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Republican lawmakers advance bill to reduce Iowa income taxes by $1 billion
Critics argue accelerated cuts hurt schools, public services
Tom Barton
Apr. 18, 2024 5:52 pm, Updated: Apr. 19, 2024 9:45 am
DES MOINES — Republican lawmakers plan to use the state’s budget surplus and Taxpayer Relief Fund to further cut Iowans’ income taxes by an estimated $1 billion next year.
The legislation makes other changes, including tweaking last year's property tax overhaul that limits revenue growth for cities and counties. It also allows county supervisors to decide whether to keep or disband county compensation boards, which review the salaries for elected county officials and recommend increases.
The proposals, which advanced out committee Thursday in both the House and Senate, would accelerate previously planned state income tax reductions passed in 2022 that started to take effect this year. As is, the law would gradually reduce personal income taxes to a flat 3.9 percent in 2026.
The bill, House Study Bill 752 and Senate Study Bill 3207, would instead lower the rate to 3.8 percent in 2025.
Iowa’s top income tax bracket this year is 5.7 percent, and it would be 4.82 percent next year if it is not accelerated by a new law.
"We are accelerating the promised tax cuts, taking it lower and returning an extra billion dollars back to Iowans," said Sen. Dan Dawson, R-Council Bluffs, who chairs the Senate Ways and Means Committee that oversees tax policy.
Iowa’s tax revenues have largely stayed robust as the tax cuts have taken effect, leading Iowa Republicans to call for deeper tax cuts, arguing that the state is collecting more money than it needs.
Iowa ended the year with a $1.83 billion surplus, $902 million in reserve funds and $2.7 billion in the Taxpayer Relief Fund, where unspent taxes from previous years have been deposited.
What do Iowa groups say about the bill?
Lobbyists for developers, banks and business groups praised the proposal.
“We appreciate all the progress that has been made over the last several years in making our tax climate more competitive for both individuals and businesses,” Brad Hartkopt, a lobbyist for the Iowa Association of Business and Industry, told senators during a subcommittee hearing. “We believe this bill takes us in another step going in that direction, and we support it.”
Opponents argue the savings come at the expense of underfunded public schools and health care, water quality, roads, bridges and other services across the state.
House and Senate Democratic leaders have said further income tax cuts would disproportionately benefit the wealthy, who receive the largest windfall from the falling tax brackets, and give no financial relief for the thousands of Iowans who pay no income taxes.
“This bill compounds a patently unfair tax system that we have. It takes us away from a tax system based on an ability to pay,” said Mike Owen, deputy director of progressive advocacy group Common Good Iowa. “… I would add this is one more case of taxes directing budget choices rather than the other way around, where we could determine our needs, transparently set priorities, find the best way to fund them.”
Owen argued lawmakers “could have done so much better,” focusing instead on targeted tax cuts for working families, such as strengthening the earned income tax credit and creating a child tax credit.
Opponents worry the eventual consequences will be cuts to services that make Iowa a good place to live, work and raise a family, including funding for schools, health care, public safety, child care and environmental protection.
The nonpartisan Legislative Services Agency estimates previously approved tax cuts will cost $1.9 billion a year by fiscal year 2028.
“We continually deny that we have any unmet needs today that we can push out the inevitable budget problems, for years” Anne Discher, executive director of Common Good Iowa, told lawmakers. “But just because the damage isn’t immediate doesn’t mean it’s not real. Inevitably, eventually, revenues will” drop and surpluses will dry up.
What if state revenue drops?
If state revenues drop below state spending during a fiscal year, the bill would take half of the difference from the state's Taxpayer Relief Fund to cover the costs. The other half would come from the state's ending balance.
The state’s Taxpayer Relief Fund is expected to rise to about $3.6 billion in July, when the fiscal year ends. House Republicans say an analysis by the non-partisan Legislative Services Agency expects the fund to be at $2.6 billion in 2029, once that part of the bill expires, before rising to $2.7 billion the following year.
