Second in a series of articles about issues likely to come up for debate in the 2020 Iowa Legislature.
DES MOINES — Iowans who like surprise endings might want to pay attention to this year’s session of the Iowa Legislature.
Leaders from both political parties say they believe this 2020 election-year session will feature a multipronged discussion of state tax policies encompassing income, sales, property and business taxes — but they would not be surprised if it takes most of the scheduled 100 days for a consensus to develop, if one does at all.
GOP Gov. Kim Reynolds and Republicans who hold majorities of 32-18 in the Iowa Senate and 53-47 in the Iowa House say they want to build on tax-relief efforts they started in 2018 in ways that will ease Iowans’ tax burden, make Iowa more competitive with other states and simplify areas of the tax code at a time the state budget has a surplus.
That seems simple enough, but the conversation quickly develops into a Rubik’s Cube puzzle with an array of moving parts that have been hard to address individually, let alone trying to do them as part of an overall package that may leave Iowans paying more for things they buy while getting breaks on their income and property tax costs.
“That’s a really heavy lift to put all of those things together,” said Senate Majority Leader Jack Whitver, R-Ankeny.
At the top of the list is a discussion that dates back a decade to a constitutional amendment passed by Iowa voters.
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That measure authorized the Legislature and governor to raise the sales tax and direct the proceeds into a wide range of environmental, conservation, natural resources and outdoor recreational initiatives.
The crux of the Iowa Water and Land Legacy initiative held that three-eighths of a new penny sales tax increase — estimated to raise about $170 million a year — would flow into a trust fund with a designated formula for distribution.
That would leave up to nearly $380 million in new sales tax proceeds — the rest of the penny — up for grabs.
Some possible uses now being discussed include plowing the money into lowering income tax rates, having the state take over all or part of mental-health costs currently paid for by property taxes or accelerating and expanding the 2018 tax-cut provisions that are being phased in over several years.
“Whatever we do on taxes, we’re not going to increase the tax burden on Iowans,” Whitver said. “And so to put all those pieces together and make sure it’s a tax reduction — that is difficult to do.”
Rep. Pat Grassley, R-New Hartford, who officially will be installed as the new speaker of the Iowa House when legislators convene Jan. 13, said the one thing certain is that reaching a consensus on any tax package is going to be a time-consuming process beginning with whether and how to revamp the IWILL funding formula to reflect 2020 needs; and deciding if lawmakers want to raise the sales tax effectively to 8 percent (including local-option and school infrastructure assessments) in an election year.
“Moving to 8 percent is a big decision,” said Sen. Joe Bolkcom, a Democrat from Iowa City who was skeptical that some Republicans would vote to raise the sales tax and questioned whether local officials would give up control of mental-health services to the state — given the track record with Medicaid privatization and shifting tax burdens in the name of relief.
“There’s a reason why we haven’t raised the sales tax in 10 years. Republicans don’t like raising taxes to fund the environmental trust fund, so if they’ve got some desire in an election year to raise taxes on people, good luck,” said Bolkcom.
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Reynolds said the first hurdle that must be cleared in the IWILL discussion is the desire by Republicans to change the funding formula that currently would commit 23 percent of the money raised to natural resources, 20 percent to soil conservation and water protection, 14 percent to watershed protection, 13 percent to the resource enhancement and protection program, 13 percent for local conservation partnerships, 10 percent for outdoor recreational trails and 7 percent for lake restoration.
“The allocation of the funding has to change or it’s not going anywhere,” the governor said.
That’s not a problem in the Senate, where Whitver said he expects to get at least 26 Republican votes — if not all 32 — for whatever final tax package agreement gets formulated with the House and governor.
But it’s likely a different story in the House, where Democratic votes may be needed for a deal.
“The devil is always in the details,” said House Majority Leader Matt Windschitl, R-Missouri Valley, of any IWILL package that includes a sales tax increase. “I do believe for it to move forward — 3/8 or a whole penny — it would have to have bipartisan support.”
Rep. Todd Prichard, D-Charles City, the House minority leader, said his members aren’t interested in merely shifting tax burdens at a time when the state has surplus funds that could be used to address needs such as workforce development, health care, education and quality of life that he said have been neglected or underfunded too long.
“I look at this as an opportunity for the state to kind of renew some of its commitments that it has failed in supporting and some of the obligations it hasn’t met in the last few years,” he said. “I look at this as an opportunity to invest in Iowa.”
But GOP interests are cautioning legislators to keep the focus on revamping the tax code.
“With the current state of our economy and a surplus of taxpayer revenue from last year, there should be an opportunity to continue reducing tax rates on both the individual and business side of our tax structure to improve our competitiveness with other states,” said Drew Klein of Americans for Prosperity.
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“As part of that effort, we continue to advocate for the elimination of tax credits and other giveaways. This would free up even more room to reduce rates and would help ensure that all taxpayers are playing by the same rules,” Klein added. “We’re also supportive of efforts to reduce property taxes, but will resist a dollar-for-dollar shift from property taxes to a sales tax increase.”
Grassley said he expects House Republicans will take a cautious approach to budgeting and tax policy, keeping an eye on sustainability and continuing the direction of state finances while easing tax burdens.
“This is going to be a theme this session: ‘We have an ending balance, let’s just spend every penny we have, we need to put in programs,’” the incoming House speaker noted some will say. “I think we’re going to be under a lot of pressure this year to spend money, and our caucus is not going to go down that path.”
Rep. Lee Hein, R-Anamosa, chairman of the House Ways and Means Committee, said he expects legislators to review some of the tax credits the state offers to see if they’re still needed or if they’re producing the desired results.
He said he was uncertain if the big-picture tax policy discussions would include efforts to revise the 2013 property tax “backfill” for local communities and schools.
When Iowa lawmakers passed a massive commercial property tax cut in 2013, they promised to backfill local government coffers to partially compensate for the loss of revenue. But whether the state intends to end that commitment has been a recurring topic.
Reynolds said she had no plans this year to initiate that discussion.
“I have a hard time predicting stuff now because once we get into session every year, there’s something that pops up that today we have no idea and we deal with it,” said Hein.
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