Tax change moved back to July 1

DES MOINES - A state law change that could give Iowa manufacturers a sizable sales tax break was allowed to advance Tuesday after a state agency that offered the controversial language agreed to move back the effective date to July 1 to give lawmakers time to debate the issue during the 2016 session.

The move came after the Administrative Rules Review Committee, on a 5-5 vote, failed to bring a formal objection to a tax change that could lower business taxes between $30 million and $90 million - an outcome that critics called an executive-branch attempt to usurp legislative authority.

The rule, proposed by the state Department of Revenue, would apply to the state sales tax on manufactured products but would expand the exemption for items used in the manufacturing process to avoid a double tax.

Department spokeswoman Victoria Daniels said the updated code language was needed after Iowa joined the streamlined sales tax initiative in 2003.

Gov. Terry Branstad last week called the proposal an effort to modernize the state's tax code.

'The rule does not introduce concepts that do not exist in the statute,” Daniels said. 'We're within our authority to do that.”

However, she said her agency was willing to move back the implementation date from Jan. 1 to July 1 to address concerns by lawmakers who believe Branstad's administration was attempting to accomplish something by rule that should be done through legislative action.

Committee co-chairwoman Rep. Dawn Pettengill, R-Mount Auburn, called the July 1 effective date a 'good compromise.”

But Senate President Pam Jochum, D-Dubuque, said the Constitution gives the Legislature the power to set tax policy and the rule in question was an overstep by the governor.

'This rule is bad precedent. The Branstad administration should withdraw the rule,” said Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee.

He added it was unknown how much the tax break actually would cost and comes a few months after Branstad vetoed $56 million in one-time money for education because the state couldn't afford it.

However, Sen. Mark Chelgren, R-Ottumwa, said it was within the purview of the department to periodically review rules and update them, and critics of the governor should not 'punish” him or the executive branch 'because he made a vote you don't like.”

Mike Ralston, head of the Iowa Association of Business & Industry and a former director of the state Department of Revenue, called the proposed change 'sound tax policy” that would provide 'clear guidance” to manufacturers what is taxable in Iowa.

Jochum and several educators expressed concern that the tax change would reduce the revenue school districts receive from a dedicated 1 percent sales tax that could have to be replaced by property taxes to meet bonding requirements or avoid delaying infrastructure projects.

Jim Larew, a lawyer who served as former Gov. Chet Culver's legal counsel, warned the lawmakers to 'watch out” because they were dealing with a balance of constitutional power issue that could have serious and lasting effects.”