Lawmakers consider sales tax changes for local governments

Proposal billed as a replacement revenue stream as lawmakers cut property taxes
By Robin Opsahl – Iowa Capital Dispatch
Local government advocates say property tax reductions will mean cuts to the services and amenities Iowans rely on — but lawmakers are considering a proposal they say will help cities, counties and school districts pursue new means of funding.
Lawmakers discussed legislation to create one potential new revenue source Tuesday in a Senate Ways and Means subcommittee meeting. Senate Study Bill 1125 proposes changing local option taxes, which exist in a majority of Iowa communities, to a statewide tax.
Sen. Dan Dawson, R-Council Bluffs, said the proposal comes after discussions with local entities on how to diversify their revenues, and looking at how cities and counties in other states approach funding while keeping property taxes low.
He said two strategies stuck out to him: raising local option sales taxes and local income taxes.
“The income tax idea is probably not going to catch much fruit here within the state of Iowa, compared to what we’re trying to do from a statewide policy on income taxes,” Dawson said. “So the local option sales tax becomes the the most realistic, viable policy tool out there.”
Dawson introduced a similar measure in 2022. The bill also implements new property tax assessment limitations, makes changes to tax credits including the Homestead Property Tax Credit and provides funding for Iowa’s Water Land and Legacy program (IWILL), a natural resource trust created by a constitutional amendment in 2010.
Lobbyists and officials with cities and counties told lawmakers they were happy to see action on finding new ways to fund local governments, but that they were still determining the financial impacts of the bill on their communities. Daniel Stalder with the Iowa League of Cities said  swapping a higher sales tax for a local property tax will have different effects on cities based on their make-ups. Largely residential cities would see a boon, he said, but smaller communities could see less money.
The conversation on this proposal should be considered in the context of the other property tax proposals being discussed this session, Stalder said.
“Having a broader conversation on local government revenues is something that we think is a laudable goal, but reducing the burden on taxpayers should be considered as part of the quality of life and essential services that taxes fund,” he said.
Different property tax cut strategies
Republicans in the Iowa House and Senate have put forward different proposals on how to cut property taxes, which GOP legislative leaders named as a goal for the 2023 legislative session.
The Senate Ways and Means Committee moved forward Senate Study Bill 1124 on Monday. The bill would limit levy rates and assessment valuations, add new accountability measures and put in new transparency requirements for local governments.
Local government advocates have also criticized House File 1, the House Republicans’ property tax proposal.