In 2011, Governor Terry Branstad played hardball to force Cedar Rapids leaders to abandon a project labor agreement for a public building. Last Friday, one of the governor’s line-item vetoes boxed in Des Moines leaders. The governor’s action may eventually push capital city officials toward unpopular ways of refunding so-called “franchise fees” to residents.

Like most U.S. cities, Des Moines has cut staff and services in recent years. Adding to the strain on the city’s budget, the Iowa Supreme Court ruled this March that the city must refund some $40 million to residents who were subject to an illegal tax between 2004 and 2009. The city had attached a “franchise fee” to utility bills since the 1960s and increased it during the last decade to help compensate for budget shortfalls. A Des Moines woman filed a class-action lawsuit in 2004, claiming the fee was an illegal tax.

In 2009, the Iowa legislature passed and Governor Chet Culver signed a bill making such “franchise fees” legal. A Polk County district court judge then determined that the city should refund franchise fee money collected between 2004 and 2009. The Iowa Supreme Court affirmed the lower court’s ruling but did not outline a framework for refunding the money collected illegally. Click here for the full text of the decision.

Des Moines City Attorney Jeff Lester told me today that the city is working on an appeal of the Iowa Supreme Court ruling to the U.S. Supreme Court. That appeal will be filed sometime next month. If the U.S. Supreme Court finds in favor of the city, then the franchise fees collected between 2004 and 2009 will not have to be refunded after all. If the higher court refuses to hear the appeal or affirms the Iowa Supreme Court ruling, the case goes back to Polk County district court, where a system for refunding the money will be adjudicated.

Democratic legislators representing Des Moines managed to squeeze a little help for the city into the legislature’s “standings” bill, passed just before the Iowa House and Senate adjourned for the year.

While the bill does not specifically mention the city of Des Moines, the language is crafted in such a way that it’s quite specific.

It allows “a city that is subject to a judgment, court-approved settlement, court-approved compromise, refund, or other required return of previously collected franchise fee revenue” to impose a franchise fee at the rate of up to 7.5 percent for any seven-year time period beginning July 1, 2012, through June 30, 2030. It requires that an ordinance increasing the rate to greater than the current 5 percent must be approved by referendum.

That means the city may increase the 5 percent fee by 50 percent to 7.5 percent for up to seven years if voters approve.

The bottom line is lawmakers handed the city a way to collect a higher fee to repay as much as $40 million the court said was the result of an “illegal tax.”

Sen. Matt McCoy, a Des Moines Democrat, crafted the legislation.

He said the language was a compromise with House Republicans who felt the issued needed to be put to a vote in a referendum. That way, taxpayers can decide whether the $40 million is paid through a 50 percent increase in the fee rather than through higher property taxes.

Without a fee increase, most of the burden would be taken on by homeowners and for-profit businesses because about 40 percent of Des Moines property is owned by government or nonprofit entities that do not pay property taxes.

Branstad didn’t like the sound of that. Excerpt from his veto message:

I am committed to continuing a tax and jobs policy discussion with the House and Senate to adopt a package of tax reductions that facilitates our long-term economic growth and job creation. It is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state’s ability to compete for new business and jobs.

When Branstad vetoed an expansion in the earned income tax credit last year, he similarly explained that he would prefer to approach tax policy holistically. The thing is, Branstad has signed off on various other tax policy changes. He approved the Iowa House Republican-crafted “taxpayer relief fund,” even though no one knows how approximately $60 million from that fund will be distributed to Iowans. The governor signed a bill cutting taxes for Iowa individuals making more than $83,000 and married couples making more than $166,000. He signed a bill creating tax incentives to install solar panels and geothermal systems. Even as he item-vetoed the franchise fee language, Branstad approved the rest of House File 2465 (the standings bill), which included other tax-related provisions.

During the past two legislative sessions, officials from Des Moines and many other cities lobbied against Branstad’s plan to cut commercial property taxes, a major source of revenue for local governments. Now the governor has returned the favor. Taking the franchise fee off the table leaves Des Moines leaders with less attractive options for finding $40 million to distribute over the next seven years: borrowing more, making bigger cuts to city’s annual budget of approximately $608 million, or raising residential and commercial property taxes.

I wouldn’t go as far as Democratic State Senator Jack Hatch, who cited last week’s line-item veto as evidence that Branstad “hates cities.” I do see the veto as yet another signal that the governor is not particularly sympathetic to the concerns of local government officials. (Nor are Iowa House and Senate Republicans, for that matter.)

Any relevant comments are welcome in this thread.