Taxes and Fiscal Policy

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A bill that would overhaul Iowa's property tax system is still on the table for this legislative session. We'll talk taxes and more with two fiscal policy advocates on this edition of Iowa Press.

Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation.

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The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure.

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For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating more than 50 years on statewide Iowa PBS, this is the Friday, April 4th edition of Iowa Press. Here is Kay Henderson.

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[Henderson] A couple of weeks ago we had guests on this program who are legislators and they talked about a property tax relief plan that has been introduced in the Iowa House and the Iowa Senate. No votes yet. Today, we have two guests who represent organizations that analyze fiscal policy, including state tax policy. And you've seen them on this program before. They are Chris Hagenow, he is the President of Iowans for Tax Relief. And Mike Owen is Deputy Director of Common Good Iowa. Gentlemen, welcome back.

[Hagenow] Thank you.

[Owen] Thank you.

[Henderson] Joining the conversation, Dave Price of the Gray Television Stations in Iowa and Erin Murphy of the Gazette in Cedar Rapids.

[Murphy] So, gentlemen, we want to get both of your perspectives. Obviously, some of the big news right now is the latest round of tariffs being proposed by the Trump administration. A lot of concerns about how that could impact the U.S. economy. How about here specifically in Iowa? And Chris Hagenow, we'll start with you. What are your thoughts as we see these latest rounds of tariffs?

[Hagenow] Well, certainly like most folks watching your 401K balance right now is the primary concern, which hopefully we can get back to a little later as what is actually impacting Iowa's pocketbooks. But, it's early to tell. It's early to tell what impact any of this is going to be. Obviously, it's a huge shift in policy at the federal level. One of the things that I hope we can include in this conversation too though and one of the goals of the administration is not just the broad macro impact. But we've had a lot of displaced Iowa workers over the last year and seen their jobs outsource overseas and maybe they can be a part of the conversation as well.

[Murphy] Mike Owen?

[Owen] I would say that we need to look at that in terms of the impact on state and local services and the taxes are raised to provide them. This will have a big impact on the Iowa economy. We don't know what that impact will be yet. But we already knew that our state budget is going to have to shrink because of tax cuts that we've had over the last few years that are phasing in still. And those anticipated cuts in revenue that were seen were before there was the tariff situation or a lot of the other uncertainty that we have in the economy. So, it's really making for a precarious landscape from a fiscal standpoint going into this property tax discussion.

[Murphy] Which we're definitely going to get to here. I also wanted to ask you, and Mike I'll stay with you here, specifically on agriculture in Iowa and we've heard that because of one of the tariffs China is now reciprocating on agricultural products that obviously very well could impact Iowa. Specifically in the ag sector do you have concerns here?

[Owen] Great concerns. And not just for farmers, but for all of the manufacturers and other providers for farm services that will be impacted by this. Again, all of these things will have an impact on the Iowa economy and thus on the revenues that we have to provide the services that folks need.

[Murphy] Chris, in ag specifically?

[Hagenow] I think one thing I would say, and I'm not an economist, but clearly there were troubling signs ahead in Iowa's ag economy long before even the presidential election and you saw layoffs at Deere and Kinze and commodity prices coming down. So, some of these economic head winds predated anything having to do with President Trump and his economic policy. So yes, it's a challenging time for agriculture in Iowa. I think we all can see that.

[Price] I can't help but look at you and think you came from politics. What would it be like to be a republican member of Congress to face all of our questions about these tariffs and try to game play how this goes?

[Hagenow] For this among many reasons I continue to be resolute and glad that I never got anywhere near --

[Price] I promise your wife is also equally as happy. Hey, so if you kind of look at all of this uncertainty potentially, and maybe Chris start with you, so what action should your -- some of these are maybe your former colleagues over at the Statehouse, you still have a few over there you served with -- do they have to look at maybe putting together a smaller budget for next year? Do they have to think about rebate checks? Democrats have talked about maybe reextending unemployment benefits. Is there any proactive activity they should do because of this?

[Hagenow] I still think they're on the right path, which is yes, they should always -- fiscal discipline is always in order when we do this and separating wants from needs going forward. The budget is in strong shape. There's a lot of dollars at play. We have surplus accounts. We've got a taxpayer relief fund that is flush with cash. To the comment about rebates and some of those things, I think that would be absolutely the wrong way to go, to deplete those funds, which were established and designed to phase in the income tax cuts that we have done in the past. And so, we need to keep those accounts in place so we can use them for what they were intended to be used for.

[Price] Mike, do you look at is it status quo? Or do they have to do anything proactively here?

