Introduction

In March, Iowa lawmakers introduced House Study Bill 313 and its companion, Senate Study Bill 1208, to overhaul the state’s property tax system.[1] While some argue the legislation could threaten local governments’ ability to provide essential services, legislators from both parties agree some form of property tax relief is needed.[2] Democratic legislators have introduced alternative legislation also aimed at reducing the property tax burden for residents.[3] The conversation around property taxes raises important questions about the tax burden appropriate and necessary for providing local services. Ultimately, the people and their elected representatives must make this determination based on the local services they wish to receive and the tax burden they are willing to shoulder to receive those services. Deep tax cuts may leave local governments with insufficient revenue to fund the services their residents demand. Inordinately high tax burdens can impact a state’s economic growth and reduce migration into the state.[4] This report provides policymakers and the public with a barometer for measuring Iowa’s property tax burden and its total local tax burden, ranking it against other states. It then quantifies and forecasts possible property tax reform targets that would bring the state’s local tax burden in line with the median U.S. state.

Key Findings

• CSI’s analysis ranks Iowa 11^th most burdensome nationally for local property taxes and 19^th for total local tax burden.
• Property Tax Reform Target – If Iowa’s statewide property tax revenue growth exceeds 2.3% annually, CSI forecasts Iowa will always remain one of the top half most burdensome states for local taxes—assuming no changes to other local taxes.
  • CSI forecasts property tax revenue will grow at an average of 2.63% annually under the current trend.
  • If tax reform kept statewide local property tax revenue growth at 2% annually, Iowa’s total local tax burden would reach the U.S. median by 2033.
  • If tax reform kept statewide property tax revenue growth at 1% annually, Iowa’s total local tax burden would reach the U.S. median by 2027.
  • Total statewide local property tax revenues would need to fall by about $400 million to make Iowa a median local tax burden state in just one year.
• From 1978 through the end of the century, Iowa’s statewide property tax revenues tracked inflation almost exactly. From 2000 to 2024, however, property taxes grew at more than twice the rate of inflation—170% versus 73%.
• If tax reform fixed total local property tax revenue growth at 1% annually, it would take nearly 2 decades for Iowa to become a median property tax burden state. At 2%, it would remain in the top half indefinitely.
• Iowans spend 3.25% of state personal income on just property taxes, or 25% more than the national average.
• Iowans spend 3.8% of state personal income on all local taxes, or 7% more than the national average.
• Iowans spend 0.5% of state personal income on local sales taxes and 0.1% on other local taxes. Both are below the national average.
• One-third of the total $22.7 billion in revenue received by Iowa’s local governments in 2022 came from local taxes. Of that, $6.4 billion came from property taxes, equal to 85% of local tax revenues and 28% of local revenue from all sources.

Policy Recommendation – Cutting local property taxes by $400 million in one year would make Iowa tax competitive with other states, but it would be a rug pull for local government budgets. However, backfilling the lost revenue to local governments from state funds would only shift the burden of the tax from local to state taxpayers, resulting in no net benefit to Iowa’s economy or to its taxpayers. Instead, policymakers should use modest gradual property tax reform that controls the rate of growth in property taxes. That will make Iowa’s property taxes and overall local tax regime more competitive over time without cutting local budgets.

How much tax revenue does local government need?

Article IV, Section 4 of the United States Constitution guarantees Iowans a “Republican Form of Government.” This empowers the people, either directly or indirectly through their elected representatives, to determine which functions their state and local governments serve.[5] The same democratic process provides the means for determining the appropriate level of expenditures for carrying out those functions. Likewise, it dictates the methods for raising the funds necessary to provide state and local services. The same constitution also establishes a federalist system of government whereby people govern their own local affairs based on the needs and interests of their communities. Over 90,000 local governments across the United States carry out these responsibilities.[6] Local governments are an integral part of the American democratic system.

Iowa’s local governments provide residents with a range of services, including sanitation services, public recreational facilities, public education, emergency services, social services, infrastructure maintenance, and much more. To provide those services, they generate revenue from various sources, including taxes, fees, licenses and permits, fines, bonds, and government operated business enterprises such as utilities and parking facilities. They also receive revenue from the state and federal government.  It is up to policymakers and the public to answer three key questions about their local governments:

1. What is the proper role of each local government?
2. What is the appropriate cost of local government?
3. What is the best way to raise revenue for local government?

This report does not attempt to answer the first question. It does not make an item-by-item value judgment on each service provided by local governments across the state. Federalism works precisely because residents get to make those decisions locally based on their local needs. The Tax Foundation has done excellent work on the question of how to tax to fund local governments, including in a recent report, “Securing Property Tax Relief in Iowa.”[7] This report does not purport to add to the discussion. Rather, in this report CSI offers Iowa policymakers an approach for addressing the second question: What is the appropriate cost of local government?

Where do Iowa’s local governments get their revenue?

In Iowa, local governments receive about a third of their revenue from the state and federal government, about a third from local taxes, and about a third from all other sources. According to the U.S. Census Bureau, all local government revenues across Iowa totaled $22.7 billion in fiscal year (FY) 2022, the last year with available data.[8] Of the total, $7.9 billion came from transfers from the state and federal government; $7.5 billion came from various local tax revenue sources; and $7.3 billion came from other charges, fees, and miscellaneous revenue sources. Property taxes alone supplied $6.4 billion in revenue, or about 28% of the total. Figure 1 shows the total revenue collected by all local governments across Iowa in 2022, broken down by revenue source.

Figure 1. Total Revenue Collected by All Local Governments in Iowa, Divided by Revenue Source, 2022

Source: Census Bureau, “Annual Survey of State and Local Government Finances (ALFIN).”