budgetgraphwebLesson #1: Not All Property Tax Rates are Created Equal

First in a Series by Mike Whittlesey

When La Porte City voters elected Dave Neil in November, it was a vote for change in the mayor’s office, the first in 14 years. During the campaign, candidate Neil was candid in his pledge to take a fine-tooth comb through the city’s budget to divert dollars to invest in the city’s infrastructure.

“I come with a budget perspective. We’ve only got so many dollars, so we’ve got to look at best practices to find a way to stretch those dollars,” he stated.

Mayor Neil’s commitment to stretching city resources does not involve raising the property taxes of La Porte City residents, if he can help it. Citing the city’s property tax rate, higher than those of neighboring communities, Neil has targeted spending cuts, most notably from the police department, as the means to find dollars to make improvements to city streets and the Main Street district, areas he believes must be acted upon with a sense of urgency.

Mayor Neil and new City Council members, Eric Allsup and Brent Sadler, begin their terms at a time when the city’s work to develop a budget for fiscal year 2015 (July 1, 2015 – June 30, 2015) begins in earnest. The process of developing a municipal budget is a complex one, and relies on a series of calculations made by multiple state agencies to determine the primary source of funding city government- property taxes. While Mayor Neil acknowledges some of his proposals to cut spending may be controversial, he understands that final decisions regarding the city’s budget rest in the hands of the City Council. In the early stages of the budget process, how La Porte City’s elected officials go about the process of gaining consensus on the services they choose to fund will help determine how easily any potential controversies are resolved.

In Municipal Budget 101, The Progress Review will examine how La Porte City, and other cities in Iowa, go about the process of developing a budget. Lesson One will examine where the money to fund city government comes from. Lesson Two will examine the nuts and bolts of a municipal budget in the state of Iowa. Lesson Three will take a close look at the services the city provides and to what extent they are funded. Where appropriate, the series will compare and contrast La Porte City’s budget with neighboring cities of similar size, as they provide the most relevant examples of how city government in communities the size of La Porte City go about serving their citizens.

While no two cities in Iowa are identical, each of the state’s 947 cities follows the same, specific process for determining the services they will provide for their citizens and how those services will be funded. The primary source to fund city government are the property taxes local residents pay. Those taxes are assessed on five separate classes of real property: residential, agricultural, commercial, industrial and utilities/railroad. Owners of homes (residential) typically pay the largest share of property taxes that are collected. In addition to funding city government, property taxes also fund schools, county government and other entities. Iowa has more than 2,000 taxing authorities and most property in the state is taxed by more than one authority.

In Iowa, property is assessed every two years during odd-numbered years, the exceptions being railroads and public utilities, which are assessed annually by the Iowa Department of Revenue. Every two years, the Department of Revenue uses a process called “equalization” to ensure the property values between each class of property are comparable. Equalization occurs on an entire class of property, not on an individual property. Also, equalization occurs on an assessing jurisdiction basis, not on a statewide basis.

“Equalization is important because it helps maintain equitable assessments among classes of property and among assessing jurisdictions. This contributes to a more fair distribution of state aid, such as aid to schools. It also helps to equally distribute the total tax burden within the area.”

           -Iowa Department of Revenue (www.iowa.gov)

Another factor that impacts property tax is an assessment limitation known as “rollback,” which was enacted by the Iowa legislature more than 20 years ago. The rollback was initiated during a time of rapidly rising property values and set the maximum increase in statewide total taxable value due to revaluation of a class of property, residential, for example, at 4% annually. Because the limitation is applied to a class of property, it is possible individual homes can see more than a 4% increase in valuation from one year to the next.

A property tax rate is established for a taxing authority, like the city of La Porte City, after a budget detailing anticipated expenditures has been established. For the current fiscal year  (FY2014), which began July 1, 2013 and concludes June 30, 2014, the city of La Porte City levied property taxes in the amount of $912,078. Based on this amount, a tax rate of 15.51828 was established for La Porte City property owners, a figure that is known as “dollars per thousand.” That means a home assessed at $100,000 would owe $1,551.83 in taxes for the city of La Porte City’s portion of the homeowners total tax bill. Of course, there are other taxing authorities that contribute to a property owner’s tax bill, including school districts, community colleges, county government and others. When homeowners receive their tax statement, it contains a consolidated levy, the total amount of each taxing authority added together.

That means an individual’s total tax bill can vary considerably from year to year, depending on the financial needs of their community, school district and other tax-supported entities.

Often lost in the comparison of tax rates between cities is one very important figure- the value of taxable property contained within each city. For example, in the state of Iowa, Hudson is the city most comparable to La Porte City. Both are located in Black Hawk county, approximately the same distance from the Waterloo/Cedar Falls metropolitan area. Both cities are nearly identical in population, La Porte City ranking #141 in the state with 2,285 people, Hudson next in line with 2,282. A comparison of tax rates between the two cities illustrate why not all property tax rates are created equal. La Porte City’s tax rate is more than 37% higher than Hudson. In actual dollars, though, the city of La Porte City levied only $1.27 per person more than Hudson. How is this possible? The city of Hudson’s property is valued at more than $92 million, while La Porte City’s is just under $58 million.

The cities of Jesup (14.7) and Center Point (14.0) also have a lower property tax rate than La Porte City (15.5). Higher property values, though,  allow both cities to generate more money in support of their budgets. In fiscal year 2014, Jesup, despite a lower tax rate, levied more than $1.2 million, nearly $300,000 more than La Porte City. Center Point, with a tax rate even lower than Jesup, also levied for more than one million dollars. Despite having lower tax rates, the cities of Jesup and Center Point levied  $79.04 and $30.74 more per person, respectively, than La Porte City.

These comparisons confirm what La Porte City government officials have known for years. Areas like Hudson, Jesup and Center Point are experiencing more rapid growth, with taxable valuations growing nearly 30% since 2008, while La Porte City and Dysart’s growth in valuation, under 20%, is much closer to the state average during that time.

The key to growth in raising property values is new construction. From 2008-12,  the number of single-family new house construction building permits issued tells the tale: Jesup leads the way with 46, followed by Center Point (36) and Hudson (32). La Porte City (12) and Dysart (5) trail the pack.

Because of limited opportunities for growth, city leaders have shown considerable sensitivity to raising La Porte City’s property tax rate. Since 2008, the total valuation of property in La Porte City has risen nearly 19%. The city’s property tax rate, however, has risen just 3.9%. During that same time period in neighboring communities, only Hudson (0.0%) and Dysart (0.7%) have lower tax rate increases, compared to the increases experienced by taxpayers in Jesup (14.3%) and Center Point (28.8%)

Lesson #1: Not all property tax rates are created equal. Total property valuation has a significant impact on the number of dollars a city in Iowa can generate to support the services it provides.

Next Week in Municipal Budget 101- Lesson Two: The Nuts and Bolts of a Municipal Budget