A recent Iowa Supreme Court decision could tear a $3 million hole in Iowa City’s budget.

A July 29 court ruling will allow apartment owners wanting to reduce taxes to switch to a co-operative housing classification in order to pay residential tax rates. If apartments, which normally fall under a commercial property classification, switch to residential, they’ll pay 50 percent less taxes.

This could mean millions of dollars in revenue decreases for every Johnson County localities, which would call for re-budgeting and possible cuts in services.

"We anticipate that many and most eligible structures will be reclassified to take advantage of tax treatment," said Iowa City Mayor Matt Hayek. "That will cause a serious pinch in the city budget."

Iowa City stands to take the biggest hit, potentially losing $3 million in revenue, because Iowa City receives 45 percent of local property-tax revenue — nearly three times the 17 percent Johnson County receives, said Johnson County Board of Supervisor, Rod Sullivan.

Hayek said the reduction in property taxes has the potential to be extremely crippling because the city receives two-thirds of its revenue from property taxes.

"We don’t have a lot of room to maneuver," he said. "Taxes are already high, and I think it’s realistic to assume there will be cuts in service."

The change in budget and funding allocation for Iowa City will ultimately have to be decided by city councilors, but officials said adjustments will have to be made by nearly all Johnson County entities.

Second in line are Iowa City schools — the School District could potentially lose $2 million.

"It’s a huge revenue loss. It’s not just the city," said City Councilor Mike Wright. "It’d be the School District and the county. What I hope that cities across the state will do is push the legislators to change the law."

With the economy in a slump, this new change comes at an unfortunate time.

"This is coming at a particularly bad time because the state of the economy has already affected local government budgets," Hayek said. "We are facing a period of austerity even without this change in tax treatment."

With the exception of public safety, the city has been unable to add positions because of a lack of funds. Even when employees retire or switch jobs, their positions are left open in an attempt to work with economic difficulties, Hayek said.

As for specific cuts in government, officials say it’s too soon to tell, but certain speculations can be made.

"I don’t know if taxes would necessarily go up. My guess is there might be different fees," Wright said. "The point of the fact is it’s pretty difficult to quickly replace a $3 million hit in your budget. There would have to be cuts in services as well."

And officials believe that this tax cut will mostly benefit landlords.

"I’d be shocked if very many landlords lowered rent. I’m sure there are some truly decent people who will, but unfortunately I think they’re going to be in the minority," Wright said. "But I’d love to be proven wrong."

And Sullivan agreed.

"The only thing that could change for tenants is they may be writing their checks to a different entity," he said.

With this new legislation, city officials expect an increase in the number of apartment to co-op requests within the next few months, Hayek said.

"We’ll learn a heck of a lot more as winter approaches and the numbers we have and the calculations we’re making will crystallize," he said. "We’ll have a much better sense of what our options are and how things are shaping up."