Tax plans: The price is too high

As Iowa legislators and the Governor rush this week to make tax cuts no matter their costs, they are adding a few positive elements addressing long-ignored concerns to their newest tax bills. Still, on balance, this legislation fails the vision of a “common good” agenda that promotes greater prosperity for all Iowa families and communities. For that reason, despite those favorable elements, Common Good Iowa opposes both HF 893 and SSB 1276.

The bills’ beneficial elements, including telehealth parity, housing assistance and some improvements to child care access, should pass on their merits, untethered from shortsighted tax cuts. Iowa also needs a better approach to mental health funding than what is being offered.

These bills, along with remarks by the Governor, set the parameters of what will likely be passed in a package to help the Legislature close its 2021 session. Here are the biggest problems:

They will force the state to forfeit federal COVID recovery and relief funding

• The federal American Rescue Plan Act requires that any net state tax reductions initiated and approved to take effect between now and December 31, 2024, will cause a dollar-for-dollar reduction in ARP state relief funds. This federal provision guarantees that the federal funding is used for COVID-19 impacts as intended, rather than to pay for state tax cuts. The Governor Wednesday discussed $400 million in tax cuts. If those cuts reflect a net reduction in revenue over the next 3 1/2 years (and she’s called for no new revenue to offset them), Iowa’s federal aid can be expected to be reduced by the same amount, equal to more than 25 percent of the anticipated $1.38 billion ARP state relief.

They include costly tax reductions that will harm public services

• Repeal of revenue triggers that reduce income-tax rates — These tax cuts build on previous  cuts approved in 2018. While the triggered changes would help lessen severe inequities in Iowa taxes, making those changes happen a year earlier will cost about $335 million between now and Dec. 31, 2024.  Besides this direct cost to resources for Iowa public services, such as education, these tax cuts are likely to reduce ARP funding by the same amount, as noted above.

• Phased repeal of Iowa's limited inheritance tax — Iowa's inheritance tax totally exempts immediate family members from tax on income from a person’s estate. Still, the tax on other more distant family members or others generates close to $90 million in revenue each year. This unnecessary and costly proposal to repeal that tax will compound unfairness in Iowa taxes — treating people differently despite similar incomes, and ignoring the concept of ability to pay in taxation, benefiting the wealthy, as official state analysis has confirmed. A costly benefit to shirttail relatives, friends or others to receive, tax-free, wealth that in many cases has never been taxed. The taxpayer cost is the equivalent of about 2 percent Supplemental State Aid to public schools in a normal year.

The Senate version includes a provision that would be less costly, phasing in a larger exemption for inheritances from estates (up to $1 million in 2023), but it still would repeal the tax totally for inheritances from people dying after 2023.

• School Tuition Organization Tax Credit expansion — This tax credit diverts tax dollars from public purposes to scholarships for private-school students. The House bill would increase the credit in stages from 65 percent to 87 percent after Jan. 1, 2025, and raise the cap on the cost by 33 percent over four years, to $20 million. The Senate bill does not include this provision.

• Other tax breaks — The 54-page House bill is a so-called “Christmas tree bill” offering other special breaks, including generous and unnecessary business depreciation rules.  In this kind of process, issues are not considered on their merits but get rolled into a package that, with enough support for unrelated issues, turns them into law.

• The Senate bill includes a badly designed, unfair and costly property tax credit for those age 70 and older. Instead of building on existing elderly property tax relief for renters and homeowners, this bill creates a new complicated credit, with no state funding, that leaves renters out in the cold.

They reverse one promise to local governments even as they make another

• No more “backfill” — The Senate bill, like the Governor’s proposal but unlike the House bill, ends the state’s so-called "backfill" of commercial and industrial property tax revenue in FY2030, reversing a 2013 promise to make up for revenue lost to state-ordered property tax cuts. It also adjusts the school funding formula to keep that change from reducing the state share of per-pupil funding and forcing a school property tax increase — but does not raise state revenue to pay for that.

• Shifting mental health funding from counties to the state — Just as lawmakers and the governor are proposing to end state compensation to shore up local services lost to 2013 property tax cuts, they propose now to make a similar promise to provide state funding for mental health. Funding for these services has long been inadequate and unpredictable. A standing state appropriation is a promising step toward sustainability, but total state control removes local direction to address need, and risks inadequate support subject to the whims of state decisions. A partnership of the state and counties, including resources from both, is a more sustainable and stable option.

The bills contain several provisions that would help Iowans, but their benefits don’t outweigh the bills’ great harms.

• Require telehealth parity for behavior health services. Both the House and Senate bills would require private insurers to reimburse the same amount for a behavioral health service whether it's provided via telehealth or in person. During the pandemic, telehealth has proved to be a viable alternative for many services. By reimbursing for telehealth services at a rate that reflects their costs, Iowa can improve access for people who otherwise wouldn't be able to be seen. This is especially helpful for folks in rural Iowa who can't take off enough time from work to travel to an out-of-town provider.

• Modestly increase the amount of Workforce Housing Tax credits that can be awarded. Both also create a Disaster Recovery Housing Assistance Program, with an eviction prevention feature. But the major housing tax credit pushed by housing advocates is missing in both.

• Double the income eligibility ceiling for the state child and dependent care credit. The session began with widespread support for legislation to increase the supply of child care slots and make child care more affordable. Several related bills passed the Iowa House. But this is only significant change that made it into either of these latest bills.

Iowa lawmakers can and should do so much more to promote a common good agenda for every Iowan and for our future.  For any positive steps being offered, the package being put together contains more destructive elements that take us further away from that vision.