DES MOINES — For income tax-relief advocates in Iowa, opportunity apparently knocks once every 20 years.
It has been two decades since a GOP-led Legislature passed and Gov. Terry Branstad signed a 10 percent income tax cut. Now Republicans are back in control and bring an appetite for tax relief and changes to the Statehouse that has some groups salivating and others hoping lawmakers don’t bite off more than the budget can handle.
“We’re Republicans. We’re always interested in reducing the tax burden on Iowa taxpayers. That’s what we do,” said House Majority Leader Chris Hagenow, R-Windsor Heights, who will be a key player when the 87th Iowa General Assembly convenes Monday with Republicans holding a 59-40 edge in the House and a 29-20-1 majority in the Senate.
Front and center in an aggressive GOP agenda over the next two years will be a concerted effort that advocates say would make Iowa’s income tax system simpler, fairer, streamlined and more competitive while maintaining the revenue necessary to fund essential government services.
“We’re going to look; we’re going to study: we’re going to see what’s possible. We’d love to have taxes be lower. It’s who we are, but we’re going to do the right things for Iowans,” said House Speaker Linda Upmeyer, R-Clear Lake. “We’re going to make sure that we’re funding priorities and then we’re going to look for opportunities for taxpayers to keep more of their dollars in their pockets.”
Key lawmakers already have been busy laying the ground work for tax-policy discussions by analyzing data and tax studies, meeting with stakeholder organizations, testing the impacts of various rate scenarios and looking at what other states do to better understand the successes and pitfalls of revamping complex tax structures.
Incoming Senate Majority Leader Bill Dix, R-Shell Rock, said everything is on the table now but he expects the focus to narrow as lawmakers hold closed-door discussions to seek consensus.
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“The states that are growing the fastest today are the ones that have recognized that economic policy and tax policy makes a big difference,” Dix said. “High income tax punishes people who want to work, save and make investments in our state. We need to recognize that.”
One feature of Iowa’s income tax system that few other states have is the ability for Iowans to deduct federal tax liabilities from the state tax.
Muscatine-based Iowans for Tax Relief has defended federal deductibility as a protection from “a tax on a tax,” but a growing number of GOP and business interest groups see it as an uncompetitive impediment that skews Iowa’s true tax rates.
“Our state’s complex system makes Iowa less competitive and requires a cumbersome explanation to prospective businesses,” said Jason Hutcheson, a Greater Burlington Partnership executive who is chairman of the Iowa Chamber Alliance, a coalition representing the 16 largest chambers of commerce and economic development organizations throughout the state.
“Lowering and simplifying income taxes for both corporate and personal taxpayers is a critical need to make Iowa as competitive as it can be in realizing economic growth,” he added.
Iowa’s personal income tax system has rates in nine brackets that range from 0.36 percent to 8.98 percent, but state officials argue the top effective rate is closer to 6 percent when the effect of federal deductibility is factored in.
“Federal deductibility is an issue whose time is now,” said Mike Ralston, leader the Iowa Association of Business & Industry. He notes that over the past 12 years he has seen a shift from a majority of his association members supporting the deduction to now feeling it’s time to get rid of it in favor of lower rates.
Chris Ingstad, president of Iowans for Tax Relief, said his members want to preserve federal deductibility but would be open to considering other protections such as adopting constitutional amendments limiting future tax or spending increases or making such decisions subject to a supermajority of both legislative houses. He also said his group supported a House approach to offer a two-track system where a taxpayer could file under the current system or a separate flat-tax option.
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“We’re going to be a little bit flexible this year and help legislators where we can,” Ingstad said. ”If there comes a time where we need to stand up for something that our members just wouldn’t take, then we’ll do that. But we’re optimistic that we’ll get a pretty good tax reform or tax relief package passed.”
GOP lawmakers and interest groups say the state has a spending problem, not a revenue problem, and a key component is reducing government and the spending needed to support it.
“The problem is not that the state doesn’t have enough money. It’s that there are a lot of hands in the lobby that are open expecting something for themselves,” said Drew Klein, state director for Americans for Prosperity-Iowa.
“Priority No. 1 is fiscal discipline and growing the economy,” Klein added. “If we can take care of those issues, then eventually we can start to address some of the wants and nice to haves that we would like to fund. But if we can’t grow the economy, then all of those are just a pipe dream.”
Kevin McLaughlin, a Des Moines investment counselor and longtime income tax-cut advocate, said while groups are working to present a unified front, the challenge might be harder in a situation of GOP control because the lobby against tax reform also will be working to keep whatever entitlements or benefits its enjoys under the current system.
“We’re not out to skin anybody,” said McLaughlin. “We’re out to have everybody benefit.”
Sen. Joe Bolkcom, D-Iowa City, who has served as Senate Ways and Means Committee chairman, said Democrats would support addressing federal deductibility to lower rates and rein in the “explosion” of tax-credit spending that has mostly gone to out-of-state corporations, but do not want to see inequities for working people exacerbated.
“I hope that whatever tax reform we do provides relief to working people and not millionaires,” he said.
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Bolkcom also noted that lawmakers face a $100 million shortfall in the current budget year they have to address.
“Given the fact that this budget is going into red, it seems ill-advised at this point to do any major tax cutting because we simply can’t afford it,” he said.
Branstad expressed similar reservations last week, telling reporters he does not believe the state can afford to cut income taxes right now and will not be making a tax-policy recommendation as part of the 2017 legislative agenda he lays out Tuesday.
But Branstad said he would be open to considering tax policy changes that majority Republican lawmakers send him if they are fiscally responsible and sustainable.
Rep. Guy Vander Linden, R-Oskaloosa, who now chairs the House Ways and Means Committee, took a similar cautious posture, saying tax-cut enthusiasts should “just cool your jets” until lawmakers get a better fix on the state’s economic situation.
Cedar Rapids Mayor Ron Corbett, a former legislator who was speaker of the Iowa House in 1997 when Republicans last spearheaded an effort to cut state income taxes, said he knows only too well how difficult the path to tax relief can be.
“It will be a challenge for them, but it will not be impossible,” he said. ”It’s been 20 years since Iowa has even tinkered with the rates and it’s long overdue.”
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