Iowa GOP lawmakers vow more tax cuts, but will it be ‘moon shot’ to eliminate them entirely?

DES MOINES — Senate Republicans in the Iowa Legislature are formulating a “moon shot” tax-cut plan that would eventually eliminate the state’s personal income tax.

But skeptics hungry for mission details worry the trick in engineering such an endeavor would be pulling off a successful landing that doesn’t crash and burn.

For years, Statehouse Republicans have contended one of Iowa’s biggest impediments to growth has been a top state income rate — skewed by a provision that allows Iowans to deduct their federal income tax paid from their state tax liability, like few other states do — that makes Iowa appear to be a high-tax state when in reality it’s roughly in the middle of 50-state comparisons.

Republican Gov. Kim Reynolds and the GOP-run Legislature already have implemented a plan to phase out federal deductibility to lower tax rates and compress taxable income brackets. But now with the state general fund surplus and taxpayer relief fund projected to top $2 billion, with another $900 million in reserve, GOP senators say it’s time to take an aggressive run at cutting personal income taxes deeper with a goal of eliminating them in the future.

“We want to take as big a chunk as we can, and put as much money back in the taxpayers’ pockets as we possibly can,” said Senate Majority Leader Jack Whitver, R-Ankeny. “The goal should be zero. And how long we get it takes to get to that goal, whether we put that in place this year or not, is still to be determined.”

Whitver points to the latest state budget projections that indicate Iowa will collect nearly $9.1 billion in revenue from various sources next fiscal year, with the expectation that state spending will be the $8 billion range. But that points to a surplus that need not be amassed, he said.

“Iowa is in a really strong position and that’s after record investments in foundational priorities,” said Reynolds, who appears to be “all in” on the GOP tax-cutting momentum, although she did not make herself accessible to reporters for the traditional pre-session interviews this year to discuss her priorities.

“We have a significant, healthy balance,” Reynolds told a public hearing on the state’s fiscal 2023 budget mostly attended by lobbyists for business groups and interests sympathetic to GOP causes. “We’ve over-collected and it’s time to turn that money back to the taxpayers. We’re not competitive; we’re not near where we need to be.

“I looking forward to working with the Legislature to pass generational tax relief which I believe we have the capacity and we absolutely should be moving in that direction,” she added. “We’re going to come (this) year with a comprehensive, ambitious tax plan that will really make Iowa competitive and I think really help spur economic growth in the state of Iowa, so I’m really excited about that.”

House Speaker Pat Grassley, R-New Hartford, said Statehouse Republicans are in agreement on a goal to return as much over-collected money to taxpayers as quickly as possible — most likely through lower rates — within a responsible plan that keeps the state solvent and does not come at the expense of other things.

At the same time, Grassley said his 60-member House GOP caucus is taking a cautious view on how to address a stockpile of one-time money — some from economic growth and some with the federal cash infusions to help weather the COVID-19 pandemic — in the context of maintaining ongoing financial commitments and government services that Iowa citizens expect.

“We want to do something that's sound and sustainable. So, whatever we do needs to be long-term feasible. We're not going to just pass something to pass something. Whatever commitment we make, we want to make sure that it has long-term impacts, and then we can uphold our commitments. So that will be a major part of whatever we do,” said Grassley.

“Now, obviously, how we do that is going to be the part where there's not necessarily everyone's on the exact same page,” he added. “But I think knowing that, ultimately, that's our goal. It makes it a lot easier starting down that path.”

Along with the shared goal of reducing individual income taxes, Republicans say they plan to accomplish it without raising other taxes or fees charged to Iowans — which has been the case in some of the other nine U.S. states that currently do not collect personal income taxes.

They point to action they’ve already taken to lower Iowa’s top income tax rate from nearly 9 percent to just over 6 percent, and they plan a reduction in roughly $500 million the state currently provides in business and other tax credits before they add any discussion of corporate tax rate reductions into this session’s tax-policy discussions.

Skeptics point to the latest quarterly estimates from the state’s Revenue Estimating Conference in December that show about $5.4 billion of the $10.7 billion in gross general fund tax collections the state is estimated to take in during the fiscal 2023 year that starts next July 1 will come from personal income taxes paid by Iowans. That nets out at $9.075 billion after refunds are paid and other adjustments are made.

