Benefits of Iowa's tax cuts could be delayed by slow growth

DES MOINES, Iowa (AP) — Iowa Republicans said it was essential to pass $2.8 billion in tax cuts in part due to federal tax changes, but those state reductions might not be implemented for years under a plan awaiting the governor's signature.

Iowa has an unusual tax system in which federal tax cuts passed late last year are poised to create state tax increases, which Republican lawmakers argued should be returned to taxpayers. GOP Gov. Kim Reynolds said the state should also get rid of the policy that created the problem in the first place.

Yet the bill that passed the Iowa Legislature would delay a solution for at least several years. The bill also delays other changes that would further lower taxes on working families.

Former Democratic state Sen. Charles Bruner, who chaired a key tax-writing committee, said many Iowans will continue to pay more until the standardized deduction, which accounts for typical household expenses, is increased. Earlier proposals would have grown the standard deduction within a year, but Bruner said that was delayed in favor of corporate tax cuts and bigger tax deductions for business expenses.

Lawmakers who wrote the legislation said delaying parts of the tax cuts until certain economic conditions are met, which could happen as soon as 2023, was needed in case of an economic downturn.

"For the first few years of this bill, tax reform is built into law," said Rep. Peter Cownie, a West Des Moines Republican.

A coalition of conservative advocacy groups asked legislators to lower the trigger, which requires the state to reach a certain level of tax revenue and show significant revenue growth from the prior year. They plan to lobby for a reduction in the trigger in a future legislative session.

The state has hit the required growth rate 11 times in the past 19 years, according to Iowa Department of Management data. To hit the trigger by 2023 would require yearly revenue growth of 4 percent.

"It's pretty unlikely," said Drew Klein, state director of the conservative-leaning Americans for Prosperity-Iowa. "By 2030, we could probably hit that trigger. But 2023 is pretty unlikely."

Once the trigger is hit, the state would eliminate what's known as "federal deductibility," a process that allows individual taxpayers to deduct the full amount of their federal income taxes from their state tax returns. Because federal taxes are declining, Iowans would be able to deduct an estimated $148 million less next year.

Iowa is one of three states that allows for full federal deductibility. Opponents of federal deductibility say it complicates the state's tax code and primarily helps higher income Iowans who pay more taxes. Reynolds said eliminating federal deductibility will allow overall tax rates to be lowered.

"I believe it's important that we do something with federal deductibility because we have federal tax reform, and so the timing seems appropriate," Reynolds said while the final bill was being crafted.

The tax cut bill would eliminate federal deductibility by using the same income calculation for Iowan's state returns as their federal taxes. That would also incorporate a significantly higher standard deduction for Iowans, raising it from the current $2,030 for single filers and $5,000 for married filers to the federal deductions of $12,000 and $24,000 respectively.

Income tax rates also would shift from the current nine brackets to four once the trigger is hit. The highest tax rate would fall to 6.5 percent, down from nearly 9 percent now. Those reforms cumulatively are expected to significantly simplify the process of filing a tax return for many Iowans.

Peter Fisher, research director with the liberal-leaning Iowa Public Policy Project, said that simplification for taxpayers would have come sooner under earlier versions of the tax cut bill.

"We could have simplified things for them by increasing the standard deduction in Iowa right away," Fisher said.

Earlier versions of the bill also phased out federal deductibility without a trigger. The bill ultimately passed by lawmakers includes corporate income tax cuts that were not part of Reynolds' original proposal or a bill from House Republicans. The final price tag for the bill is $2.1 billion over six years, which accounts for new tax revenue also included in the bill.

New sales taxes will apply to digital goods like e-books and movie downloads, digital subscription services such as Apple Music and Netflix, ride-sharing apps and goods purchased online. Some online retailers, such as Amazon, already collect sales taxes on some transactions. The Iowa Department of Revenue estimates the new taxes will yield more than $867 million.

Iowa's ability to collect those taxes depends on a forthcoming Supreme Court decision, which is anticipated by late June. Without a change to the status quo from the Supreme Court, much of those anticipated revenues could go unrealized — adding to the cost of the tax cuts to the state coffers.

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