[Owen] Well, I think proactive is the best response in this situation. I would disagree with Chris on the use of the taxpayer relief fund. That was set up for paying for tax relief. And there was no stipulation in the law that that has to be for future income tax cuts or anything like that. It's for any tax relief. We have a situation where people think property taxes are too high. You could be going to the taxpayer relief fund right now and dealing with that issue with almost $4 billion in it. On top of that, some of the things that you mentioned like unemployment compensation, that is a big concern for people in this environment. And so, I think they really need to stop and slow down and figure out what they can do immediately to help people in this precarious time and at the same time get their heads together about better tax policy. This property tax bill that I know we'll be discussing here, it came out a month ago and we have less than that for this legislative session to deal with it.

[Henderson] Allegedly.

[Price] Maybe.

[Owen] Yeah, well, the thing is there's no rush. And we have had property tax initiatives before where big promises were made and they really haven't delivered for homeowners. And there's, as we can get into there's no assurance that homeowners are going to benefit in a great way from the proposal that is on the table.

[Henderson] Well, let me just generalize about the property tax proposal that has been laid on the table. It would save people who pay property taxes to their local school districts about $400 million because the state would begin to pay a larger share of state dollars to the budgets of local school districts. It includes a limitation on how much cities and counties can raise in property taxes and does a few more things. Chris Hagenow, we have heard that this will be adjusted, it's going to be changed in the coming week. So, what has been your recommendation in terms of adjustments?

[Hagenow] Well, several things that we have floated as ideas. In principle, the structure of that bill is one that we support. It is I think an excellent vehicle to begin that work. Philosophically I'm a little bit, our organization is a little bit skeptical of shifting a great deal of the state general fund onto school funding to make that shift away from it, if for no other reason that the state has managed its budget very well and been able to deliver income tax relief. At the local level, it shouldn't just be up to the state to cover over increases in spending at the local level. We want to see the locals pick up, to limit their own spending, which comes back to the fundamental problem is all of the property tax problem is because of local government spending. And so, the recommendations that we would have going forward into this bill is limitations on local government's ability to spend.

[Henderson] Mike, what would be your adjustments in the plan that has been laid on the table?

[Owen] Well, we have registered undecided on this bill. We didn't take a position for or against because there is a lot to be understood about it. I think if you look at the list of organizations there's only four who have actually registered for the bill and everybody else is registered undecided because they're trying to figure out what is going to happen. But on the question of school funding, the legislature sets what the schools can do on that every year. There's no change there. It's just the mix of funding. And so, they want to shift more of that funding to the state instead of local property taxes.

[Henderson] Use income taxes rather than property taxes.

[Owen] Income taxes and sales taxes that are state revenues. The problem with that is, again, we have a shrinking general fund. And the more pressure you put on that general fund, the less likely you're going to be able to deliver on all the things that are expected now. And schools in the long run can suffer from that, not just schools you're talking about mental health, you're talking about public safety, it's going down the list, environmental quality, all of these things that are supported by or funded by the state are going to be competing for a piece of a smaller pie. And this bill contributes to that.

[Murphy] Chris Hagenow, you just mentioned that you weren't a super big fan of that provision where the state takes over the payment of the school property tax portion anyways. But let me ask you, the state has done that in the past in similar systems with the courts and with mental health and we're still here talking about property tax. So, is it fair -- and I think Mike was alluding to this earlier -- is it fair to suspect whether that will provide property tax relief anyways?

[Hagenow] Right, to be clear, I think in the bill, at least as Chairmans Dawson and Kaufmann explained that, the $400 million, a lot of that was repurposing other credits and exemptions and it wasn't just the state picking up the tab on that, which is actually there's a lot of really good ideas inside of that, just to be clear on that.

[Henderson] To make it more complicated.

[Hagenow] Right, right, but to get away from your question for just a second, that's the hardest part of all of this. And I remember being at the table when we talked about the first income tax bill in 2018 when I was inside the legislature and that was simple even though there were a whole bunch of moving parts to that. Anything you try and do with property taxes is complicated. And it's, to your point, to Mike's point, it's difficult to understand all of the moving parts and how they impact not just individual local governments and the state but the individual taxpayer as well. And so, it makes reform in these things so much more difficult. I think with some of the other examples you provided, a lot of those were statewide, the mental health for example and something had to happen with that because of the way the system had been structured before and it was capped and it wasn't working. And interestingly enough, a lot of those savings didn't get passed onto individual taxpayers at the local level, they were just local governments continue to go ahead and spend even though the state picked up that obligation. But I digress.

[Murphy] Mike Owen, I will concur with the point in the complexity as a reporter who has had to write stories about this topic. What in your view can help Iowans see, if not lower property tax bills, something that doesn't grow quite as fast?

[Owen] Well, something other than what is in this bill to change the rollback system. Now, whether the rollback system is the right system or not is a valid question.

