Tax Policy Overhaul

(music) Iowa republicans hold trifecta power in state government and are poised to overhaul tax policy. We discuss the possibilities with Chris Hagenow of Iowans for Tax Relief and Peter Fisher of Common Good Iowa on this edition of Iowa Press. (music)                           Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. Fuel Iowa is a voice and a resource for Iowa's fuel industry. Our members offer a diverse range of products including fuel, grocery and convenience items. They help keep Iowans on the move in rural and urban communities. Together we Fuel Iowa. Small businesses are the backbone of Iowa's communities and they are backed by Iowa banks. With advice, loans and financial services, banks across Iowa are committed to showing small businesses the way to a stronger tomorrow. Learn more at IowaBankers.com. (music)                     For decades Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating 50 years of broadcast excellence on statewide Iowa PBS, this is the Friday, December 3rd edition of Iowa Press. Here is Kay Henderson.  (music) Henderson: Governor Kim Reynolds and republican legislators have made clear that they intend to pass another tax plan in 2022. Our guests on this program today have definite views about tax policy. Chris Hagenow is a former state legislator who served 12 years in the Iowa House of Representatives. His republican colleagues elected him as their House majority leader for two sessions, two general assembly rather, four years. He did not seek re-election in 2022 and is now the Vice President of Iowans for Tax Relief. Chris Hagenow, welcome to Iowa Press. Hagenow: Thank you very much. It's an honor to be here, Kay. Henderson: Also joining us remotely is Peter Fisher, a retired University of Iowa Professor who is Research Director for Common Good Iowa. The Iowa City based think tank was recently formed by the merger of the Iowa Policy Project and the Child and Family Policy Center. Gentlemen, both of you, welcome to Iowa Press. Peter? Fisher: Good morning, yes, glad to be here. Henderson: Great. Also joining us today at the Iowa Press table are Stephen Gruber-Miller of the Des Moines Register and Erin Murphy of the Lee Enterprises newspapers in Iowa. Murphy: So, gentlemen, as Kay said, the plans for tax cuts coming in the coming legislative session. Part of the reason for that is we're sitting on a billion dollars in the Iowa Taxpayer Relief Fund. Wanted to get each of your thoughts on how you would like to see that money spent in the form of tax cuts. Mr. Hagenow, we'll start with you. What do you think should be done in the form of tax cuts this session? Hagenow: Well, broadly speaking the legislature has a tremendous opportunity this year to enact significant broad-based income tax rate reductions. In addition to the billion dollars that exists in that fund this year is given the current REC projections it seems to be there is going to be another $800 million or so at the end of the current fiscal year. And so clearly Iowans are overpaying on their taxes. And so we need to reform that tax code to match that. So we think that the tax reforms should be permanent, structural and significant across-the-board for Iowa taxpayers. Murphy: So what does that look like? Are we talking about income, sales, property? Hagenow: Primarily income tax and that is the driver of that, that we're the most interested in right now. I'm sure there will be other things that the legislature considers. But on the tax foundation rankings recently Iowa has improved a little bit based on some other tax bills that we've done. We've come up to 40th out of 50 states. But we've got a long ways to go to make Iowa's income tax code competitive with other states. Murphy: Mr. Fisher, how about you? If you were being consulted on this, what would you recommend state lawmakers do with this billion dollar tax relief fund? Fisher: Well, first of all, I'd like to remind people that this is a one-time surplus. And I know many legislators have often said that we don't use one-time money for permanent expenditures or changes in the budget. So it seems to be unwise to say we are going to use a one-time surplus to enact permanent tax cuts. And it's a surplus, by the way, that is a result of underestimating revenues. It is almost three-fourths of the states are showing budget surpluses last year and this year and that is largely because their forecasted revenues were low. So we have a surplus right now, that doesn't mean we have a permanent surplus and it's not a good reason for, once again, more and more tax cuts, which has been a recent history throughout Iowa. And I think our view on taxes is that we need taxes to finance the services that Iowans are demanding. People want good schools, they want clean air, they want safe streets and workplaces, they want people to have access to food and child care and affordable housing and health care. We can't pay for those things if we are continually cutting taxes and eliminating our ability to fund those services. Murphy: Mr. Hagenow, what about that? And we also have recent tax cuts that just passed earlier this year, a significant one a property tax cut in 2018. Do we even have the full impact of those to know that the state budget can long-term sustain another significant tax reduction? Hagenow: Well, we're starting -- that's what the REC is starting to take a look at. The REC is in the out years in which the most recent new rates would take effect are part of that second year projection that they have already rendered. And so clearly those revenue projections continue to grow. Iowa's economy is growing and we're thriving. And so we have this surplus. It is dedicated in a fund for tax relief. And so what I think the prudent way to move forward is to bend down that tax curve over a period of years and you can use that taxpayer relief fund to do that and there is a smart way to make those lines on