DES MOINES | For income tax-relief advocates in Iowa, opportunity apparently knocks once every 20 years.
It’s been two decades since the GOP-led Legislature passed and Gov. Terry Branstad signed a 10 percent across-the-board income tax cut. Now Republicans are back in control and bring an appetite for tax relief and reform to the Statehouse that has some groups salivating and others hoping lawmakers don’t bite off more than the state 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 for change over the next two years will be a concerted effort to make Iowa’s income tax system simpler, fairer, streamlined and more competitive while maintaining the flow of revenue necessary to fund essential government services Iowans expect.
“This is a tough year when you’ve got declining revenue and yet we don’t want to ignore the opportunity,” said House Speaker Linda Upmeyer, R-Clear Lake.
“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,” Upmeyer added. “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 past tax studies, meeting with stakeholder organizations, testing the impacts of various rate-change scenarios and looking at what other states to better understand the successes and pitfalls of revamping complicated and complex tax structures.
At this early stage of the process, said incoming Senate Majority Leader Bill Dix, R-Shell Rock, everything is on the table for discussion, but he expects the focus will narrow as House and Senate members hold closed-door discussions at the Statehouse aimed at reaching a consensus approach.
“What we want to generally look at is how can we reduce our rates, make it more simple, and get the Legislature out of the business of picking winners and losers,” Dix said. “The states that are growing the fastest today are the ones that have recognized that economic policy and tax policy makes a big difference. 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 and complicates the way Iowa’s rates are calculated and perceived is the ability for Iowans to deduct their federal tax liabilities from their state individual or corporate income taxes.
Muscatine-based Iowans for Tax Relief have defended federal deductibility as 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 in national comparisons.
“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 non-partisan 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.
Currently, Iowa’s personal income tax system has rates in nine brackets that range from 0.36 percent up 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 into the calculation.
“Federal deductibility is an issue whose time is now,” said Mike Ralston, leader the Iowa Association of Business & Industry, who noted that over the past 12 years he has seen a shift from a majority of his association members supporting the deduction but now feel its time to get rid of it in favor of lower rates. “I think there’s a chance that something will happen on that.”
Chris Ingstad, president of Muscatine-based Iowans for Tax Relief, said his members want to preserve federal deductibility but would be open to considering other taxpayer protections such as adopting constitutional amendments limiting future tax or spending increases or making such decisions subject to a super majority of both legislative houses for passage. He also said his group supported a House approach to offer a two-track tax system where a taxpayer could file under the current system or a separate flat-tax option.
“We hope to work with legislators and understand what direction they want to take with the tax code,” Ingstad said. “We’re going to be a little bit flexible this year and help legislators where we can. 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 long-time income tax-cut advocate, said while prospects are good and groups are working to present a unified front, he thought 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 they enjoy 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 to rein in the “explosion” of tax-credit spending that has mostly gone to out-of-state corporations but do not want to see inequities toward working people exacerbated in the name of tax reforms.
“I hope that whatever tax reform we do provides relief to working people and not millionaires,” he said.
Bolkcom also noted that lawmakers face a $100 million shortfall in the current budget year that they have to address once they reconvene next week. “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 added.
Branstad expressed similar reservations last week, telling reporters he does not believe the state can afford to cut income taxes right now given the current budget shortfall situation so he will not be making a tax-policy recommendation as part of the 2017 legislative agenda he lays out on Tuesday.
However, Branstad said he would be open to considering tax policy changes that majority Republican lawmakers may send him with a benchmark that whatever is proposed must be fiscally responsible and sustainable for the long term.
“Considering the difficult budget decisions we’re faced with this year, at this time at least I’m not making a recommendation for a major tax reform this year,” he said. “It’s certainly something I support and would like to see done, but at this point I don’t have anything in my program.”
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 and what appears to be the best course of action in setting the course for future tax policy.
Cedar Rapids Mayor Ron Corbett, a former state 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 at the Iowa Capitol Building.
“I had to use almost every piece of political capital that I had built up over the years as being speaker of the House and a state representative to get that bill down to the governor’s desk,” he said. “It will be a challenge for them, but it will not be impossible. It’s been 20 years since Iowa has even tinkered with the rates and it’s long overdue.”