[Murphy] And just real quick, the rollback system established in the '70s to adjust inflation essentially, right?

[Owen] It adjusts your assessed value of your property and what is going to be taxed. And for the residential side, it's about half. You're going to pay on about half of the value of your property. This change would phase that out over five years. Now, the rollback for corporations or for business property is going to be a lot less than that. And so, by taking away this rollback you're actually shifting more of the property tax to residential. So, if in 2013 they pass the big property tax bill, biggest tax cut in history --

[Henderson] For corporate, for commercial property.

[Owen] But that's what it was. And so, people were hearing big tax cut, they didn't get it. So, now legislators are going to the doors and they're hearing we want property tax cuts. And so, they come at it again a few years later and the same thing happened, the main benefit was to commercial property. We're coming on this round and it looks like the benefits that will happen will not be to residential property taxpayers, it will be to business property.

[Henderson] Chris, you're nodding your head.

[Hagenow] I actually agree with quite a bit of what Mike just said and I think that's the reason that you're seeing the legislature continue to look. Look, this is not the final version of the bill and I don't think anyone believes that it is. And speaking from past experience, there are multiple iterations of these bills before they are actually enacted into law because I think they're seeing are these benefits being delivered to the people that we're trying to help? And I think from a legislator's standpoint it's exactly that. They were on someone's doorstep last July or August in 95-degree heat asking for their vote. And the thing, at least in terms of the candidates I talked to over and over, was my property taxes are too high and what are you going to do about it? And so, we have encouraged, whether it's the actual folks writing these tax bills or the individual rank and file legislators, don't forget that person who you talked to last summer and make sure that they get the benefit.

[Henderson] Who is a homeowner.

[Hagenow] Who is a homeowner --

[Henderson] Not a business owner.

[Hagenow] Yeah, usually you don't door knock at a large commercial -- but you might, I don't know, different people have different campaign strategies. But yeah, and I think I believe that is their goal and I believe that is where they are trying to go is to provide relief to those individual taxpayers.

[Price] All right, I'm going to ask a question that is going to put me at risk of sounding like a big old stooge here. But I'm going to try it. Why can we not uncomplicate this and the locals decide your property tax? Your house is worth X, they decide you pay a percentage of it and that's it, no rollbacks, no state, no nothing. Why can it not be that simple?

[Owen] I'm the wrong person to ask that question to because I think it makes a great degree of sense. Now, the legislature wants to have some parameters on what local governments can do and that is understandable. But you do have to remember that whether you're talking about school board members or city council members or county supervisors, they all have to go to the voters too. So, they should be given some latitude on what they need to provide the services they provide and what they hear from people in their neighborhoods and then face the voters for it.

[Price] So, Mr. Former House Majority Leader, why not have complete local control? Does that money not add up? Why can it not work that naively?

[Hagenow] To the technical question of just your house is assessed at X and the tax rate Y, that can get pretty lumpy. A lot of Iowans, many of them I know in Central Iowa, just got an assessment notice in the mail that their home valuation went up 5%, 7%, 8% or more. Well, that creates a lot of uncertainty in how much you're going to have to pay. So, to that answer --

[Price] It could have a huge year to year jump.

[Hagenow] Right. And so, rollback, one of the other benefits of that, we actually believe it's a good taxpayer protection. Not that there's not maybe a better system, but sort of smooths that out. But anyway, taxation even at the local level has always been the limits on it, the manner of it has always been the purview of the state legislature. And there is decision-making authority inside of those parameters at the local level, but the state has always decided how much and where it should go.

[Price] But the President doesn't decide what the Governor does tax wise or the legislature does.

[Hagenow] Well, as a former state legislator, the state is sovereign both directions in all of this. So, that would be my -- and I don't mean that to be a flippant answer. But we are the state of Iowa, we are part of the federal government, and they exist at the pleasure of the state or ideally and similarly the state is sovereign over the local governments.

[Henderson] We have talked a lot about property taxes. Let's talk a little bit about income taxes in the limited amount of time we have left. Chris, the individual income tax rate in Iowa went to 3.8% on January 1st. The Governor has said that she would like that to go to zero at the end of her current term, which would be December 31st of 2026. Is that going to happen?

[Hagenow] I would love for the individual income tax to be zero by the end of her term.

[Henderson] How would that happen?

[Hagenow] I don't know. I don't know. Obviously, November of 2026 is right around the corner politically. So, I haven't seen anything yet on that front. But I do know that there is a collective interest in continuing to tick down as the budget will allow for that individual income tax rate to continue to come down over time and then seeing what is possible. I think to make a bigger leap beyond some marginal changes in it from here probably would have to come with some other decisions inside of the tax code whether it be other tax types or not to truly get there or a wide scale broadening. There would be some very huge decisions that would have to be made inside of that.