the chart converge. I think it is absolutely a very smart way to get this done. Henderson: Mr. Fisher raised the point that republicans have often said if there is one-time money it should not be spent on ongoing expenses. What about the argument that this one-time you're flush with cash at the state level because of different kinds of estimates of how much taxes the state would collect and it would be unwise to base tax policy in the future on one estimate? Hagenow: Well, I would start by saying that that statement is a good budgeting principle and has been, we offered it, I was one who was responsible for saying that several times, is that that was to keep a check on the growth of the state budget and the growth of spending. And I would submit that this legislature has continued to do a very good job of that, which has put us in a position to be able to return more of those dollars to taxpayers. And so to the exact question you ask, it has met its goal of keeping a lid on the budget, and it would be absolutely appropriate to take and draw those dollars back down to be able to cash flow the budget as we cut taxes and return those dollars to Iowans. Gruber-Miller: I want to ask both of your thoughts on this. Governor Reynolds -- you had alluded to it before, Mr. Hagenow -- but Governor Reynolds and other republican legislators have talked about eventually eliminating the state's income tax altogether. Is that something that is possible to do given the budget? And if so, how would you adjust for that? Again, I want both of you but we'll start with Mr. Hagenow. Hagenow: Well, it's a great goal, make no mistake. I also don't think it's a goal that anyone accomplishes in year one. And I would argue that we should at least start. And to get to that goal is you make significant cuts in the income tax rate when you can and we absolutely can this year. And so we share that goal with legislators, legislative leaders, the Governor of getting there. The best way to get there is to take this first start right now. It will be a generational project absent another significant change to the way we collect revenue in this state. But absolutely let's get started. Gruber-Miller: And, Mr. Fisher, how about you? Is the elimination of the state's income tax a good long-term goal or even possible to do? Fisher: Actually I think that's a recipe for disaster. We had a state that tried this not too long ago, it's pretty recent history. And the tax cut advocates who sold Kansas on this idea promised immediate economic recovery and growth as a result of their proposal to cut income taxes and move towards a zero income tax state. And the result actually was a disaster. Kansas prior to those tax cuts had actually been growing a little more rapidly than the U.S. as a whole. You look at the period after the tax cuts, they were only half the rate of the nation. They had to close schools early because the schools ran out of money and three years later the legislature basically abandoned the effort to eliminate the income tax. So if you say you want to eliminate the income tax, I think what you're saying is you aspire to be one of the lowest taxed states in the country, which is saying you aspire to be like Mississippi with an education system like Mississippi's. Over half of the budget is education and you can't eliminate an income tax without drastic cuts in education. So we might move from first in the nation to last in the nation in education if that is the policy. Gruber-Miller: So, let me ask you this. I'll ask both of your thoughts on this. Mr. Fisher, start with you. If you could wave a magic wand, which state in the nation would you want Iowa's tax code to most resemble and why? Fisher: Well, I would want our tax code to tax people more fairly. There's three major components to it, property taxes, sales taxes and income taxes. The sales tax is a big chunk of it, it is the one that takes the biggest chunk out of the budgets of people who are least able to pay taxes. And the result is that when you look at our overall tax system it's upside down. The people that least can afford taxes are the people who pay the biggest share of their income in taxes, about 12% for the bottom fifth of the population while the top 5%, the richest 5% of taxpayers are only paying about 8%. So if you're going to cut the income tax, which is the only component of the tax system that offsets that regressivity of the sales tax, you're going to make the equity situation in this state worse instead of better. Gruber-Miller: Okay, how about you, Mr. Hagenow? Hagenow: Well, first of all, I'm glad we get to talk about Kansas because I actually enjoy that conversation. We're not Kansas and the big differences here in Iowa, we control the budget and we have done a great job of it. And the legislature continues to hold the line on spending, which they didn't do in Kansas. It seems like every time that the opponents to tax relief mention Kansas we get a good tax bill done and Iowa's fiscal situation improves. And here we last year did a significant tax bill and here we are with huge funds in our tax relief fund. So it seems like the only thing that keeps happening is keep talking about Kansas and we keep doing better. To the question of who I'd like to be like, I'd definitely like to be like one of these very low tax states because there is a great economic migration underway in this country. People in businesses are fleeing high tax states like California, New York and Illinois and they are moving to low tax states where they can seek a better life for them, their families and their businesses can thrive. And absolutely I want Iowa to be a part of that. I want Iowa to be on those lists of the states that these businesses and individuals want to move to, that is what we aspire to. Henderson: I covered the legislature in the last century, as well as this century, and there used to be a republican chairwoman of the House Ways and