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GOP leaders seeking Iowa income tax ‘moon shot’
Big state surplus has them pushing reform, but others urge caution
ALTOONA — With a state surplus approaching $2 billion, a key Senate Republican says his majority caucus is looking for a “moon shot” change in state tax policy, with the ultimate goal of eliminating the income tax at some future time.
Sen. Dan Dawson, R-Council Bluffs, chairman of the Senate Ways and Means Committee, told an Iowa Taxpayers Association forum Friday that key legislators and staff are exploring options aimed at creating “a 21st century model” that will move Iowa among the top U.S. states with competitive tax codes.
“We have the opportunity to do a tax reform moon shot here in Iowa,” said Dawson, who noted Senate Republicans are looking at a five-year reform initiative as a starting point.
“There’s no reason we should settle for mediocrity,” he told the taxpayer group. “Simplicity, transparency, competitiveness — that’s our defining marker that we’re putting ahead of us. That’s what we want to do when we reform our tax system, so the ultimate goal is to eliminate the income tax.”
Currently, the state has more than $1 billion in its taxpayer relief fund, and Dawson said carry-over funds could add another $1 billion to the surplus, meaning legislators are in a prime position to make major policy changes when they convene their 2022 session next month.
More cautious views
However, three other forum members — Rep. Lee Hein. R-Monticello, chairman of the House Ways and Means Committee, and ranking House and Senate Democrats Sen. Pam Jochum of Dubuque and Rep. Dave Jacoby of Coralville, ranking member of the House Ways and Means Committee — took a more cautious view.
The three advocated for returning surplus revenue to Iowa taxpayers while meeting budgetary obligations and revisiting policy discussions related to local property tax burdens and tax credits already on the books for corporations and various taxpayer classes.
“It’s an overpayment. It’s their money. We’re going to try to give it back to the taxpayer,” Hein said. “There are a multitude of ways to do that, whether it’s a cut in rates, property tax relief — there’s lots of different ways.
“It could be as easy as writing a check. We’re looking at studying all the different options and absolutely we need to refund some of that over-taxation.”
At the same time, Hein said legislators have to be “careful” in how they deal with surplus dollars that are one-time resources.
“We’ve got a challenge here on how to get the excess money back to the people that gave it to us in the first place,” he said. “There are a lot of different ways to do that, but we need to be responsible in getting it back to those people and still be able to operate a budget in a responsible way.”
Jochum noted the state’s budget surplus was a byproduct of some economic anomalies brought on by the COVID-19 pandemic, most notably more than $9.2 billion sent to the state, local governments and individuals in Iowa as a one-time relief infusion.
At the same time, she said, the state still faces financial challenges that include commitments that require ongoing funding, such as the shift of mental-health programs from local property taxes to state general funds.
“We have a number of budget issues that are coming due in the coming next few years,” Jochum said. “We need to take into account the budget situation as we deal with any kind of tax reform to make sure that as that federal money begins to disappear that as a state we can sustain what we already started.”
“That federal money is going to disappear eventually, and we are taking on a lot of new spending measures that we need to make good on. You can’t make that promise and then not pay for it,” she added. “We need to make sure that we come out of this pandemic well because it’s not behind us yet.”
14.5% sales tax?
Jacoby noted other states that have cut or eliminated their income taxes have had to make up lost revenue by raising their sales taxes or fees or tax their top domestic product.
North Dakota, he said, taxes its burgeoning oil fields and other states with major entertainment draws tax out-of-state visitors, which Iowa won’t be able to do.
“I would love to do away with income tax,” the Coralville Democrat said. “If we eliminate all income tax, the equivalent would be the sales tax would have to be at least 14.5 percent, and there would have to be sales tax on food in Iowa.”
The legislative Democrats said they would like state lawmakers to review all current tax credits the state offers that are close to $550 million as part of any tax policy discussion and to fully fund existing property tax credits offered for homesteads, veterans, elderly/disabled and farmland, which usually don’t get their annual allotments from the state.
Corporate income tax
Asked by Iowa Taxpayer Association members if the legislative discussion would include cuts in the state’s corporate income tax rates, Dawson said Senate Republicans would be “a willing partner to substantially lower the corporate rates.”
But, he added, “I have no interest in lowering current corporate rates without substantially reforming some of our incentives and credits.”
Dawson said the session’s primary focus will be on making bold tax policy changes rather than doing across-the-board rates cuts or one-time tax rebates that would represent “a lost opportunity,” given the possible options presented by the state’s surplus.
Jacoby said his main worry heading into the 2022 session is focused more on social than tax-policy issues, given that Iowa, like many places, is facing a workforce shortage and not taking steps to attract young people.
“I’m worried about some of the things that we’re doing at the Statehouse that don’t encourage young people to move to Iowa,” he said. “I take it extremely personally when we talk about book burning or restricting women’s rights and other things.”
He said one of his daughters, who lives in Nashville, told him, “Dad, I would move back to Iowa, but the way you’re treating women, I’m not going to move back. She says Tennessee is more progressive than Iowa.”
Cut or not cut?
During a taping of this weekend’s “Iowa Press” for Iowa PBS, Chris Hagenow, a former state legislator who is vice president of Iowans for Tax Relief, said the Legislature has “a tremendous opportunity” to enact significant broad-based income tax rate reductions next session.
The $1 billion-plus surplus in the taxpayer relief fund and “another $800 million or so at the end of the current fiscal year” are indications that “clearly Iowans are overpaying on their taxes, and so we need to reform that tax code to match that. So we think that the tax reforms should be permanent, structural and significant across-the-board for Iowa taxpayers.”
However, Peter Fisher, a retired University of Iowa professor who is research director for Iowa City-based Common Good Iowa, noted the surplus is one-time money.
“I know many legislators have often said that we don't use one-time money for permanent expenditures or changes in the budget,” he said. “So it seems to be unwise to say we are going to use a one-time surplus to enact permanent tax cuts.
“And it's a surplus, by the way, that is a result of underestimating revenues.
Because Iowa has a budget surplus “doesn't mean we have a permanent surplus, and it's not a good reason for, once again, more and more tax cuts, which has been a recent history throughout Iowa,” he added.
“I think our view on taxes is that we need taxes to finance the services that Iowans are demanding,” he said. “People want good schools, they want clean air, they want safe streets and workplaces, they want people to have access to food and child care and affordable housing and health care.
“ We can't pay for those things if we are continually cutting taxes and eliminating our ability to fund those services.”
Plans to eliminate the state income tax in Iowa, he said, are “a recipe for disaster.”
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