Most Iowans have seen it without giving it a second thought.  There is a small, easily overlooked line on page 3 of their state income tax return labeled “School district surtax.” For many taxpayers, it’s just another box to complete before filing. Yet that single line represents one of the most unusual and least understood pieces of Iowa’s school finance system, one that has quietly been a part of district budgets for more than fifty years.

The local income surtax is a tax that Iowa school districts may choose to levy as part of their overall funding authority. It is calculated as a percentage of a taxpayer’s Iowa individual income tax liability and appears as a separate line near the bottom of the state income tax return.

The Iowa Legislature created the local income surtax in 1971 as part of a larger reform of the school finance system. At the time, property taxes were rising quickly, and lawmakers sought ways to reduce pressure on property taxpayers while maintaining adequate school funding. The surtax was intended to serve as an alternative revenue source that could complement property taxes and increase a district’s budget authority.

The school income surtax is used to support discretionary programs that can be scaled back or adjusted in future years as revenue needs change. School districts may use the surtax to supplement two major funding streams: the Instructional Support Levy (ISL) and the voter-approved Physical Plant and Equipment Levy (PPEL). Each levy can be funded entirely through property taxes or through a combination of property taxes and the income surtax. Districts may adjust the surtax rate annually, with the property tax portion automatically increasing or decreasing to balance the total levy amount.

Over the past twenty years, the number of Iowa school districts operating without an income surtax has steadily declined.  In 2004, 80 districts did not use the surtax; by 2014, that number had fallen to 57, and by 2024 it had dropped to just 41. Put another way, roughly 22% of districts did not impose an income surtax twenty years ago, compared with only about 13% today. The map below illustrates how the surtax is utilized across Iowa.

Only 16 states allow local governments to levy local income taxes. Iowa’s surtax structure, where a school district applies a percentage to state income tax liability, is somewhat unique in how it integrates with state-level tax administration.

While Iowa residents may be broadly aware that their local district levies an income surtax, many taxpayers do not closely follow discussions about surtax changes or understand how the surtax interacts with overall school district budgets. And they almost certainly don’t understand the ISL or voter-approved PPEL the tax can be used for.  This lack of awareness may stem from the surtax being embedded within the year-end income tax filing process rather than collected throughout the year as property or sales taxes are.

As Iowa’s school finance system continues to evolve, the local income surtax remains an overlooked component of education funding. Its long history and growing prevalence, however, make it a significant part of how many districts balance their budgets and pay for discretionary programs. Yet because the surtax appears only at tax-filing time and is tied to complex elements of school finance, many taxpayers have limited visibility into how it works or why their district uses it. As policymakers and communities evaluate school funding in the years ahead, a clearer understanding of the surtax, and its role alongside property taxes, ISL, and PPEL, will be essential for informed decision-making and meaningful public discussion.