A League legislative priority calls for a study of the state’s tax system, including property taxes. A series of Q&A articles providing an overview of the state’s current property tax system will continue through the next issue. This article will address the assessment limitation order (property tax rollback) issued annually by the Iowa Department of Revenue and Finance (IDRF). The final article in January will address property tax exemptions and credits. The League will issue a special report on property tax rollback in December.

Q: What is the property tax rollback?

A: The property tax rollback, or assessment limitation order, is issued annually and limits the taxable value of most classes of property. Property in Iowa is divided into classes based on its use. The classes of property in Iowa are residential, commercial, agricultural, industrial and utility. In effect, the rollback limits the taxable value of most property to a statewide increase of four percent annually and eight percent for utility properties. This means that even if property values statewide increased 20 percent, for the purposes of taxation, they would only increase four percent. This helps shield property owners from sharp increases in property tax resulting from dramatic increases in the value of property. Although all classes of property can be affected by the rollback, residential property is most significantly affected.

Q: What makes the residential rollback different from the rollback on other property classes?

A: Residential property is subject to an additional limitation on the growth of taxable value. The increase in taxable value for residential property cannot exceed four percent or the actual increase in assessed value for agricultural property, whichever is lower. The intent is to prevent either class from growing faster than the other. For example, if agricultural values grow at two percent and residential values grow at eight percent, residential taxable valuation growth will actually be reduced and both classes will have a two percent valuation growth. This results in residential property valuation actually growing at a rate lower than the four percent allowed for other classes of property. This additional restriction is referred to as coupling of agriculture and residential taxable values.

Q: Why were the taxable values for agriculture and residential properties coupled?

A: Legislation enacted in 1978 tied residential and agricultural valuations together. The impetus for this coupling was a fear that inflation would cause agricultural property values to outpace residential property values, resulting in a shift in tax burden to agricultural property owners.

Q: Why is the residential rollback problematic for Iowa’s cities?

A: In reality, the feared shift of tax burden to agricultural property never occurred, as agricultural values grew at a slower pace and actually declined in some years. Coupling of residential and agricultural property artificially suppressed the taxable value of residential property.

Q: Isn’t it difficult to compare agricultural and residential property?

A: Yes. In fact, under Iowa law the two classifications of property are assessed based on two different methodologies. The assessment of residential property is based on market value. The assessment of agricultural property is based on productivity.

Q: Does the residential rollback impact industrial and commercial classifications?

A: Yes. The artificial suppression of residential taxable values because of coupling has resulted in an inordinate shift of the property tax burden to classes other than agricultural, particularly commercial and industrial. City officials and others concerned with economic development have long argued that the rollback provisions in Iowa law actually hinder our economic development policy.

Although residential rollback has seen slight increases and decreases over the past decade, the general trend has been downward and now hovers near 50 percent. Other classes of property have remained at or near 100 percent over the past 10 years.

Ten Year History of Rollback (all numbers are percents)