Means Tax Writing Committee named Dottie Carpenter who said, it's good to have this buffet, if you will, of taxes, income, sales, property and we need balance. If you unbalance that, aren't you going to necessarily have to raise another tax like the sales tax, which we've had economists on this program say they're going to have to raise the sales tax if they get rid of the income tax? Hagenow: Right. And those would be questions for future legislatures far down the road from today. What I do know is that right now the individual income tax is an outsized part of that buffet is that we collect far more in individual income tax than we do in sales tax in corporate. At a minimum let's take this tremendous opportunity that the legislature has to at least balance that. If we brought down the individual income tax to the level of the state sales tax, which we have the capacity to do, would be a tremendous benefit for the taxpayers and the economy of the state of Iowa. So let's start there. Henderson: Mr. Fisher, would you reduce the sales tax and keep the income tax at the same level? Based on your answer to a previous question that seems like something that you might advocate. Fisher: Well, I think if we're looking at income tax reform I think what we need to look at is things like the Earned Income Tax Credit. If you look at Iowa's income tax overall it collects about 30% of what the federal income tax in this state. We should have an Earned Income Tax Credit that is 30% of the federal if we want to be proportional. That is a credit that rewards work and that helps support working families who have trouble making ends meet. That is the kind of tax change that I would like to see. If you're going to increase the sales tax, I think you need to do something to balance the impact on the lowest income households and that might include an Earned Income Tax Credit expansion as well as an elderly renters credit, which is very low and not doing much to help elderly renters. Murphy: So gentlemen, we've had on this show economic experts with varying sort of ideological backgrounds both agree and say that if you wanted to cut taxes, one of the best ways to do it is through the property tax. It seems like most of the discussion right now is around, especially at the legislature, is about the income tax. I'll get to both of you on this. Mr. Fisher, we'll start with you. Should we be cutting the property tax first before the others? Fisher: I think local governments are already tightly constrained by the state, particularly schools as well as cities and counties, they don't have a whole lot of flexibility and I don't see any good argument for further cuts in property taxes or further state constraints on local government. I just have to respond to one thing that Chris said. He has repeated this myth that tax cuts are a driver of migration and that's just not, that's just not the case. People do not flee to Arizona for low taxes, they go there because they're retiring and they want warm weather. People are not fleeing California and high tax states. And in fact, if you look at Kansas again, when they enacted the tax cuts, Kansas actually increased the out-migration and neighboring Missouri, which they were trying to poach people from, actually experienced an in-migration with higher taxes than Kansas. Just the idea that Iowa taxes are not competitive just doesn't hold up. We're about in the middle and that's probably where we should be. Murphy: So Mr. Hagenow, I don't know if you want to respond to that too. But then also what about property taxes? Why is so much focus on income tax right now? Hagenow: Well, I do know that Iowans care about their property tax burden. Our C3 Foundation recently did a statewide poll and asked Iowans and two-thirds of them said their property taxes are too high. And as a former candidate you go out and knock on doors and if there was one theme I heard over and over is that, well my tax burden is too high, specifically my property taxes, they go up a lot, they go up in some areas 10% based on assessments. And yet, why am I paying 10% more just because I got a new assessment and the city council goes out and spikes the football and says, our levy rate is unchanged. Well wait a minute, I'm paying more. So there is plenty of opportunity for city and county budgets to right size, to come down. The state has done a pretty good job of tightening the belt and getting rid of some of the things that are less necessary and I think cities and counties can do the same. One thing that we're advocating for is a notification system that would give Iowans the information of when those budget decisions are being made. Right now Iowans don't go to a budget hearing at a local level because they simply don't know that it's happening. But if you can give them a notification of that. And another idea is to rebalance the levy rate. So if the assessment goes up, the levy rate goes down by a corresponding amount and true that up and make the cities and the counties enact what they need to do, not just reap the reward of an increase in assessed values. So I think there's a lot of opportunities for the legislature to make meaningful progress on property taxes this year. Gruber-Miller: I want to ask about some of the federal context here because in the last two years the federal government has given to the state of Iowa upwards of $9 billion and that includes direct payments, stimulus payments to people as well as unemployment benefits. But does all that federal money coming around kind of muddy the waters or make it difficult to know really the health of the state's income and revenue going forward? We'll start with you and we'll get both of your thoughts. Hagenow: Sure. I don't think there's any question that when you inject that kind of money into our economy that gets spent that it's going to change some of the outcomes. The concern would be how long-lasting is that one-time influx