DES MOINES | Republicans who control the Iowa Statehouse aren’t debating whether they will reduce state income taxes this session, but rather by how much and just where changes will deliver the most bang for the buck.
Now that President Donald Trump has signed a major overhaul of the federal corporate and individual income tax system, Iowa Gov. Kim Reynolds and the 29 GOP senators and 58 representatives who make up the legislative majorities are analyzing the numbers to determine how much tax relief the state can afford and how best to enhance the state’s competitive position equitably.
“It’s a once-in-a-generation opportunity,” said Senate President Jack Whitver, R-Ankeny.
“Frankly, we haven’t had income tax reform in 20 years. We haven’t had corporate reform in 30 years, and so it’s really a once-in-a-generation opportunity for us to take a new look at our tax code,” added Whitver. “I would like to see something that is fair across the board so that everyone is getting the same percentage decrease in their taxes and it’s beneficial for everybody in the state of Iowa.”
In 1997, the Republican-led Legislature and Gov. Terry Branstad approved a 10 percent across-the-board cut in state income taxes, which put Iowa’s top rate for individuals at 8.98 percent and the top rate for corporations at 12 percent.
They left intact the politically popular option for Iowans to deduct their federal tax liability from their taxable state income. But the feature skews Iowa’s competitive position by placing it high in state-by-state comparisons that do not reflect the effective rates once the federal deductibility is factored in.
Business recruiters say companies do not conduct deep-dive research that would show Iowa’s top individual rate is really more like 6 percent after federal deductibility. Instead, Iowa ranks 40th in the Tax Foundation’s business climate index, they say, and Iowa’s current nine brackets are too cumbersome and complicated compared with other states that have streamlined their tax systems.
With Iowa facing a likely revenue windfall from the federal tax cuts — due to Iowans deducting less tax on their state returns — Reynolds and GOP legislative leaders say the time is right to do a comprehensive rewrite on the Iowa tax code. They say they are looking at reducing tax rates, compressing brackets, simplifying the state return while also examining credits, deductions and expanding the sales tax base to capture online sales that have given Internet-based operators an advantage over “bricks-and-mortar” businesses in the state.
“The economy has changed in 20 years and it’s changing very rapidly. And so what do we need to do with our tax code to fit a 21st century economy — and for me it’s all about growth. The only reason to do tax reform is to encourage more growth in the state of Iowa,” Whitver said. “To fund our priorities long term, we need more people in the state of Iowa. We do need economic growth because our revenues have stalled out over the last three or four years. Without growth, there are a lot of priorities that aren’t going to get funded.”
Sen. Randy Feenstra, R-Hull, chairman of the Senate Ways and Means Committee, said lawmakers have had to start over with simulated computer runs based on the “game changer” of the federal tax rewrite. He said he hopes to have state Department of Revenue data fairly early in the legislative session that can be used to craft a package of tax reforms for consideration.
“I do think we are at a precipice to do something,” said Feenstra. “Maybe this is a watershed year that you can do some solid planning for years ahead if you do it right, if you create a plan of spending and reform or discounting.”
Reynolds, in assembling her first legislative agenda, said improving Iowa’s competitive business climate and building a skilled workforce are at the top of her list.
While the tax discussion is in its formative stages, she said she hopes to convey “some broad ideas of the direction that we’re headed” to help Iowans “keep more of their hard-earned money” when she gives her Jan. 9 Condition of the State address.
“We want to make sure that it’s financially sustainable and that we can continue to honor the commitments that we’ve made,” she said in an interview. “So I think we can give some broad senses about the direction that we’re heading but I just want to make sure that we’ve done the proper analysis, we feel comfortable in what we’re doing, it accomplishes what some of our goals are going forward.”
Senate Majority Leader Bill Dix, R-Shell Rock, said his No. 1 priority is lowering the rates for Iowa’s income taxpayers and creating a competitive environment to attract new careers and more taxpayers.
“In my opinion, this won’t be a successful session unless we have a significant tax bill get accomplished,” he said.
Minority Democrats worry that Iowans will be shut out of the process, given past GOP actions to revamp collective bargaining for public-sector employees, injured workers’ compensation and gun regulations, along with closing state mental health and other institutions and shifting to privately managed Medicaid.
“Their tax packages that we have seen in the past have not been beneficial to everyday Iowans,” said Senate Minority Leader Janet Petersen, D-Des Moines. “With the budget our state is facing, knowing that all of us will be coming back and Republicans will have to fix the budget mess we’re in, it seems like this is not a wise time to be cutting taxes when they’re busy cutting essential services that Iowans count on and our public education system.”
Tax overhaul has to be “framed in the context of the existing budget mess,” said Sen. Rob Hogg, D-Cedar Rapids. “Tax reform that would take more revenue away from the state is unimaginable.”
House Speaker Linda Upmeyer, R-Clear Lake, said majority House Republicans are “pretty pragmatic” when it comes to balancing the budget while improving tax competitiveness.
“We’re not going to do something that puts the state in a position where we have an entire mismatch there,” Upmeyer said. “We’re not going to do that. But we are going to look for opportunities and, if for any reason the federal activity generates a windfall or an increase in resources here for Iowa, I think much of that is dollars that weren’t paid in taxes, we expect them to be able to keep it so we’re not just going to haul it in.”
That struck a chord with John Stineman, executive director of the Iowa Chamber Alliance, which wants to see the Legislature address the “sticker shock” associated with Iowa’s top individual and corporate income tax rates — but not at the price of fiscal responsibility that fosters quality of life and other elements also important to business development.
“We want to make sure that whatever we bite off is something we’re actually able to swallow,” said Stineman. “All that being said, we want to see lower rates, lower advertised rates in particular, and we want to see a move toward simplicity.”
Mike Owen, executive director of the Iowa Policy Project, said Iowa has a regressive tax system that slants in favor of wealthy Iowans who pay a lower percentage of their income in state and local taxes than do the bottom 80 percent of the taxpaying population.
Any changes should be based upon fairness and generating the revenue needed for vital public services, he said, especially with indications coming from Congress that some safety-net programs may be cut.
“I don’t think there’s an argument for cutting business taxes for competitiveness reasons,” said Peter Fisher, an Iowa Policy Project economist. “We don’t need to be near the bottom, probably don’t want to be near the bottom, because that probably means we’ve got potholes in our roads and our kids aren’t getting a good education, which are all things that matter to businesses.”
Rather than flattening income tax rates, which would make sales and property taxes more regressive, Owen said, lawmakers should place a five-year “sunset” on existing tax credit programs and inject more accountability into the tax system while plugging loopholes.
Whitver said he expects “everything will be on the table” during the legislative tax policy examination, including more than 40 tax credits that carry an obligation ranging between $400 million and $500 million.
“Some of those have been around for a long time,” he said. “Maybe at one point they served a great purpose and maybe today in this new economy it’s not as relevant.”