DES MOINES — Iowans will see their state income taxes cut by $2.7 billion over six years if the GOP-run Legislature passes and Gov. Kim Reynolds signs a compromise plan that was unveiled last Friday, according to a key architect of the plan.
Senate Majority Leader Jack Whitver, R-Ankeny, said Monday preliminary numbers indicate individual taxpayers and businesses will see their tax liabilities lowered beginning in the 2019 tax year. According to information issued by the governor’s office last week, individuals, families and business owners will receive $398 million in income tax relief in 2019 by providing an average tax reduction of nearly 10 percent.
“Over six years, it’s about $2.7 billion of income taxes and then the net tax when you factor in some of the sales tax modernization, it’s close to $2 billion over six years,” Whitver said.
When fully implemented as soon as 2023, the plan will reduce the number of individual income brackets from the current nine to four with a top rate of 6.5 percent and eventually eliminate the ability for Iowans to deduct their federal taxes paid on their state returns. The top corporate rate will be lowered to 9.8 percent from the current 12 percent.
Republicans say the plan is designed to prevent Iowans from seeing an increase in their state tax liabilities due to the recent federal tax reform that cut Iowans’ federal tax liabilities by an estimated $1.8 billion but those cuts would translate into higher state taxes for Iowans who have lower federal taxes to deduct on their state returns.
Sen. Joe Bolkcom, D-Iowa City, ranking member on the Senate Appropriations Committee, is calling the tax-cut proposal that could see committee action in the Senate as early as today an ill-advised move given the state has gone through two years of budget revisions due to lower-than-expected tax collections.
“The state is broke today,” Bolkcom said Monday, who noted the tax plan for each calendar year beginning Jan. 1 will straddle half of two fiscal years that run from July 1 to June 30, so the budget impacts he has been told of the GOP plan would be $105 million in fiscal 2019 and $260 million in fiscal 2020.
“The budget has been in crisis the last year and a half. The Republicans have de-appropriated $120 million, they’ve borrowed $144 million from the rainy day (cash reserve) and it’s been extremely difficult to make a budget that supports education and public safety and the health care needs of the state. It’s unfathomable to think about trying to put together a budget in two or three years with hundreds of millions of dollars in fewer resources to fund our local schools and fund the community colleges,” he added.
“I think this is going to be a slow fuse to a very big bomb that’s going to go off in three or four years when this is phased in and there’s hundreds of millions of dollars in cuts to education and cuts to health care and cuts to our courts and public safety that are going to be required should we enact a tax cut that takes hundreds of millions of dollars away from the state treasury,” said Bolkcom. “We can kind of see Kansas from here and we will be Kansas if that happens.”
Republicans say their tax reform package is intended to make Iowa’s tax code more competitive and transparent, simplify Iowa’s complicated tax code and modernize the state sales tax system to create more fairness between Main Street businesses and online merchants operating in the 21st century economy, architects say. Other provisions automatically couple the state system with most federal tax laws and provide a comprehensive review of tax credits.
“We have a five-year plan with everything built in and with spending priorities built in,” Whitver said Monday. “We took a lot of time to craft it in a way that made sense.”
Also, to address state budget concerns, sponsors say the tax plan utilizes a trigger to protect budget sustainability in future years, ensures full repayment of the cash reserve fund this year and does not reduce the property tax backfill. The agreement also maintains large ending balances in both fiscal year 2019 and 2020 and protects budget commitments made to education, health care and public safety, according to backers. The agreement also provides tax relief to farmers and small business owners, but a Senate proposal to begin applying state taxes to credit unions remains unresolved, Whiter said, noting “that’s an issue that we’ve talked a lot about. The House is still working on it so we’re not sure what’s going to come back.”
While most Iowans will see a 10 percent tax cut on average, architects of the plan say the minimum for all income classes would be 7 percent. However, Bolkcom said revamping Iowa’s income-tax system is very complicated and most Iowa Department of Revenue runs show at least one-third of Iowans will see no change or possibly a tax hike within the projected averages.
Whitver said he expected House and Senate Republicans to provide more details on the tax cut and reform package later Monday.
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