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Iowa City Council reviews local option sales tax, franchise fees to close budget shortfalls
Summary
City staff told councilors on Dec. 10 that local option sales tax (LOST) could yield about $8.8 million annually for Iowa City but requires voter approval and must allocate 50% for property-tax relief; councilors pressed for public engagement and cautioned against funding recurring operations with a volatile revenue stream.
Iowa City — City staff briefed the Iowa City Council on Dec. 10 on alternatives to property-tax revenue, including franchise fees and a possible 1% local option sales tax (LOST) that would require voter approval and a legally required allocation of at least half the revenue to property-tax relief.
"Cities in Iowa can levy a sales tax up to 1%." City staff (Speaker 4) said while explaining the mechanics and limitations of LOST and comparing it with franchise fees.
The staff presentation outlined several constraints and figures: a franchise fee may be set up to 5% on gas and electric (Iowa City currently has a 1% fee); staff suggested adding a second 1% to help sustain fare-free transit and noted a 1% on both gas and electric generally produces roughly $980,000 per year. For a 1% LOST, staff provided a current estimate of about $8,800,000 in annual revenue for Iowa City, but cautioned the final amount depends on which Johnson County jurisdictions participate.
Staff also highlighted the limits imposed by recent state property-tax reforms and noted ongoing reductions in other local levies that previously generated revenue. "We are very reliant on property taxes as cities in Iowa, and particularly in Iowa City here," the presentation said, adding that recent homestead-exemption changes are projected to reduce city revenue (staff estimated roughly a $439,000 loss in the next fiscal year related to exemptions).
The presentation reviewed how LOST has been used in the past in Iowa City (a short, four-year LOST after the 2008 flood funded flood mitigation, wastewater work and Riverfront Crossings Park) and summarized a community survey showing strongest support for using LOST for streets, bridges and sidewalks (72%), with 69% supporting investment in affordable housing and lower support for other categories.
Councilors asked technical and policy questions about the statutory requirements and timing. Staff emphasized the 50% allocation to property-tax relief is an ongoing requirement and that LOST proceeds can be volatile year to year. "You really wanna be careful funding operations with sales tax," staff warned, noting that sales tax receipts can vary widely from year to year and that putting a sunset on a measure complicates hiring and program continuity.
On timing, staff advised against rushing a ballot measure, saying sufficient public engagement and completion of the budget process are important before placing LOST before voters; a November 2025 election was cited as a plausible target if the council moved forward after deliberations.
The council made no formal decision at the work session and directed staff to continue providing information ahead of the budget process and future work sessions.
The council is expected to receive related survey and pavement-management updates in January as staff continues to refine estimates and scenarios for LOST and other revenue options.
