A Citizens Guide to a Property Tax Cap and Truth in Taxation
What is a property tax cap?
A revenue cap is a limit on how much total property taxes collected by local government can grow each year. ITR proposes a limit of 2 percent or the rate of inflation, whichever is less.
If a local government wants to exceed the cap, local elected officials must justify to their citizens why spending more tax dollars is necessary and cast an affirmative vote on that tax increase after a public hearing process. This would preserve local control and encourage cost savings.
Why is a property tax cap necessary?
A property tax cap is necessary because property taxes have become unaffordable in Iowa. From 2000 to 2017, the amount property taxes collected across the state more than doubled, increasing by 103 percent. This increase is more than Social Security cost of living adjustments (46%), inflation and population growth (56%), and the growth of the state general fund (60%). Local governments are also taking advantage of increasing assessments to collect more property taxes without raising tax rates. A property tax cap would solve these problems by controlling local government spending. Just because property values increase by 10 percent does not mean that local governments should get an automatic 10 percent increase in revenue.
Why is it important to have a truth in taxation law?
Utah has one of the most taxpayer-friendly property tax systems. That state’s strong property taxation law requires an extensive public notification and hearing process that local government must follow if they want to increase property taxes. In addition, Utah’s truth in taxation law also prohibits local governments from receiving an automatic increase if property values increase. Iowa would benefit from Utah’s truth in taxation principles.
What about property tax assessments?
When considering property tax reform, a popular target is the assessment process and assessors. While, the assessment should be as fair and accurate as possible, focusing only on the assessment misses the root of the problem- how much money local governments are spending!
Solely addressing assessments creates inequalities, distorts the valuation of property, and creates tax shifting and other unintended consequences. Limits on assessments do not necessarily limit the growth of local government.
Why not freeze my property tax bill?
A common response to property tax reform is to freeze, exempt, or eliminate property taxes for various classes of people. This is basically having the government pick winners and losers among property taxpayers. Any solution to unaffordable property taxes must benefit everyone. While the desire to do so is understandable, targeted freezes or exemptions merely shift the burden to other taxpayers.
If improvements are made to my property will I see higher property taxes even under a property tax cap?
In short, you probably will see an increase in your tax bill. A property tax cap like ITR has proposed would control the growth of local government. So while you would likely owe more on your improved property, it is also likely that you would owe less than you would have if no cap were in place.
Are local governments penalized for growing?
No. Under similar property tax caps across the country, the growth local governments would receive from improvements made to existing properties or from properties coming onto the tax rolls are exempt from the limit.
Ok, so what will this really all mean to me? What would happen to my taxes?
You asked, so we’re going to get into the weeds a little bit here; hang on. We modeled a small city that saw the assessed values of homes grow between 8 and 12 percent in a given year. Under our existing system that keeps property taxes on autopilot, those homeowners would have seen an increase in their property tax bills of a corresponding 8 to 12 percent. However, if the property tax cap ITR is proposing were in place, the increase in property taxes would only have ranged from 0.1 to 3.8 percent.