Bad tax policy — at twice the price

Senate File 576 was already a terribly costly tax bill that Iowa cannot afford. Now, it appears to be twice as costly as previously assumed — over a half-billion dollars in Fiscal Year 2024 alone.

The federal COVID relief package signed Thursday by President Biden includes a provision that could reduce Iowa's benefit by $1 for every dollar given away in new tax cuts through the end of 2024.

Here's why:

The state Senate bill combines two principal changes — phasing out the state inheritance tax over three years, at a cost of about $65 million in FY2024, and removing so-called “revenue triggers” that ignite previously passed cuts in tax rates a year early, at a cost of $199 million.* That is a $264 million cost in that one fiscal year.

We focus on FY2024 here as one fiscal year totally within the “covered period” of the federal COVID relief package. The full cost of new tax cuts in SF576 also would include any new tax cuts newly approved for the remainder of FY2022, for FY2023, and for the first half of FY2025, so that $264 million estimate for FY2024 is not the full state cost.

Now this is where the federal COVID law comes in. The law, which will provide an estimated $1.38 billion to Iowa for various approved uses, has a caveat: Any changes in law that cause revenue cuts (tax cuts) during the covered period of March 3, 2021, through Dec. 31, 2024, will reduce the COVID relief by the same amount. Here is the language in the law:

“A State or territory shall not use the funds ... to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

The law goes on to order that any state failing to comply will have to repay “the amount of the applicable reduction to net tax revenue attributable to such violation.” In other words, a clawback of the COVID relief equaling the state tax reduction. This would indicate an intentional revenue cut of $250, or $250 million, is doubled with the loss of federal support in the same amount.

Already, the bill was a bad idea, as Common Good Iowa argued in testimony to the state Senate Ways and Means subcommittee on the bill on March 9. Its problems were not only in policy, and fiscal impact, but in process.

As we noted then, the bill is being rushed through the process when there is no immediate deadline on tax bills in the legislative schedule. The Senate panel could have waited for an official “fiscal note” from the Legislative Services Agency, to understand the budget impact. Likewise, the full Senate Ways and Means Committee could have waited for that information, but moved ahead the next day with quick approval of the bill, which is now ready for full Senate debate.

This already was an example of senators ramming through tax policy on ideological and partisan grounds, regardless of the cost of public services that these revenues support. There is no evident concern about the loss of services that will result from a loss of over $250 million in one year — let alone twice that amount in FY2024 due to the new federal law.

Official guidance from the Treasury Department will provide certainty of the impact of that law — one more reason to wait to make any changes.

It is all so unnecessary.

The inheritance tax cuts are irresponsible. Already, immediate family members receive all bequests up and down the family line without a dime in state tax. That's the way current law works. Iowa’s generous inheritance tax exemptions already protect family wealth. The changes would give shirttail relatives, nonrelatives — even nonresident nonrelatives — tax-free windfalls.

The income-tax cuts rest on inaccurate representations about Iowa taxes, denying the undeniable fact that Iowa taxes remain below average for business, and have been cut repeatedly for individuals, particularly high-income individuals. At the same time, critical services including education have been chronically shortchanged.

Iowa needs more fairness in its tax system without slashing revenues. A discussion in that spirit would bring a variety of perspectives to the table to reach consensus on a long-term, stable path to that goal. Instead the state’s policymakers are in overdrive pushing cuts without regard to the policy impacts, which are not sustainable for a state that wants to lure — let alone keep — families and good, clean businesses.

We already knew Iowans would pay for this approach. Now we may pay doubly for it.