Government

Iowa Republicans pass $2.86 billion tax cut

Democrats warn of tax shifts, budget deficits

(File photo) The dome of the Iowa State Capitol building from the rotunda in Des Moines on Tuesday, Jan. 10, 2017. (Stephen Mally/The Gazette)
(File photo) The dome of the Iowa State Capitol building from the rotunda in Des Moines on Tuesday, Jan. 10, 2017. (Stephen Mally/The Gazette)

DES MOINES — Iowans would be in line to receive the largest income tax cut in state history under a bill legislative Republicans passed and praised Saturday as their foremost 2018 accomplishment. But Democrats warned the tax cut would benefit mostly the rich, raise other taxes and blow a “massive hole” in future state budgets.

Majority Republicans in the House and Senate approved a $2.86 billion multiyear state income tax cut and reform package. It will take six years to fully implement and have a general fund impact of about $2.16 billion over that same span, according to state analysts.

The Senate vote was 28-20, while House passage came on a 54-32 margin that sent Senate File 2417 to Gov. Kim Reynolds’ office for her expected signature.

Final action came as the 87th General Assembly adjourned its 2018 session on its 118th day.

“This bill is really significant to Iowa,” said Sen. Randy Feenstra, R-Hull, chairman of the Senate’s tax-writing committee, who called the bill “awesome” and the first income relief in two decades.

“It allows Iowa workers to simply keep more of their paychecks,” he said, noting the measure would cut individual income taxes by an average of 10 percent in 2019. “I’m just excited to see this going into law.”

‘Secret’ tax increase

However, minority Democrats — who were not able to amend the bill because of a procedural caveat — lambasted the GOP tax deal as tilted in favor of wealthy Iowans and corporations and a shift to Iowans paying sales and property taxes.

“This is the secret GOP tax increase on Iowans,” said Sen. Matt McCoy, D-Des Moines, noting the bill calls for collecting and remitting state sales taxes on digital or online items such as electronic games and entertainment, ride-sharing services, online travel sites and popular subscription services.

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“This is going to cost Iowans $66.7 million for services they’re already buying but not being taxed on. I guarantee you they’re going to pay more in your secret, hidden tax than they’ll get back in this phony income tax cut,” McCoy said.

“It’s a shell game,” he added. “You’re trying to fool the taxpayers. You’re trying to cheat the taxpayers with this plan. You are cheating the middle class. Those earning under $200,000 a year. You’re giving them nothing. You’re costing them more.”

Democrats argued more than half of the individual income tax benefit will go to people with annual incomes of more than $250,000 who make up about 3 percent of the state tax filers.

‘demonizing’ the rich

But Sen. James Carlin, R-Sioux City, said Iowa needs to revamp its income and corporate tax rates — which rank among the highest in the country — to grow and attract investment.

“It really is time to stop demonizing the people who pay the bills, create the jobs and invest the money that creates the opportunity. It’s time to stop demonizing people who are wealthy,” Carlin said. “The politics of resentment don’t help anybody except politicians on Election Day.”

Budget woes

But minority Democrats questioned whether the state budget, already “in crisis” the past two fiscal years, could absorb the reductions without putting severe pressure on state programs and services.

“If this bill becomes law, it will be the single most fiscally irresponsible bill in Iowa history,” said Sen. Herman Quirmbach, D-Ames, an economist and Iowa State University professor.

Sen. Nate Boulton, D-Des Moines, said GOP budget-makers continue to ignore warning signs. Once fully implemented, he said, the multiyear tax plan would eliminate as much as $1 billion a year from the state’s budget.

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“Most people understand that when you find yourself in a hole, the first thing you do is quit digging,” said Boulton, who is seeking the Democratic Party’s gubernatorial nomination. “You are saying: ‘Hand us the dynamite. I’ll show you what a real hole looks like.’”

Protections

Republicans countered that to address state budget concerns, the tax plan uses a trigger to protect budget sustainability in future years, ensures full repayment of the cash reserve fund this year and does not reduce the property tax backfill to cities and counties.

The agreement also maintains large ending balances in fiscal 2019 and 2020 and protects budget commitments made to education, health care and public safety, according to backers.

During the House debate, bill manager Rep. Peter Cownie, R-West Des Moines, told his colleagues, “If you vote ‘no’ on this bill, you are voting for a tax increase on Iowans and small businesses in your district. That is unacceptable and that is a fact.”

Will it deliver?

Rep. Mary Wolfe, D-Clinton, compared the tax relief measure to the bipartisan 2013 commercial property tax cut.

“It, too, was touted as delivering historic tax relief,” she said, and quoted former GOP Gov. Terry Branstad that it would “put more money in Iowans’ pockets and encourage Iowa businesses to invest and grow.”

It didn’t live up to the hype, she said. In her community, population has declined, employers have left and property tax receipts have decreased.

Clinton, she said, has seen “nothing resembling an economic development boom.”

“Next year, when House Democrats sit down to put together legislation to mitigate the damage done by (the GOP plan), we will invite you to the table,” Wolfe said.

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How revamp works

The GOP-passed tax-cut agreement also provides tax relief to farmers and small-business owners.

Federal deductibility for corporate income taxes is slated to be eliminated by tax year 2021, with some exceptions, while the phaseout for individual income taxes will be completed by 2023.

Triggers will be based on reaching or exceeding an annual net general fund tax receipts of 4 percent. The plan included an example of tax receipts valued at $8.314 billion for fiscal 2022.

The nine brackets used for Iowa income taxes now range from 0.36 percent for annual taxable income of $1,628 or less to the top rate of 8.98 percent for taxable incomes over $73,260.

It will be revamped to 0.33 percent at the low end, up to a top rate of 8.53 percent in tax years 2019 and 2020, according to the Department of Revenue analysis.

When fully implemented, as soon as 2023, the plan will reduce the number of individual income brackets from the nine to four.

The new brackets would begin with a low rate of 4.4 percent and with a top rate of 6.5 percent for Iowans making $75,000 or more — and eventually would eliminate the ability for Iowans to deduct their federal taxed paid on their state returns.

The top corporate rate will be lowered to 9.8 percent, from the current 12 percent.

Republicans say their plan is designed to prevent Iowans from seeing an increase in their state tax liabilities because of the recent federal tax overhaul that cut Iowans’ federal tax liabilities by an estimated $1.8 billion. But those cuts would translate into higher state taxes for Iowans who have lower federal taxes to deduct on their state returns.

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Analysis

The state Department of Revenue’s 49-page analysis of the tax package said that for tax year 2019, Iowa’s 1.6 million income tax filers would receive an average cut of $243, or 9.8 percent. Iowans with incomes of:

* $10,000 to $20,000 — would see an average cut of $18 in the first year.

* $60,001 to $70,000 — average cut of $182.

* $250,001 to $500,000 — average cut of $2,593.

* $500,001 to $1 million — average cut of $6,465

* More than $1 million — average cut of $18,773.

According to the revenue agency analysis, state tax collections by fiscal year would be reduced by about $100 million in fiscal 2019; by $261.7 million in fiscal 2020; $328.5 million in fiscal year 2021; $390.5 million in fiscal 2022; $437.5 million in fiscal 2023; and $642.6 million in fiscal 2024.

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