DES MOINES — Legislative leaders from both political parties expect to face another tough state budget when they convene in January, but top majority Republicans said Thursday they believe they could cut taxes and commit substantial long-term funding to water quality improvements next year.

Senate President Jack Whitver, R-Ankeny, said tax reform will be the top priority of the 2018 legislative session. Republicans plan to revamp Iowa's corporate and individual income tax system for the first time in more than two decades, he said.

"We would like to take a look at making sure that Iowa's tax system is flatter, fairer and that everyone gets a break in that," House Majority Leader Chris Hagenow, R-Windsor Heights, told about 150 participants in Greater Des Moines Partnership's annual legislative leadership luncheon.

"I think it's obviously going to be a challenge because there are so many moving parts to whatever it is we decide to do and I also think it depends what the federal government may do on tax reform," Hagenow told reporters after the event. "So once those pieces are in place, I think we'll be able to make better decisions."

Whitver said optimism is always riding high heading into a new legislative session and Republicans who hold a 28-20-1 edge in the Iowa Senate and 57-43 majority in the Iowa House will seek to build what he called "the most historic and productive" session in state history in 2017.

The Senate president said the focus will be on growing Iowa's economy in key areas, including beefing up workforce skills and improving the tax climate. He told reporters "we feel it's time to take a fresh look at that and see if our tax structure is set up for the 21st century economy. Now is as good a time as any."

Democratic leaders Rep. Mark Smith of Marshalltown and Sen. Janet Petersen of Des Moines said tax cuts should not come at the expense of K-12 and higher education improvements, mental health and Medicaid concerns and other priorities that have been cut as revenue collections are below expectations. Revenue shortfalls have led to short-term borrowing from state reserves to cover gaps.

"Unfortunately, this upcoming session we're facing a budget that is in a horrible mess. We have a governor who promised to create 200,000 jobs and we haven't seen that job growth," Petersen told the business crowd.

"The Medicaid mess is going to be another issue we must tackle," she added. "Democrats were not interested in privatizing our Medicaid system. We're seeing what happens when we dumped the entire program into a privatized MCO model and it's not working and we need to take a serious look at bringing Iowans back under Iowa care."

Sue Huppert, a partnership official, said the business group hopes the 2018 Iowa Legislature will simplify and reduce state corporate and personal income taxes, maintain economic development tools that included business tax credits, bolster worker training for advanced skills and provide "sufficient, permanent and dedicated" funding sources to address water quality concerns.

Petersen said the water quality issue provided the best opportunity for bipartisan work next session, noting the feedback she's getting after lawmakers were unable to act last session is that "Iowans don't want to be Flint, Michigan."

Hagenow said he expected legislators in the House and Senate would work out their disagreements between two competing water quality bills that passed in 2017 and get a bill to Gov. Kim Reynolds' desk earlier in the session. Reynolds, who became governor last May after former Gov. Terry Branstad resigned to become U.S. ambassador to China, said she hopes a water quality measure will be the first bill she gets to sign into law.

"It's still a priority," said Whitver. "At the end of session, we decided there was too many dollars on the line and too much policy to hammer out to do that at the last minute and just patch it together.

"We decided that we wanted to take time and make sure that we did it right because that's a plan that's going to be around for 20 or 30 or 40 years and hopefully more. So we decided to take a step back," he added. "I'm confident that we can do something major for water quality this year."