[Murphy] Are you talking about potentially having to raise the sales tax too?

[Hagenow] I think so. And I'm not saying I advocate for raising one tax to cut another, but sometimes if it's completely eliminating a tax type, well then that gets interesting to us. But I think too to point out, and Mike touched on this about the state budget, all of these income tax bills have been built on surplus amounts, that Iowans are paying more in income tax than the state needed to operate. And the state budget continues to grow. I think the proposal this year is somewhere north of 5% that it will grow this year, even on a reduction of revenues. So, the state's fiscal house is absolutely strong and we'll go through a challenging time. But then we'll see what is possible as we get some clarity on that.

[Henderson] Mike Owen, your organization has not been a terrible fan, a big fan of this 3.8% tax rate, a so-called flat tax. It has not been a winning argument because the legislature has been moving in this direction for a number of years. Do you need to change the argument?

[Owen] I think we're going to have to see how things play out and people will understand as the things they depend upon, whether it's good schools or health care or other things that are provided by the tax system, we're going to have to see how well those things hold out. But the math just isn't there for this to work. The 3.8% was a bad idea because it loses a lot of money and because it's not fair to take out the only piece of our tax system that was charging high income people at a higher rate than it charged lower income people. To flatten that to nothing it made our system a lot less fair overall. At the same time, the projections were about $2 billion in cuts in revenue. Now, you can do that for a while, while you have your surpluses, surpluses created by underfunding things in the first place. You've got strong revenues coming in from a strong economy that was backed by the federal government and pandemic aid and so forth. But it's not as strong now.

[Henderson] Dave, talk about the surplus.

[Price] Yeah, how much is it? $4 billion? What have we got in there?

[Owen] The surplus is about $2 billion.

[Hagenow] The taxpayer relief fund --

[Price] I mean, if you add everything --

[Henderson] It’s $6 billion.

[Price] It's $6 billion total if you do it all, right?

[Henderson] Cash reserves, the economic emergency fund and the Iowa taxpayer relief fund.

[Price] Okay, so we add up to roughly $6 billion. Is it right to have $6 billion potentially kind of sitting in there? Is that the best use of this? It safeguards against if the tax cuts go sideways, revenue wise, whatever. But there are some who wonder why do we have all this sitting there? You may use it for some things. You may want it for another. But is it right to have that much in there?

[Hagenow] Look, I don't know what the exact dollar amount needs to be, but some of those reserve funds, the cash reserve fund, economic emergency fund, those are statutorily set aside for those cash flow purposes. So, the surplus accounts, that needs to be -- I believe, some of it is philosophy of what you want to do with government, some might want to grow government with it or add services, some might want to give it back to the taxpayers, we're not going to resolve that today. But to your question, a lot of those dollars have been spoken for in these runs, these out year projections of what will be necessary to continue to meet the priority needs of Iowans. And when I say that the state's fiscal house is in order, it is based not on the plan that was set out when we went to 3.8% that for a period of time we would need to dip into those funds. So, if we go and raid those funds for some other purpose at this point, then you have to wonder whether that is prudent in order to cash flow the state budget.

[Henderson] Mike, real quickly because we want to get to tax credits.

[Owen] The state's fiscal house may look like it's in order, but a lot of stuff has been stuffed in the closets.

[Murphy] We saved the nice simple, sorry, go ahead Mike.

[Owen] And the reason is, again, the out-year impacts of the tax cuts that are happening now and the surpluses are going to be spent down, you're not going to have anything left. What we've done is set up a cliff and we just don't know what year that is going to come in.

[Murphy] Apologize for dropping this topic on you with about 30 seconds left. Tax credits are getting a look at the state legislature right now, the whole system holistically. Chris Hagenow, which credits need to go or be cut?

[Hagenow] We should have a look at all of them. The tax code in Iowa should be flatter and fairer for everyone without special carveouts.

[Murphy] Mike Owen, do you agree with that?

[Owen] That we should, yes, definitely look at all of them. And we could do it a lot more deliberately than have it, again, like the property tax bill. The tax credit bill was just kind of dumped in everybody's laps a month ago and now we're going to decide it by the end of the session. It can be a lot more deliberate than that.

[Henderson] Well, our deliberations at this table are over for this edition of Iowa Press. Thanks to both of you for being here.

[Hagenow] Thanks, Kay.

[Owen] Thank you.

[Henderson] You can watch every episode of Iowa Press at iowapbs.org. For everyone here at Iowa PBS, thanks for watching today.

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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.

(music)

Across Iowa, hundreds of neighborhood banks strive to serve their communities, provide jobs and help local businesses. Iowa banks are proud to back the life you build. Learn more at iowabankers.com.

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