M-8 - Budget Special Report - FY 2024-2025

Revenues A wide variety of factors have impacted municipal revenues in recent years, including major changes to the property tax system, the COVID-19 pandemic, property valuations, the 2020 Census, global inflation and more. Each city can be affected differently and it is critical for city officials to carefully review revenues as they make budget decisions. Assessment Limitation Order – Rollback and More Major Changes to Iowa’s Property Tax System The January 1, 2023 property valuation serves as the basis for calculating property taxes in fiscal year (FY) 2025. Since 1978, residential and agricultural property has been subject to an assessment limitation order, or “rollback”, that limits annual growth of property values (all other classes of property were eventually added). Prior to the 2013 overhaul of the property tax system, property value growth was limited to 4 percent per year for agricultural, commercial, industrial and residential properties. If property values grew by more than 4 percent, the taxable value was rolled back to comply with the assessment limitation system. In addition, the rollback included a formula that tied the growth of residential property to that of agricultural property. This connection is commonly referred to as “coupling” and limited the valuation of either property class to the smaller of the two. Since the law’s inception, residential property has always been subject to significant rollbacks while the other property classes did not grow as much and were often taxed at or near their full assessed value. While the property tax rollback system remains in place, several major changes were made during the 2013 legislative session and additional measures passed in 2021 and 2022 further overhauled the system. Additionally, the Iowa Legislature approved a major bill in 2023 that will fundamentally alter key components of the system. For each assessment year beginning in 2013, residential and agricultural property value growth is now capped at 3 percent, or whichever is lowest between the two classes (the coupling provision remains). A separate rollback was instituted for commercial, industrial and railroad which began at 95 percent for valuations established during the 2013 assessment year (affecting FY 2015) and went to 90 percent for the 2014 assessment year and thereafter. The rollback percentage for these properties will remain fixed at 90 percent regardless of how fast or slow valuations grow. The legislature created a standing appropriation, beginning in FY 2015, to reimburse local governments for the property tax revenue reductions resulting from the new rollback for commercial and industrial property (railroad not included). The “backfill” was funded at 100 percent by the legislature for fiscal years 2015-2022 and cities received the funds in a similar manner as property tax revenue.