs. Des Moines' total property tax levy rate is $16.61 per $1,000 of taxable value and is just one of several levies on a homeowner's bill.
West Des Moines Finance Director Tim Stiles says the city had to pull several million dollars from savings to balance its budget because of legislative changes. What's more, he says the Legislature's changes made property taxes more complicated for taxpayers.
"And to me, you can't have a good conversation about property taxes unless you understand it — and nobody can understand it," he said.
Sanders said Des Moines managed to balance the budget for the upcoming fiscal year 2025, which starts July 1, but it wasn't without some financial Tetris.
Schaul says over the past several budget cycles, the city has increased its reliance on the 1-cent Local Option Sales & Service Tax, and the American Rescue Plan Act, or ARPA, a federal economic recovery package meant to provide relief from the effects of COVID-19, which will run out next year. The city's interest rate income also has allowed it to fill gaps.
City officials say it's too soon to tell what services could be impacted, but Sanders and Schaul say budgeting will become more challenging in the coming years. In the long run, the city needs to come up with alternative sources of revenue to avoid service cuts or issuing more debt, they said.
What changes by the Iowa Legislature are squeezing cities' budgets?
House File 718 consolidated 15 individual tax levies into a general services levy for cities, which will be capped at $8.10 per $1,000 in taxable value. Schaul said Des Moines' levy already is at the limit.
It also established a formula that requires local governments to use a portion of any revenue growth above 3% to lower property taxes. If a city's or county's revenue does not grow by at least 3%, it would not need to reduce its levy.
Des Moines grew by about 4% in taxable valuations this year, but due to the new system saw about a 2% increase in revenue, Sanders said. This resulted in about a $1.5 million loss in the general fund levy for fiscal year 2025.
When the bill passed, Republican legislators predicted it would result in a $100 million property tax cut statewide — a win for taxpayers.
"The old days of local governments getting an assessment windfall and leaving your levy rate the same are over," Sen. Dan Dawson, R-Council Bluffs, the bill's Senate floor manager, said at the time. "If valuations rise, your levy rate will fall. What we do here today changes the entire dynamic of our property tax discussions here in this state."
At the city's budget meeting in February, council member Chris Coleman called it a tax on "being cool." If the city invests in itself and, in turn, people want to pay more to live in Des Moines, the city gets "no return on that investment," he said.
"The whole thing is as stupid (a) policy as you can create," Coleman said.
Mayor Connie Boesen said the city is "almost penalized for improving."
Neighboring West Des Moines saw 4% revenue growth, though its assessments grew more than 7% in fiscal year 2024.
Stiles said the city is in "better shape" than many other cities but still faces a challenging future. In fiscal year 2024, city revenue grew 4% — but expenses went up 12%.
In the next year, West Des Moines will tap into about $7 million in reserve funds to balance its budget. But with only $50 million in savings, the city will need to find alternative funding sources for future budgets, he said.
Other bills that impacted city budgets include:
The commercial and industrial rollback in 2013 — Commercial, industrial and railroad properties had been taxed at 100% of their assessed value, but the bill lowered it to 90% over two years.
The multiresidential rollback in 2013 — The bill created a new multiresidential property class, which includes assisted living facilities and apartment complexes. They used to be taxed as commercial properties but were reclassified as residential properties, dependent on a rollback rate that changes annually. This change has occurred over eight years.
Business property tax credit backfill in 2022 — The first $150,000 of commercial properties eligible are subject to the residential rollback for taxable value calculations. Any assessed value over $150,000 is subject to the commercial/industrial rollback of 90%.
What does this mean for Des Moines, other metro cities?
Kemp says the league has tracked news articles across the state covering the struggles that cities and counties are facing in the wake of this legislation. Some cities, like Kalona, he said, may have to cut back on library hours and other services. Others may have to leave vacant employee positions unfilled.
Given that Des Moines continues to grow, Sanders says the city has to figure out how it will fund more services with less property tax revenue. In particular, the community expects the city to pay more to address social needs — mental health, food insecurity, homelessness — rather than the usual road construction and city maintenance. And residents' demands for the city to chip into these social services continue to grow louder, he said.
Yet it continues to rely on other streams of revenue to fund even the status quo. In fiscal year 2024, the city used ARPA money to cover $33.4 million worth of operational expenses and capital improvement projects. Nearly $4.6 million in ARPA money will be used to fund operations in the upcoming fiscal year.
More: Basic income to water: How Des Moines metro cities will spend $137 million in COVID relief
The city also is using more than 15% — or about $8.8 million — of local option sales tax revenue to cover operational costs for fiscal year 2025. That's up from about $5.1 million in fiscal year 2024. Some of the money in the new budget will be used to pay the salaries of 19 officers on the police department staff.
Des Moines leaders say it's difficult to predict any shortfalls for fiscal year 2026. With the "thousands" of variables from the property tax system changes, it's hard to tell the "magnitude of what could be waiting for us," Sanders said.
Art Wittmack, president of the Taxpayers Association of Central Iowa, an organization that provides education on tax issues facing central Iowans, agrees that while it's necessary to fund public services, the public's ability to support those services isn't "unlimited."
"There's got to be a balance," Wittmack said.
He said with the property tax system changes, the Legislature is trying to reel in cities' budgets.
"They've got to feel the same tension that the state does and that the residential property holders feel balancing their own budgets," he said. "They've got to live within their means. Now, how they do it and what they choose to do is up to them."
Virginia Barreda is the Des Moines city government reporter for the Register. She can be reached at vbarreda@dmreg.com. Follow her on Twitter at @vbarreda2.
This article originally appeared on Des Moines Register: Des Moines leaders say state's property tax changes hurt city's budget
