Legislative preview: Iowa lawmakers expect to face taxing issues

DES MOINES — The 2016 legislative session could produce at least one state tax policy change with or without action from the Iowa House or the Iowa Senate.

That unusual circumstance stems from a rule change, proposed by the state Department of Revenue, that would continue to apply 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 officials say the updated code language is needed to conform Iowa with the national streamlined sales tax initiative in 2003, and Gov. Terry Branstad has endorsed the change as a way to modernize the state's tax code to recognize the new realities of manufacturing.

'This is a correction that we've always believed was the right thing to do,' said House Speaker-select Linda Upmeyer, R-Clear Lake, who noted the Republican-led House has passed the proposed statutory change before only to see it stall in the Senate where Democrats hold the majority. 'We believe that that should be done.'

The rule change was brought before a legislative panel for consideration earlier this year but met a 5-5 deadlock along the House-Senate partisan divide.

State revenue officials agreed to move back the implementation date to July 1 to give the split-control Legislature an opportunity to revisit the issue this session, which begins Jan. 11. But no action would mean the exemption will take effect after they leave town, with an impact estimated from $45 million up to $75 million for the state and a carry-over effect for cities, counties and school districts that benefit from extra sales tax collections authorized by taxpayers.

'It will become law unless we do something to stop it,' Upmeyer said.

Senate Majority Leader Mike Gronstal, D-Council Bluffs, noted the exemption could have disparate impacts on communities depending on the size of their manufacturing base or whether local schools had bonded against the expected sales tax receipts — factors that could trigger legal action if nothing is done to address potential adverse effects.

However, he conceded 'it's not likely that the House will help slow that down' at a time when budget-makers already are struggling to fund past commitments and priority items such as kidergarten-through-grade-12 education. That funding took a $55.7 million hit last July when Branstad vetoed extra surplus money for school districts.

'From our perspective, in a time when the governor says we cannot afford $55.7 million in one-time money for K-12 education but he's willing to give away $45 million a year in perpetuity to the business world that just got a $300 million commercial property tax break, we think they are shortchanging K-12 education in the state of Iowa and they're doing it directly by doing this,' Gronstal said.

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

Limited leeway

Critics have called the attempt to change state tax policy via the rule-making process a bureaucratic 'overreach' and a Branstad administration power play that attempts to usurp legislative authority.

But Senate Republican Leader Bill Dix of Shell Rock said the clarification fell within the confines of executive-branch authority and hopefully would make Iowa a more attractive place for manufacturing and, with it, growth and good-paying job creation.

If the sales tax change opened a 'window' to a larger discussion of tax policy with legislative Democrats who have been a roadblock to bigger attempts to simplify other areas of the state tax code, Dix said he would be receptive to add that to the 2016 agenda. That agenda appears fairly limited and targeted as lawmakers prepare to gather for a 100-day election-year session, he said.

'If all we do is have a fight over the budget and don't address the potential and the opportunities that are out there for us in economic growth, then that will have been a mistake,' Dix said.

However, legislators from both parties acknowledged that the fiscal 2017 state budget they will build during the coming months holds limited leeway for attempts at significant tax relief. And Branstad has not indicated plans to come with major tax law changes when he delivers his policy charge and lays out next year's budget blueprint during his Jan. 12 Condition of the State address to a joint session of the 86th General Assembly.

'Obviously when you're working on tight budget margins, the opportunity for tax reform becomes increasingly difficult,' said Rep. Chris Hagenow, R-Windsor Heights, the new House Majority Leader.

Sioux City business leader Chris McGowan told an Iowa Chamber Alliance assemblage in December that cumbersome state taxes can be an obstacle to closing an economic development deal when he called for changes aimed at 'flattening and streamlining the personal income tax.'

However, Senate President Pam Jochum, D-Dubuque, told a similar legislative forum sponsored by the Iowa Taxpayers Association she did not expect significant tax policy changes in 2016.

'In terms of any big, new policy changes in taxes,' Jochum said, 'I truly do not see any of that happening.'

However, a big-ticket policy item legislators likely will be asked to consider is whether to implement tax 'coupling' provisions retroactive to the 2015 tax year that would conform Iowa's tax laws with federal changes recently passed by Congress and signed into law by President Barack Obama.

Legislators say the 'coupling' bill would boost deductions for things such as business depreciation, earned income and child care tax credits, and reimbursing teachers who spend their own money on books, supplies and computer equipment used in the classroom at a price tag to the state's general fund that could approach $90 million.

'This will be a really interesting dynamic on how this plays out,' said Sen. Randy Feenstra, R-Hull, ranking member on the Senate Ways and Means Committee. 'I think this is going to be the biggest tax issue this year.'