Iowa Republicans weigh cutting state income tax, but hurdles remain

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There is no doubt that Republicans will want to cut taxes when the Iowa Legislature returns next year.

The only question left is: which and how much?

Republicans, who hold legislative majorities and control the governor’s office, have repeatedly promised further tax cuts for the coming year. They point to a budget surplus of more than $ 1.2 billion and a $ 1 billion balance in the Iowa Tax Aid Fund as evidence that government revenues are strong. The Democrats have warned that the state is overflowing with one-off federal stimulus funds that will disappear.

Earlier this year, Governor Kim Reynolds signed a comprehensive tax cut package that will cut income and wealth taxes over the next few years and abolish Iowa inheritance taxes. But Republicans don’t wait for those cuts to be fully implemented before promising to go further.

They reiterated their promises on Monday when a state revenue estimation panel increased its forecast of the state’s revenue for the next two years.

The three-person board forecast the state will raise $ 9.06 billion in the current fiscal year ending June 30 – a 3% year-over-year increase. And for the fiscal year beginning July 1, 2022, the state would raise $ 9.21 billion, up 1.7% year over year.

Reynolds will use this estimate to work out the budget proposal that she will table in January.

“Iowa’s economy continues to show very positive signs of growth,” Reynolds said in a statement. “I will continue to fight to get these funds back into the hands of hardworking Iowa taxpayers, and during this legislature I will consider substantial tax cuts that will make Iowa one of the most competitive states in the country. This excessive taxation is unethical and must be stopped. ”

The Democrats have not spoken out against the idea of ​​tax cuts, but have stressed that they want to focus on the lower and middle classes of Iowers. Senator Joe Bolkcom, D-Iowa City, said in a statement Monday that the new revenue estimate “opens the door” to allow lawmakers to cut taxes for small businesses and lower-income Iowa, as well as invest in services such as vocational training, childcare and housing .

“Iowa workers deserve our respect and support,” he said. “We have to do more to put more money in their pockets.”

More:Republicans call for more tax cuts as Iowa board raises revenue estimates for the next two years

Republicans in the Senate hope for the abolition of the state income tax

Senate Republicans intend to abolish Iowa individual income tax despite not posting a specific proposal and recognizing that it “will not happen overnight.”

“I believe this would likely be one of the most important tools we can use to attract people to Iowa, if we can do that,” said Senator Brad Zaun, R-Urbandale, at a legislative breakfast for the Greater Des Moines Partnership last week.

Reynolds has said she is ultimately open to that goal, while Republicans in the House of Representatives have insisted that future government revenues must remain sustainable.

Earlier this year, differences between the House of Representatives and the Senate on tax policy kept the legislature in session weeks past the projected end date. House Republicans have consistently taken a more cautious approach than their Senate counterparts – a potential obstacle to the complete abolition of income tax.

“Remember, the surplus is great, but it’s a one-time money, it’s your savings account,” said Rep. Brent Siegrist, R-Council Bluffs, at the Legislative Breakfast. “Whatever you do for tax purposes, you have to make sure it’s sustainable in four or five years.

Chris Hagenow, a former Republican House majority leader and now Iowan’s vice president for tax breaks, said on an episode of Iowa Press this month that even if total income tax abolition isn’t possible, lawmakers should cut that much as you can.

“It’s a great goal, make sure you don’t make a mistake,” he said. “I don’t think it’s a goal anyone achieves in the first year either. And I would argue that we should at least be able to start this year. “

After Iowa ended fiscal 2021 in surplus of $ 1.2 billion, Republicans attributed this to conservative budgetary practices. The Democrats countered that the budget looks rosier than it is because Reynolds is backing state finances with federal pandemic aid dollars, which she is opposed.

Common Good Iowa director of research, Peter Fisher, said on the same Iowa Press program that the elimination of state income taxes would be “a recipe for disaster”. He also warned against imposing permanent tax cuts because of a one-time surplus.

“That this is a one-time surplus. And I know many lawmakers have said many times that we don’t use a one-time allowance for permanent expenses or budget changes,” Fisher said. “So it seems unwise to say that we will use a one-time surplus to push through permanent tax cuts.”

More:Iowa legislature accepts a second reallocation plan that establishes the next decade of policy

Republicans: Not in the mood for sales tax hike

One option that is almost certainly not on the table is to increase sales tax to offset any loss of government revenue from the cut or abolition of income tax.

Fence said he saw no “appetite” for doing so next year. Instead, he said Senate Republicans wanted to see if they could offset the loss of revenue from the abolition of income tax but the abolition of state-offered tax credits, including corporate tax credits.

“I can tell you that we are not interested in raising taxes,” said Zaun. “Having the conversation about abolishing tax credits would potentially mean we wouldn’t have to raise sales tax to get rid of income tax entirely.”

One of Reynolds’ top priorities in 2020 was to increase sales tax by a penny to offset other tax cuts and allocate more funding to mental health and water quality projects. But the proposal didn’t get a positive response from Republicans, and the arrival of COVID-19 closed the legislature and created uncertainty over the state budget.

Legislative tax cuts passed that year provided the funding Reynolds was looking for for mental health – without increasing sales tax. And the state spends hundreds of millions on water quality using federal funds from the American rescue plan and the new federal infrastructure law.

Minority leader in the House of Representatives, Jennifer Konfrst, D-Winsdor Heights, said at the legislative breakfast that the increase in sales tax was falling disproportionately to the working poor, “and I think that is unacceptable”.

“We need to find a way to ensure that whatever proposal we have doesn’t just affect those who are less wealthy to implement,” she said. “So I hope we look at middle class taxes and find a way that workers can actually benefit from these tax cuts for a change.”

More:Des Moines tries to fill the “missing middle” and offers tax breaks for apartment buildings on building lots

Stephen Gruber-Miller covers the Iowa Statehouse and registry policy. He can be reached by email at sgrubermil@registermedia.com or by phone at 515-284-8169. Follow him on Twitter @sgrubermiller.

Ian Richardson runs the Iowa Statehouse for the Des Moines Register. Reach him at irichardson@registermedia.com, at 515-284-8254, or on Twitter at @DMRIanR.

https://www.desmoinesregister.com/story/news/politics/2021/12/13/iowa-legislature-republicans-weigh-eliminating-state-income-tax-cuts-kim-reynolds/8850134002/