of frankly money that is part of a frightening amount of federal debt that is coming on board? But the other indicators of Iowa's economy are also strong and if you listen to the REC from last time is that Iowa's agricultural economy is strong, commodity prices are high, land values are high, Iowa's unemployment level is low, Iowa's labor force participation rate is continuing to climb back up to where it was at a pre-pandemic level, which was very high. So there's plenty of very optimistic signs in Iowa's economy beyond that influx of federal money. So does it muddy the water? Yes. And I think you'll get economists to give you slightly different answers to that if you ask them. I'm just a simple country lawyer that makes political arguments. But yes, it is a little bit difficult to figure out exactly where and how much. Gruber-Miller: Mr. Fisher, what about you? What does the influx of federal money mean for what Iowa should or should not do with its tax code going forward? Fisher: Certainly a lot of the growth that we have seen in Iowa in the past year and a half has been due to the huge influx of federal money in the form of COVID relief and expanded unemployment benefits, the increase in the child tax credit, which may become permanent that has put money into people's pockets every month. The prospect of that increasing or continuing that kind of funding is up in the air right now. I don't think we're going to see those kinds of infusions of federal cash every year. We certainly aren't going to see the kinds of COVID aid I wouldn't think, once again. So I think it is reason to be cautious about what the current surplus actually means. Murphy: Governor Reynolds and her predecessor Governor Branstad both made separate proposals to use sales tax revenue, some portion of sales tax revenue, to fund water quality projects. We'll start with you. You were involved in some of those discussions as a state legislator. Neither of those proposals ultimately got off the ground. Is using sales tax revenue to fund water quality still possible or are legislators going to have to go in another direction on that? Hagenow: I don't know that I have enough visibility to say that it's possible or not. I know that there are many legislators that will want to pursue that. I haven't heard it offered as a proposal yet. The Governor's Invest in Iowa plan was one that Iowans for Tax Relief supported as a way to broaden the base and to get dollars into that. One thing that is a little different now is the legislature has now picked up that mental health funding, the county mental health levy, which was one of the components of that was trying to find additional resources for mental health funding. And with the state budget now paying for those services that is one of the components that is not as necessary inside of that plan. So it would certainly be something different if it came forward again next year. Murphy: Mr. Fisher, is raising the sales tax, or at least using some sales tax revenue, a good way to fund that multibillion dollar issue that is water quality in Iowa? Fisher: Well, that's what the voters of Iowa, by a large majority, said they wanted to do. It has been a long time since they voted for that tax increase, that sales tax to fund water quality. And nothing has come of it. I think if you're going to do that, if you're going to finance it with a sales tax increase, you need to do some of the offsets that I talked about before to lessen the impact of the sales tax on people that can least afford it, things like expansion of low income Earned Income Tax Credits and the low income elderly property tax relief could go a long way to offsetting all of those negative effects on people at the bottom. Henderson: Mr. Fisher, we only have about a minute and a half left. Stephen? Gruber-Miller: In the time we have remaining I wanted to ask reach of you about state tax credits and if there are any state tax credits that you think should be eliminated? We'll start with Mr. Hagenow. Hagenow: I absolutely believe that we need to rethink all of our tax credits to make the tax code fair for everyone and flatter, we all pay the same amount and trying to reassess all of those carve outs. Many of them exist within the corporate tax code. I'm going to leave it up to the business community to figure out, they need to come to the table and figure all of that out. But yes, there are a host of specifically income tax credits that could be reined in. Gruber-Miller: Mr. Fisher, we only have a few seconds left. What would you eliminate in terms of tax credits? Fisher: I don't know that I'd eliminate any of them but I think we should take seriously the evaluations that are undergoing. In fact, this afternoon the tax credit review committee is meeting and we need to examine those seriously. Henderson: Just 10 seconds left. February or May, as a former sausage maker, when will this tax plan be passed by the legislature? Hagenow: It won't be February. Those things come later in session. And I know a lot of people that hope it's not May either. Henderson: Thank you, Mr. Hagenow, for being with us. And thank you, Mr. Fisher, for joining us remotely today. And thank you viewers for watching this edition of Iowa Press. We'll be back again next week at our regular times, 7:30 on Friday night and noon on Sunday. For everyone here at Iowa PBS, thanks for watching. (music) Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. Fuel Iowa is a voice and a resource for Iowa's fuel industry. Our members offer a diverse range of products including fuel, grocery and convenience items. They help keep Iowans on the move in rural and urban communities. Together we Fuel Iowa. Small businesses are the backbone of Iowa's communities and they are backed by Iowa banks. With advice, loans and financial services, banks across Iowa are committed to showing small businesses the way to a stronger tomorrow. Learn more at IowaBankers.com.