A pair of companion bills that lawmakers say would overhaul Iowa’s property tax system were approved by the Iowa House and Senate Ways and Means subcommittees Wednesday and now advance to the full committees in each chamber for consideration.

Many who spoke at the hearing praised the bills for simplifying the state’s property tax system and thanked lawmakers for moving through the process slowly, allowing for public input.

However, many expressed concern about the complexity of the bills, the shift of burden toward residential taxes, and the effect the changes would have on cities’ economic development efforts and their ability to continue providing basic services, including public safety.

Local government leaders have expressed concern about changes to Iowa’s property tax system that were approved in 2023. A key feature of the legislation, which was tweaked in the 2024 session, limits how much money in the form of property taxes cities and counties can take in annually. Any excess money must be used to lower property taxes.

Supporters of the law believe the changes will provide tax relief to Iowans by limiting how much revenue local governments can generate from property taxes and restricting revenue growth based on tax base. Lawmakers in 2023 estimated the law would save taxpayers $100 million.

However, changes made by the law are proving challenging for municipalities as property taxes are the main source of funding for essential services like police, fire, libraries, parks, streets and sewers.

The bills that advanced late Wednesday — House Study Bill 313 and Senate Study Bill 1208 — would place caps of 2% on property tax collected on existing properties, but excludes “new valuation” from the cap, allowing communities to collect revenue on new construction above 2%. But tax increment financing districts are not included in the definition of “new valuation,” which raised concerns about cities’ ability to collect revenue from economic development once a TIF district expires.

Des Moines City Manager Scott Sanders spoke at the hearing, saying that while he appreciates efforts to simplify the property tax code, the 2% cap on growth would lead to deep cuts in the city’s budget.

“That will not keep up with the cost of inflation for the costs [of services] city governments need to provide to the residents,” Sanders said at the hearing.

The cost of providing public safety services to Des Moines residents increases about 4% a year, he said.

Public safety is the largest expense for the city, accounting for as much as 70% of general fund expenditures, Sanders said.

“The 2% cap coupled with the 4% growth in public safety would force Des Moines to make about $2 million in additional cuts each year continuously with no end,” he said.

In an email to the Business Record after the hearing, Sanders said $2 million in cuts is equivalent to 20 positions.

The way the bills are written, revenue from TIF districts would not generate the revenue needed to support the additional services needed for those projects, Sanders said.

“There’s no motivation at that point for communities to incentivize a project because they’re not getting any additional tax dollars for operations at any point,” he said.

And that could affect existing projects that may be only partially within the life span of a development agreement, some of which extend out for as long as 20 years, Sanders said.

In the email following the hearing, Sanders said TIF incentives on existing development agreements are projected to decline by about 42% compared with current TIF rebate eligibility.

Sara Kurovski, mayor of Pleasant Hill, also spoke at the hearing, telling lawmakers the relationship between TIF and the general fund is critical and that relationship must continue to support infrastructure improvements for future growth.

But cuts are happening in the general fund as a result of previous legislation that was enacted, she said.

”Nobody likes to talk about cuts, and I don’t want us to have to run into reserves if we can avoid it because [reserve funds] help with our bonding and our ability to ask for debt and do what residents ask for,” Kurovski said at the meeting. “How do I bring 1,000 new people into a community and serve them responsibly as a small community?”

Kurovski and Sanders both sat on the panel for the Business Record’s Power Breakfast last month that discussed how property tax reform could affect growth and development in Central Iowa.

Kurovski said the general fund levy of counties and school districts would also be reduced if the bills are enacted.

She said in her email that further restricting the ability to collect property tax revenue will result in cities not being able to fill public safety positions. The move also hurts cities’ ability to grow, she wrote.

“We are faced with no longer being able to be a partner in economic development and have already turned away projects, both commercial and market rate housing,” Kurovski wrote.

The bills would also phase out the property tax rollback in five years, shifting the tax burden to residential properties, she said.

The changes contained in the bills would also hurt smaller communities faster because bigger cities have greater ability to offset the lower cap because of financial depth and growth that has already happened, she wrote.

“It causes me concern and question, is the Legislature trying to intentionally hurt smaller cities in Iowa faster and eliminate our way of life?” Kurovski wrote in her email.

Joe Murphy, president of the Iowa Business Council, told lawmakers at the hearing that Iowa’s property tax code needs to be reformed to make the state more competitive.

Iowa is ranked 32nd of out 50 states in the country when it comes to property tax competitiveness, according to the Tax Foundation in Washington, D.C., he said.

“When you think about Iowa’s competitive tax climate as a whole, you’ve done great work on corporate tax provisions the last several years and on individual income tax as well; property taxes we have some work to do,” Murphy said.

Leaders of other business groups, including J.D. Davis of the Iowa Association of Business and Industry and Dustin Miller, executive director of the Iowa Chamber Alliance, said changes in the state’s property tax system are long overdue. Miller asked that lawmakers consider that new construction be included within urban renewal and urban revitalization areas, and consider attaching the 2% cap to the consumer price index.

“And from a faster growth community standpoint some of these communities are having to outlay … and ultimately we want to work with you on existing debt making sure that in this transition we don’t impact getting public finance,” Miller said.

Subcommittee member Rep. Elizabeth Wilson, D-Marion, said she supports reducing property taxes for Iowans, but is worried about the complexity of the bill.

She is concerned about the elimination of the Homestead Tax Credit and the elimination of the rollback and the possible shift of the taxing burden to residential property owners.

“We know it’s going to be a lot of work,” she said. “We have a lot to evaluate in terms of how this is going to roll out.”

Kaufmann said one thing he has heard during his meetings about taxation over the years is that the state’s property tax system needs to change.

“We can continue to tickle the system and play around the edges or we can be responsive and do something bold, which is why we’re doing what we’re doing and that’s a complete overhaul of the system,” he said.

He acknowledges doing that will be a “work in progress,” and that there are components, like TIF, that need to be addressed.

“I’ve committed to moving slowly on this … to solicit feedback and hopefully put forward an amendment we can agree on,” he said.