DES MOINES — Cities, counties and schools would gradually lose about $150 million in yearly state money intended to “backfill” lost commercial property tax revenue under a phase-out plan that Senate Republicans called “fair and reasonable” Thursday but minority Democrats decried as a breach of trust by breaking a 2013 bipartisan deal.
Senate President Charles Schneider, R-West Des Moines, said the annual state appropriation to local entities was not envisioned to be a permanent feature and majority GOP senators had devised a two-tiered plan to begin with the 2020 fiscal year that would phase out payments over three years for growing local jurisdictions where property tax valuations have topped a five-year statewide average and would extend the state money for six years in places where growth in valuations have lagged below the statewide average. The phase-down would reduce the state’s payments – beginning in fiscal 2020 -- by $24.5 million during the first four years of the backfill phase out and $10.8 million in the final two fiscal years.
Schneider said the backfill would remain unchanged for the fiscal year than begins next July 1 because local budgets already have been certified for fiscal 2019 and state officials do not want to cause local disruptions by withholding money cities, counties and schools have built into their spending plans.
“No one realistically envisioned the backfill going on forever,” said Schneider, who also is chairman of the Senate Appropriations Committee.
The provisions contained in Senate File 2081 was the committee on an 11-8 party-line vote but not before Democrats blistered their GOP counterparts for altering terms of a deal whereby the state compensated local governments for lost revenue when commercial property tax rates were lowered by 10 percent. The 2013 bipartisan plan was hailed at the time as historic property tax reform by phasing in several changes in the way local governments could tax property with the idea that the tax cut would spur development that would then result in greater property tax revenue.
“The Republican caucus has had a lot of bad ideas this session and this might be one of the worst ones,” said Sen. Joe Bolkcom, D-Iowa City, ranking committee member. “This is a huge broken promise to local governments,” he added, noting that many cities and counties will be forced to raise taxes on homeowners and farmers to make up for the declining state payments.
By reneging on the state’s part of the bargain, Bolkcom said, “the must-heralded historic property tax cut of a few years ago is now going to be known as the historic property tax increase to Iowa property taxpayers.” He said the losers would be farmers, seniors, property owners and people who rely on local services and amenities.
“This is breaking a deal,” added Sen. Matt McCoy, D-Des Moines, one of the architects of the 2013 legislation. “I think this is a huge, massive break of trust. There is absolutely no way you can defend the indefensible.”
Schneider said the state held the backfill “harmless” in two years of budget cuts due to lagging growth in state tax collections which has meant a “big shift” from property taxes to income and sales taxes under a plan that “hasn’t worked well,” so legislators are trying to come up with a workable way to “unwind” the backfill.
“No matter what we pass, local governments certainly won’t be happy about this,” Schneider said. “I think the approach we’re taking here today is fair and reasonable and gives local governments time to adapt.”
However, Bolkcom said the answer is not to shift tax burdens back on property owners.
“It’s disappointing to see you try to get your fiscal house in order on the backs of Iowa property taxpayers. People are going to need that income tax cut (Republican plan to pass Saturday) to pay for their property tax increase,” he said. “The Republicans are basically pushing off the state’s responsibility onto property taxpayers to pick up somewhere around $150 million worth of backfill money.”
House Speaker Linda Upmeyer, R-Clear Lake, said she and other Republicans in the House are interested in phasing out these payments, but are still considering various options for accomplishing that goal.
“We’re being very cognizant that they’ve got their budgets filed so we’re not doing it for this year,” Upmeyer said Thursday. “We’ll probably phase that out kind of slowly, not in two years or something. We’re going to be approaching this is a very thoughtful way.”