DES MOINES — Trying to coax lawmakers to finish their 2021 legislative session, Gov. Kim Reynolds offered a plan Wednesday to accelerate income tax cuts, shift mental health funding from property taxes to the state and eliminate aid known as “backfill” to local governments.
“It takes some of the best aspects of a number of bills and it delivers $400 million in tax cuts for Iowans,” the governor said about her proposal. “Now is the time to come together and take action, and that’s exactly what I’m asking the House and the Senate to do in the remaining days of the legislative session.”
It’s a “thoughtful, pro-growth compromise on Iowa tax policy,” said Senate Majority Leader Jack Whitver, R-Ankeny, who thanked the fellow Republican governor for her leadership.
“She wants to get tax relief done for Iowans. The Senate Republicans agree with her,” he said. “We don’t want to leave this session missing an opportunity to get money back into the pockets of taxpayers. This bill is the path to adjournment.”
However, that path may lead the state too far, too fast for more cautious House Republicans, Speaker Pat Grassley, R-New Hartford, said.
“I'm not convinced that we can get there and do it properly,” he said. The Legislature was scheduled to adjourn April 30.
He has concerns about the totality of the compromise being asked of House Republicans. Accelerating the reduction of rates approved in 2018 tax cuts was not a priority for them. But knowing its importance to Senate Republicans, Grassley said his caucus has reached “a position where we felt that could be part of a compromise … to try to help accommodate that in these negotiations.”
In enacting faster tax cuts, the Reynolds-Senate plan includes the state takeover of the mental health system funding and eliminating the inheritance tax and the property tax backfill for local governments. Grassley indicated that despite the concessions, House Republicans are being asked to make more accommodations.
Legislative Democrats, who are in the minority, had no comment other than to say they had not seen any details.
In calling for action on her tax proposals, Reynolds said the state “has never been in a better position to take tax burdens off the backs of Iowans and invest state revenue to sustain critical and important services”
Lifting the 2018 income tax cut “triggers” to reduce rates faster would decrease state revenue collections by $155 million in fiscal 2023, $160 million the following year and $30 million the third year, according to a Legislative Services Agency analysis.
At the same time, the Reynolds-Senate plan would have the state pick up about $120 million in annual costs of the mental health system now paid through property taxes and run by counties. According to Reynolds, Iowa has the 12th-highest property taxes in the nation and is the only state to levy property taxes to pay for mental health services.
Shifting that to the state general fund “would ensure sustainable funding and create incentives for better care through performance-based contracts,” she said.
She said her plan included “guardrails” for regional expenditures and equity of services throughout the state “so that Iowans can access the care that they need regardless of where they live.”
House Republicans are interested in alleviating local property tax burdens, but that’s a “much broader conversation than most of the conversation throughout the session,” Grassley said.
The Reynolds-Senate plan would phase out the mental health property tax levy over two years, resulting in a $100 million reduction in county property taxes. As current funds are spent down, state funding would increase each year until reaching $42 per capita and then increase based on growth in sales-tax revenue. An innovation fund would be created to provide grants to improve equity in services based on needs above the per capita allocation.
It also calls for phasing out the property tax “backfill” in five years in communities where property valuations have increased or in eight years if there has been no increase. A backfill was promised to local governments when legislators approved historic property tax reductions in 2013, taking away millions worth of local revenue.
To make up for revenue school districts lost as a result of the property tax changes, the state would increase its share of state foundation aid from 87.5% to 88.4%.
Reynolds noted that cities and counties are set to receive $1.2 billion in federal American Rescue Plan funding.
A key part of House Study Bill 278, the House GOP plan, not addressed in the governor’s package is returning “excess” tax collections to taxpayers. It would limit the amount of the fiscal year ending balance carried over from one year to the next to 5% of anticipated general-fund revenue. Anything collected over that would go into the Taxpayer Relief Fund to be returned to Iowans through tax credits.
The fund is projected to grow to $300 million or higher, Grassley said. There is about $1 billion in state reserve accounts. Republicans want to maintain a cushion to protect the state in the case of a revenue downturn, but also “get those dollars back in the hands of Iowans, and they can reinvest those in the state's economy.”
Both plans includes numerous tax changes, including phasing out the inheritance tax. Reynolds would do that by 2024. House Republicans call for a 10-year phase out. They include shielding pandemic-related payments from state taxes and increase incentives for workforce housing, downtown development and brownfield/grayfield development. The plans include economic development incentives, such as an energy infrastructure revolving loan fund and grants to small manufacturers.