DES MOINES — Momentum for tax cuts is building at the Statehouse, but Iowa House Speaker Pat Grassley says his Republican caucus is maintaining a “cautious approach” until some unknown factors get resolved.
First and possibly foremost among that list is how the COVID-19 pandemic has impacted Iowa’s economy and its ability to generate tax revenue — a question that could be answered as early as Friday when the state’s Revenue Estimating Conference meets to set revised projections for state tax collections over the next 15 months.
The estimate will directly impact the outlook for spending priorities and tax reform policies.
Currently, Iowa’s budget is in a surplus position with reserves full. But much of that positivity is rooted in billions of federal stimulus and rescue dollars that have propped up government programs to aid businesses and employees negatively impacted by the disruptions caused by the pandemic.
More federal help — some $2.5 billion estimated as Iowa’s share — is on the way via provisions of the recently approved $1.9 trillion American Rescue Plan.
But legislators and Gov. Kim Reynolds’ administration are assessing the details and trying to sort out whether elements of that pandemic relief package will negatively impact Republican plans to accelerate Iowa’s 2018 income tax cuts and phase out the state inheritance tax over three years.
U.S. Treasury Department officials appeared to give states like Iowa some breathing room by indicating they still can cut taxes without penalty under the new federal pandemic relief law — so long as they use their own funds and not the federal aid to offset them.
Under a 2018 comprehensive tax cut package, Reynolds and majority Republicans agreed to put revenue thresholds in place that, if met, would “trigger” provisions in fiscal 2024 to lower Iowa’s top income tax rate to 6.5%, shrink the number of income tax brackets from nine to four and eliminate a provision that allows Iowans to deduct their federal income tax liability on their state returns.
Reynolds and GOP senators have called for eliminating those “triggers” earlier than planned and included it in a bill that unanimously passed the Senate on Wednesday, 46-0.
But Grassley says the issue might resolve itself as early as this week if the revenue estimating panel projects future state revenue growth will meet or exceed 4% and generate at least $8.3 billion in tax collections to sustain spending needs while enabling the tax breaks sooner.
Speaking to reporters Thursday, Grassley reiterated the position that the House will take a “cautious approach” to tax policy, noting that “as far as being able to make tax adjustments. I think we need to be very thoughtful and considerate of what that could be as this moves forward.”
At the same time, GOP senators made it clear during Wednesday’s floor debate on Senate File 576 that they expect tax relief to be addressed yet this session. And Reynolds told a radio interviewer on Thursday “I’m excited about it, it’s the right thing to do” when asked about the Senate’s action.
Reynolds said she and legislators agreed to the “triggers” in 2018 when “at that time we were seeing some volatility in our agricultural industry and so we wanted to make sure that we could still fund our priorities but do everything that we could to make sure that hardworking Iowans could keep more of their hard-earned money.”
“We’ve been fiscally responsible in our budgeting. We are at a place right now where I think it’s the right time to remove the triggers so that Iowans know and can count on that tax relief in 2023 and it also makes us much more competitive as a state because it condenses the brackets and the rates and eliminates federal deductibility so it’s the right thing to do,” the governor told a radio audience. “We need to send it over to the House and we need to get it done.”
Legislative Democrats said the situation at the Statehouse is “dynamic” and “evolving.” They expect tax-policy changes to be on the table as lawmakers shut down the 2021 session in several weeks, but they said it was critical the package incorporate a House-passed bill that waives state income taxes on federal PPP grants to businesses and on federal unemployment benefits paid to Iowa workers hurt by the pandemic.
“I certainly expect there will be some action before we gavel out this spring,” said Senate Democratic Leader Zach Wahls of Coralville. “Democrats support targeted relief for folks who have been hurt the most by the economic fallout. I hope we would see that before we adjourn.”
On Wednesday, Sen. Dan Dawson, R-Council Bluffs, said, “the federal government will not trounce over states’ rights and freeze tax policy for the next two years here in Iowa” ahead of the vote.
Senate File 576 proposes to accelerate the state’s 2018 income tax cuts by eliminating those revenue “triggers.” The bill also would phase out the state’s inheritance tax over three years, ending it by Jan. 1, 2024. Removing these revenue “triggers” would also enable Iowa to compress income tax brackets from nine to four and eliminate federal deductibility.
Dawson is among a number of Republicans across the country who are taking issue with a $350 billion pot of money set aside under the stimulus, known as the American Rescue Plan, to help cash-strapped cities, counties and states pay for the costs of the pandemic. Congressional lawmakers opted to restrict states from tapping these federal dollars to finance local tax cuts.
This week, 21 Republican state attorneys general threatened to take action against the Biden administration over its new $1.9 trillion coronavirus stimulus law, decrying it for imposing “unprecedented and unconstitutional” limits on their states’ ability to lower taxes.
During Wednesday’s floor debate, Dawson said Iowa has the financial capacity to proceed with tax cuts at the state level and cited 10th Amendment states’ rights in pushing back against federal CARES Act restrictions that he called “short sighted and egregious” provisions.
“We will not hold up our tax policy based upon the whims of the federal government and, if our federal government overlords wish to continue down this path of a massive constitutional overreach of the normal business of state tax policy, then it’s very likely that the states will see the federal government in court,” he said.
“Stimulus is a one-time shot; tax code change is permanent,” said Dawson. “What we have here today is building Iowa back better.”
He said SF 576 would eliminate the “shortsighted” triggers that are impeding significant tax relief now.
Sen. Pam Jochum, D-Dubuque, noted that the 2018 “triggers” — provisions added at the insistence of GOP Gov. Kim Reynolds and House Republicans — were enacted as “guardrails” to keep the state budget from going off track should a halting economy not produce the growth needed to maintain funding priorities.
She also questioned why the legislation was being rushed with the state Revenue Estimating Conference slated to meet Friday to revise the state’s tax collection forecast, and majority Republicans yet to announce their joint fiscal 2022 state budget targets.
“I think our timing is very off,” she said.
Dawson said Wednesday’s Senate action was meant to “send a strong message to our colleagues across the aisle that this is a good bill, it’s good policy and it puts Iowa in a great position going forward.”
House Democratic Leader Todd Prichard of Charles City said it is important that legislators act quickly so Iowans preparing to file their 2020 income taxes will know whether they owe state taxes on the PPP grants and loans or federal unemployment benefits they received, especially since the IRS has moved back to federal income tax filing deadline until May 17.
“They need this information as to what their tax liability is going to be,” Prichard told Statehouse reporters Thursday. “This should be the first priority. We should be staying late into the night doing this type of legislation — not some of the divisive and partisan legislation that we have been staying late every night this week in the House doing.”
The Charles City Democrat said Wednesday’s 46-0 Senate vote was “the beginning of a tax reform conversation at the Capitol,” but added “we expect the final proposal will look very different from what passed the Senate yesterday. We do think it is very important for us to be having that conversation. We need something to happen because we have a lot of folks who potentially are going to be on the hook when April rolls around.”