House Democratic Leader Jennifer Konfrst of Windsor Heights said that is a huge amount of money that funds many government functions that will not be replaced by more economic growth or some other tax — such as a huge spike in the state sales tax, cost shifts to local property taxes, the establishment of tolls road or new or higher fees for services. She and others worry the end result could have devastating consequences.

“It’s appropriate to call it a moon shot because you’d have to live on the moon to think that it was a good idea. We’d have to get rid of public education in this state, the regents, the Department of Corrections, the Department of Public Safety and we still wouldn’t get to the number that is required to meet that hole in the budget,” said Konfrst.

“Or you increase property and sales taxes so much that people are still paying it but just in a different way?” she added. “There is no solution that doesn’t wholesale change the state of Iowa when you’re looking at getting rid of the income taxes.

“It’s a political ploy, it’s a starting point, it’s a moon shot and it would have huge ramifications in the state one way or another for everyday Iowans. It is an extreme proposal to say the least,” Konfrst noted. “They’ve got a short-term solution to a long-term problem and they don’t seem to be worried about what’s going to happen three, four, five years down the road.”

Legislative Democrats say they are open to cutting taxes but believe the relief should be directed to middle-class, working families who have been hard hit by the pandemic. They also say a share of the state budget surplus that “is artificially propped up by federal relief money” should be used to fund services and amenities that will attract new residents who are as interested in the quality of life as tax policy.

“The devil is going to be in the details, obviously,” said Senate Democratic Leader Zach Wahls of Coralville, who noted the state is in a strong position to also supplement some of the priorities that have been underfunded in recent budgets. He said legislative Republicans have talked about making investments in child care, housing, broadband, water quality and mental health needs “at the same time that they’re cutting off 45 percent of the state revenue.”

Grassley noted that the fastest-growing segment of the state budget has been in Medicaid spending because states have been barred from dis-enrolling recipients during the pandemic — which could provide considerable savings once that prohibition is lifted.

Whitver said the state’s rosy fiscal position is the result of “true” economic growth and years of good GOP fiscal planning rather than “some sort of false growth from the federal money,” which has topped $9 billion through a host of pandemic related aid.

“It's a combination of good fiscal stewardship of investing in priorities where we need to, but also not spending every dollar we possibly can,” the GOP Senate leader said. “And so we're creating a surplus that we can actually go and reduce taxes as well and, in turn, more people have more money in their pocket, they spend more and it grows the economy.”

At the same time, Statehouse Republicans will continue funding priorities when they construct their fiscal 2023 spending plan, he noted, with expectations they will set next year’s K-12 public education system funding level in the session’s first 30 days. The yearly investment in elementary and secondary schools currently tops $3.4 billion, making it the largest line item in the state general fund budget.

Whitver said that despite constant Democratic naysaying, the GOP approach to fiscal management has worked for the past five years “exactly like we thought: we have more revenue than we really planned on, we have bigger surpluses than we ever thought, and so we want to continue to have down that same path.”

Konfrst likened the GOP tax-cut talk coming into the session to “quitting your job because you have a bunch of money in savings” without fully knowing the long-term consequences. She also said she expects Statehouse Republicans will want to take credit for fixing problems like child care, broadband and housing, but Democrats “will be here to remind folks that they haven’t fixed those problems. We’ve got a long way to go.”

Chris Hagenow, a former state legislator who is vice president of Iowans for Tax Relief, said lawmakers have a tremendous opportunity to make permanent, structural and significant across-the-board tax policy reforms during the 2022 session.

While eliminating the state’s personal income tax is “a great goal,” Hagenow recently told an Iowa PBS “Iowa Press” audience, he doubted it would be accomplished quickly and Senate Republicans initially have discussed their “moon shot” plan in the context of a five-year starting point.

However, Peter Fisher — a retired University of Iowa professor who is research director for Common Good Iowa, a liberal-leaning Iowa City-based think tank — told the same Iowa PBS audience that Iowa’s surplus is more a function of the state underestimating its tax collections and that using one-time surplus money to enact permanent tax cuts would be “a recipe for disaster.” He pointed to problems the state of Kansas had when elected officials proposed to phase out their income tax.

Legislators likely will spend much of the scheduled 100-day session slated to begin on Jan. 10 pouring over computer models and various tax reform scenarios before landing on a final approach, Grassley said, adding “I think it's a fair assessment to say that the Legislature won't go home until there's been a reduction in taxes.”