Gov. Kim Reynolds signed a property tax relief bill into law Monday that she said will save Iowans about $4 billion over the next six years.
The new law puts a 2% cap on city and county general revenue growth, with an exception for new construction. Levies for debt service, law enforcement, insurance, elections and employee benefits are not subject to the revenue cap.
Reynolds said local government spending is the root cause of “unacceptable” property tax increases, and the new law addresses that.
“By capping revenue growth at 2%, with clear guidelines and expectations, this bill brings certainty and discipline to a process that needed both,” Reynolds said.
Iowa’s homestead tax credit will be replaced with a 10% homestead property tax exemption up to $20,000, which will be adjusted for inflation in the future. The current credit would be worth about the same as a $4,850 exemption.
The new law will lower property taxes paid to school districts by about $150 million, with the Legislature promising to pay the difference to avoid a drop in school funding. It also increases the share of the revenue generated by the SAVE sales tax for schools that is used for property tax relief.
Reynolds said everyone agreed property tax changes were needed, but reaching a final bill was not easy.
“Months of steady work, thoughtful negotiations and a willingness to compromise meant that Republicans can now deliver Iowans the property tax relief that they deserve,” she said.
Republican leaders ultimately released their compromise bill toward the end of the 34-hour final day of the legislative session.
Senate Majority Leader Mike Klimesh, R-Spillville, said he is proud to be delivering billions in tax relief.
“As someone who served as mayor for a small rural Iowa town, I know how complicated property taxes can be, and I know how important fiscal responsibility is while trying to serve your community,” Klimesh said. “Senate File 2472 strikes a balance of looking out for the Iowa taxpayer while still offering flexibility to Iowa’s rural towns.”
House Speaker Pat Grassley, R-New Hartford, said the law is focused on providing certainty for taxpayers rather than local governments.
“What you see here today is unity within our party, that when we go to tackle big issues that some say that we’re unable to get done — like property tax reform of a historic nature — that we’ve stuck together, and we’ve been able to deliver on those promises,” Grassley said.
The new law will create a new multi-residential property class for apartment buildings, nursing homes and assisted living facilities. These properties will be taxed on a larger share of their value than single-family homes.
Future Tax Increment Financing (TIF) districts for economic development will be limited to 23 years, and the law makes some additional changes to TIF districts.
The new law also creates FirstHome Iowa accounts, which are tax-deductible savings accounts for saving up to buy a house.
Des Moines warns of budget shortfall
During a work session Monday morning, Des Moines officials announced the city would face an almost $12 million shortfall in the budget year starting July 2027 due to the property tax changes. That number could increase by another $5 million the following year in fiscal year 2029.
“I don't call this a property tax reduction bill, I call it a service cut bill, because it's forcing us to make cuts to our services,” said Des Moines Mayor Connie Boesen. “Nobody wants to be in this position.”
City Manager Scott Sanders said the city was already facing budget challenges ahead of the property tax law. He recommended the city aim to resolve the upcoming two years of budget gaps and said some departments could face steeper cuts than others.
Sanders said the city could start making cuts this year to lessen the impact, such as by leaving vacant positions unfilled.
“It is going to be very different [compared to previous budget cuts] in that ... the magnitude of the gap is such that all departments will be submitting ideas on where to find savings, because sometimes, again, it will be revenue as much as cuts,” Sanders said. “And so there will be multiple choices within each department. But understand, at the end of the day, the total across the entire city needs to be balanced.”
Finance Director Nick Schaul pointed to the law’s 2% hard cap on local revenue growth, which takes effect fiscal year 2028, as largely responsible for the budget gap.
He also pointed to the elimination of state dollars for reimbursing local governments for revenue lost because of reduced taxes on business properties.
Boesen said the city will be writing a letter to the governor to ask for a Payment in Lieu of Taxes (PILOT) agreement to potentially develop unused land around the Iowa State Capitol.
The city will host public budget meetings in July and August to provide more information on the budget challenges. Residents will also be able to take an online interactive survey during this time, where they’ll be able to “solve” the budget.
The final budget will be approved in early 2027.
