DES MOINES — Cities and counties soon may have less money than expected as a result of business tax relief passed by the state five years ago.
That could include layoffs, reduced services or tax increases, local leaders say.
State lawmakers five years ago lowered property taxes for commercial and industrial businesses. The plan called for the state to make annual payments to local governments that lost revenue as a result.
Now, with the state budget undergoing midyear cuts for a second consecutive year, state lawmakers will consider reducing or eliminating the payments.
Leaders across the state said they are disappointed the state appears to be breaking its promise, and expressed concern about the impact on their budgets.
“We are extremely concerned with this (proposal) because it is a lot of money for the city of Sioux City,” said Donna Forker, Sioux City’s finance director. “It was a promise made in previous years that this money would be there for us to compensate us for actions taken by the state.”
The state makes just more than $150 million in annual payments to local governments to help them cover the money forfeited by the commercial and industrial property tax rollback.
Republicans in the majority in the House have proposed capping the payments at $100 million for the coming budget year, then gradually reducing the amount until it reached $25 million in the state budget year that starts July 1, 2021.
Republicans in the majority in the Senate have proposed reducing that figure by one third in each of the next two budget years and eliminating the payment by the budget year that starts July 1, 2020.
“I believe they should be on the table for the next few years,” said Republican Jack Whitver, Senate president, during a recent episode of Iowa Public Television’s “Iowa Press.” “Ultimately that's $150 million that we're paying to the cities and counties that we'd like to phase out — I'd like to phase out.”
Gov. Kim Reynolds did not include such a reduction in her proposed state budget or her tax reform plan. She has not commented on the state backfill for future years, nor on either legislative proposal.
If the payments are reduced or eliminated, local governments — and local residents — will feel the impact, local leaders said.
The business property tax relief has not spurred the economic growth that was its stated goal, so the payments remain crucial to keeping local budgets whole, local leaders said.
Without them, local governments would need to make up the money elsewhere. That would mean laying off government staff, reducing government services or raising property taxes.
But many local governments cannot raise property taxes to make up the difference because they already tax at the legal limit.
“We would either have to raise the (property tax) levy or cut services, neither of which is attractive to us or our community,” said Scott Naumann, a Bettendorf City Council member and president-elect of the Iowa League of Cities. Bettendorf received more than $600,000 from the state backfill last year. “We’re in what we think is a tenuous position.”
That sentiment was echoed by officials across the state.
“I’m all for business investment and restructuring opportunities for our businesses, but we can’t just pull the rug up from under cities,” Waterloo Mayor Quentin Hart said.
Waterloo received more than $1.6 million last year, and Hart said a cut would lead to layoffs, possibly in areas like public safety.
“Now we’re talking about the ability for us to be able to properly police our streets, the ability to be able to provide the essential services,” Hart said.
“It’s a big concern to us. ... I do believe there (would be) some sort of decrease in service level,” said interim city administrator Kevin Jacobson of Mason City, which received more than $640,000.
Making matters worse, local officials say, is the proposals would begin with the state budget year that begins July 1. Many local governments have approved their budgets for the coming year, so reductions would mean cuts to planned spending.
“Counties would need to cut services that their citizens depend on in order to absorb that in a budget that’s already been set,” said Lucas Beenken, a public policy specialist with the Iowa State Association of Counties.
As officials built the city of Cedar Falls budget, they assumed there would be no payment, knowing lawmakers were considering the changes. Cedar Falls received nearly $580,000 a year ago.
That prevented Cedar Falls from being able to lower its property tax rate, city administrator Ron Gaines said.
“Our City Council made the policy decision to go ahead and budget not using backfill dollars,” Gaines said. “But they were hamstrung on what they could do with the (property tax) levy rate.”
“It’s like a lot of the commitments that the state makes,” Gaines added. “Usually at some point they don’t follow through.”
The consensus among local officials was the state should honor its commitment, but if lawmakers decide to eliminate the payments, local officials want a more gradual phase-out than either of the legislative proposals.
“If it’s a promise, it ought to be honored,” Naumann said. “If for some reason they elect not to stand by their word, we at least need to be a little more compassionate (about phasing out the payments).”