House Republicans say the LSA analysis anticipates a state budget surplus of $536.8 million in 2029.
Dawson said the bill provides "a good cushion" if revenues fail to meet expectations.
"If the economy outperforms, we won’t have to use any of it," he told reporters.
Rep. Bobby Kaufmann, chair of the House Ways and Means Committee and a Republican from Wilton, indicated that the Taxpayer Relief Fund will have more than $2 billion left in it after next year’s withdrawal.
“We’re showing here in Iowa that we’re fiscally responsible,” he told reporters. “We’re understanding concerns or mistakes made in other states. We’re still able to actualize growth, fund our priorities and still have healthy balances in the ending balance.”
House and Senate Republicans have proposed eventually eliminating the individual income tax altogether.
GOP lawmakers also have advanced measures that would make it more difficult for the Legislature to raise taxes in the future and would enshrine a flat individual income tax rate, rather than a graduated income tax system, under the Iowa Constitution — if the state imposes an income tax at all.
How does this compare to the governor’s proposal?
While it doesn’t go as far as her proposal, Gov. Kim Reynolds signaled her support of the bill.
“Cutting taxes has been a priority of mine since taking office, and I’m pleased that the Senate has introduced an income-tax cut that further reduces and accelerates the implementation of a flat tax rate that will benefit every Iowan who pays income tax,” Reynolds said in a statement.
“This was a key piece of the tax reform bill I proposed this year, and this common-sense compromise will allow hardworking Iowans to keep more of what they earn in every paycheck. Government should collect only what it needs to serve its people and allow them to keep the rest.”
Reynolds this year had proposed lowering the state income tax retroactively to 3.65 percent this year and 3.5 percent next year. The governor also proposed changes to unemployment insurance and property tax cuts for commercial child care centers.
Neither of those changes were included in the bill released Wednesday, although the tax changes for child care centers is included in a separate bill.
Kaufmann said he supports changes to Iowa’s unemployment tax system.
"We just made a decision that that’s probably a 2025 issue because of the significance of how big a piece of policy that is and the amount of time that we have left,“ Kaufmann told reporters Thursday.
Property tax fix
The plan also tweaks property tax limits the Legislature enacted last year.
Under current law, cities and counties are not able to capture significant growth in their property valuation.
If a city or county's total assessed property value grows by more than 3 percent, it must use some of the excess revenue to reduce its general fund levy.
The bill creates new tiers for cities and counties whose property values grow between 2.75 percent and 4 percent, between 4 percent and 6 percent, and more than 6 percent.
Des Moines City Manager Scott Sanders urged lawmakers to allow cities more breathing room and set a “floor” of 3.5 percent before they would have to use their excess revenue to lower property taxes.
Sanders said the law makes for difficult math in communities that are growing and attracting new workers and developments.
Dawson, though, noted that in addition to the general fund levy, cities also charge levies for such things as debt service, pensions, transit, self-insurance and emergency services that remain uncapped.
County compensation boards
The bill gives counties the ability to eliminate county compensation boards that Kaufmann asserted have contributed to “an explosion and growth of property taxes.”
“You’ve essentially got a group of friends getting together and recommending raises for each other, with which counties cannot choose to split the difference and look at things on merit,” he said.
The compensation boards are tasked under Iowa law with reviewing salaries for elected county officials — county supervisors, auditors, treasurers, recorders, sheriffs and county attorneys — by annually comparing salaries in that county to other Iowa counties, other states, the private sector and the federal government.
Supervisors can’t approve a rate of pay above the compensation board's recommended level. They can only reject, accept or reduce the recommended amount across the board.
“And so you've got an autopilot Ponzi scheme of property tax growth that the local supervisors, that are elected to do their job, have no control over,” Kaufmann said.
Comments: (319) 398-8499; tom.barton@thegazette.com