Legislators see limited budget room for tax cuts this session

DES MOINES - Two years ago Republicans and Democrats bridged their political divide in the Iowa Legislature to enact the largest tax cut in state history.

The effects of reducing commercial property tax rates and providing income tax relief now are rippling through the state budget as long-term commitments cut into a stockpile of surplus revenue, creating a period of adjustment that may make deeper cuts in personal and corporate income taxes a bridge too far as the split-control 86th Iowa General Assembly begins its two-year run Monday.

However, the bipartisan successes of 2013 after three decades of impasse have taught Statehouse players to never say never.

Given a tight state budget due largely to those ongoing commitments, Gov. Terry Branstad has said he is unlikely to include any major tax code overhaul or tax cuts in the biennial budget and legislative agenda he lays out for lawmakers in Tuesday's Condition of the State address.

Branstad said he is 'very interested” in working with Republicans who control the Iowa House on income tax relief. But he was skeptical a major compromise would emerge given that majority Senate Democrats favor targeted relief that aids Iowa's middle class, while GOP efforts focus on across-the-board relief.

'I'm trying to be realistic and put together a budget and program that I think has a realistic chance of being approved,” said Branstad, a Republican who will take the oath of office for a sixth term Friday. 'I have to take into consideration who controls what house and what's the art of the possible.”

Fiscal impact is another factor. House Speaker Kraig Paulsen, R-Hiawatha, said a plan his majority caucus will push would give state income tax filers options of using the current system to calculate their tax liability or paying a lower flat tax rate with fewer deductions and higher filing thresholds. That could shave tax collections by several hundred million dollars.

'We most definitely will be looking at income tax reform and trying to keep Iowa's code flatter and simpler,” said Rep. Tom Sands, R-Wapello, chairman of the House Ways and Means Committee.

Paulsen said Republicans would be open to discussing ways to phase in the changes to cushion the impact on the state treasury.

MIddle-Class concern

Democrats say the GOP approach appears more beneficial to higher-income taxpayers and fails to address concerns that Iowa's system is uncompetitive because of federal deductibility and the way it skews Iowa's rates in state-to-state comparisons.

'That's been an effort that has been tried and failed and would fail again,” House Minority Leader Mark Smith, D-Marshalltown, said of the GOP plan that Paulsen said he 'fully expects” will be debated this session. 'Simplification is something that we're all interested in,” Smith added. 'How we get to that is the details that we will try to work out in a bipartisan way.”

Senate Majority Leader Mike Gronstal, D-Council Bluffs, said middle-class Iowans and working families are 'stressed” in an economy that has left them out of the recovery.

'We have always been open to discussions about targeted tax relief that will help grow Iowa's economy,” Gronstal said. 'We think if there's money to be had for tax relief, that's where it should be targeted.”

However, Senate Republican leader Bill Dix of Shell Rock said the states that are experiencing the strongest growth are ones with low tax burdens. He pointed to Iowa's 10 percent across-the-board tax cut in the late 1990s as an example where relief was provided without long-term negative effects on state resources.

'(Tax relief) should be the defining question for the Legislature because if we don't focus on modernizing our tax system and gearing ourselves to a tax system that rewards hard work, investment, creating private-sector jobs, we're going to have difficulty maintaining a state budget with the growth built in that you need to support our institutions,” Dix said 'For me, it is the No. 1 priority, and we cannot take our eye off of it.”

Assessing the burden

Representatives of business interests, such as the Iowa Chamber Alliance, say Iowa's tax system is uncompetitive and impedes economic development because the state's top individual and corporate income tax rates look high when stacked up nationally. But tax experts say Iowa's tax burden generally falls near the middle when assessed on a per-capita basis.

'Iowa's income taxes, both individual and corporate income taxes, are overly complex,” said Chris McGowan, president of the Siouxland Chamber of Commerce in Sioux City, in supporting a flatter and streamlined income tax system that would reduce tax burdens while eliminating federal deductibility.

'Complex taxes make Iowa less competitive and require a cumbersome explanation of our tax system to prospective businesses,” McGowan said. 'In economic development, if you are explaining, you are losing.”

However, Peter Fisher, research director on economic opportunity, budget and tax issues for the Iowa Policy Project, a liberal think tank in Iowa City, said many factors affect business climate, and a recent report by the Battelle Institute on Iowa's economic status did not point to tax policy as a problem area.

'If businesses are saying we need a skilled labor force and we need good roads and communications infrastructure, those things cost money and we keep giving tax revenue away so then we don't have the money to do things that really matter,” Fisher said.

Ernie Adkison, political director for Muscatine-based Iowans for Tax Relief, said his group favors a plan that would provide an across-the-board cut for all income brackets as long as it protects taxpayers' option to deduct the federal taxes they pay and the charitable contributions they make from their state tax liabilities.

ITR opposes any new tax increases, he said, including a hike in the state gas tax that legislators differentiate as a user fee rather than a tax.

Paying for 2013

Legislators from both political parties said their first priority is making sure they fully fund the 2013 tax cut provisions. That includes more than $130 million in income tax relief via a doubling of the earned income tax credit and a special taxpayer trust fund as well as a projected $262.2 million state obligation in fiscal 2016 for property tax relief, which grows to $277.6 million in subsequent years.

'It's cast in stone,” Gronstal told the Iowa Taxpayers Association recently. 'We are not going to walk away from that commitment. We made local governments eat lots of revenue, we forced it on them, so they have a lot of skin in the game already. We are not going to back up on that reimbursement because when we do, we create a giant tax shift in this state.”

House Majority Whip Chris Hagenow, R-Windsor Heights, said he hadn't heard any member of his caucus express a desire to backtrack on the property tax commitment.

No Plans for TIF

On another tax-policy hot button, legislators said they doubted the 2015 session would spend much time looking to revamp ways Iowa cities and counties use tax increment financing as an economic development tool beyond reforms adopted in 2012.

TIF abuses prompted lawmakers to establish yearly reporting requirements for cities, counties and rural improvement zones and directed the Legislative Services Agency to issue an annual report to the Legislature and governor that would summarize and analyze the data.

TIF freezes the property taxes on a site at predevelopment levels and diverts the increase in taxes, or increment, into a fund used by the city. Sometimes the increment goes to a developer of a project in the TIF area, or the city might use it for infrastructure work.

'I don't think it's likely you're going to see a great deal of time spent trying to find ways to improve or redefine TIF at this point,” Dix told a recent Iowa Chamber Alliance legislative forum.

Sen. Matt McCoy, D-Des Moines, concurred, saying 'I'll resist all efforts to do anything to undermine or alter or tinker with the current system.”

McCoy said he expected some lawmakers would be looking for alternative sources of revenue for cities that are dealing with a loss of revenue because of the property tax cut or fiscal pressure from the 411 retirement system for police and firefighters. He also said lawmakers may have to do a 'cleanup” bill to clarify language in the 2013 legislation dealing with multiuse properties and other issues.