Republicans at the State House have cut taxes, and Governor Reynolds says they're just getting started.

We'll talk tax policy and what the legislature may debate next, on this edition of Iowa Press.

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This is the Friday, November 10th edition of Iowa Press.

Here is Kay Henderson.

Our guest on this episode of Iowa Press are from opposite sides of the tax debates of the past, the present and the future.

Chris Hagenow now is president of Iowans for Tax Relief, and our other guest is Mike Owen.

He is the deputy director of Common Good Iowa.

Gentlemen, welcome to Iowa Press.

Thank you.

You also joining the conversation, Stephen Gruber Miller of the Des Moines Register and Erin Murphy of the Gazette in Cedar Rapids.

Gentlemen, we had an election earlier this week and there were some ballot measures, some referendums there, where groups were asking taxpayers to help them with different projects.

There was an airport project in Des Moines that passed multiple school referendums, including one of the largest ever in Cedar Rapids, over $200 million that failed.

Mike Owen we'll start with you either individually on one of these or maybe more broadly speaking, I wonder if you had any reaction to some of those bond referendums that were on the ballot this week.

Yes, I do.

And thank you for raising that question, because I think it's a very important one.

I'll talk about one right in my home county of Cedar County, where we had one of those emergency management levy referendums so that we can have full time ambulance service throughout our county.

Now, I live in West Branch, which is already pretty well served, but most of our county, that's an issue.

So now this levy passed.

People made the connection between important services in their lives, really life and death for some people and the fact that they need to pay for it.

And how do we do that?

We do that through taxes.

Chris Hagenow, Iowans for Tax Relief got involved in some of these, was informing voters and taxpayers about some of the issues.

What was your view on how the voters?

Well, I was encouraged overall, just be what seems to be an increased amount of civic participation in these measures and an increased amount of information that was available to voters.

And, you know, we didn't take a specific position on any of these.

And some of them, by my view from afar, seemed like could be some very worthwhile projects that can't be done without some sort of bonding, maybe as a growing school district where there's no other way to build.

And so leave that up to the voters in those individual communities.

And it was mixed results.

About a 50/50 of these measures passed or didn't pass.

So I would caution against trying to make big takeaways from it.

But it did seem that the projects that were more critical services, necessary infrastructure passed more than what seem to be more luxury items.

So you're touching on a question I wanted to bring up, which is that schools are bonding for these things because they need help.

They need more money for whether it's facilities, projects or whatever it might be.

You know, I'm kind of curious.

They could they could they could get that money by putting a bond issue on raising money that way.

But the state could also help them out more.

Right.

I mean, what's the right mix there?

We'll start with you, but we'll get to both of you.

Well, I think the biggest thing the state has done was by extending save a few years ago.

So the school infrastructure, the acronym, but it's a $0.01 sales tax that goes toward school infrastructure projects.

And schools also have their pepper levy, the physical plant and equipment levy.

So there is ongoing revenue that's dedicated specifically to infrastructure in our school districts.

So that's I think the state's contribution.

And then at the local level, they can decide if they need additional improvements or additional money from that.

It should be up to the locals to decide the appropriate level of investment in the infrastructure.

Mike Owen Is there more needed from the state?

I think there is and if you look at the surpluses, which I'm sure we'll probably get into today, we have surpluses that people would say should probably be used for one time projects.

This is an example of a place you could put that into physical improvements in schools around the state so you could add to the funds that are available to schools with some of the surplus money that we have right now.

So let's shift to income taxes.

Governor Reynolds has said that her priority before her current term as over is to have the legislature pass a bill that would completely eliminate Iowa's sales tax.

You both represent income tax.

I'm sorry, income tax.

You both represent organizations that will have a voice in that debate.

Let's start with you, Mike Owen, just inform our viewers what would be your view of eliminating the state income tax.

It would be a disaster for the state of Iowa.

First of all, I would say any tax discussions need the element of the services that are affected, whether you're talking about tax increases or tax cuts.

You say tax cut, I say fewer teachers.

You say tax cut, I say who gets the benefit?

I mean, these are are a lot of connections to the issue of cutting taxes, the tax taxes that have already been cut in in laws already passed will reduce our general fund by 20% in just a few years.

They're not phased in yet.

People don't even see the impacts yet because the legislature hasn't put budgets together for fiscal year 28, for example.

When you lose $2 billion from the from the budget, from revenues.

Now, when you talk about eliminating the income tax, you're talking about taking half of what's available right now for the general fund and throwing it away.

Our budget is over half education.

It's about a quarter to Health and Human Services.

We're going to have to find ways to plug the holes that are created by the tax cuts that have already been passed, let alone the idea of doing more on eliminating the income tax.

And I would add one other piece of that.

So the income tax is the only part of our tax system that really reflects the ability to pay.

And our tax system also includes sales taxes and property taxes.

These things hit lower income people harder than they do higher income people.

So we're doing everything for the wealthy and for corporations and corporate income tax cuts.

We're not doing anything for low, moderate and middle income people.

Chris Hagenow, Iowans for Tax Relief as an advocate for eliminating the state income tax.

Why?

Well, we believe that Iowans are overtaxed and that money can be better spent by Iowans than government, first and foremost.

And we think that other forms of taxation are more fair than the income tax.

So going back to the governor, Reynolds, we're excited to see what Governor Reynolds might propose.

She's obviously been a tremendous champion for income tax reductions up to an elimination.

And I would every time we've done this, it has been with an eye to the future.

And every time there's been a tax bill that we've done back to the when we started this project in 2018, when I was still in the legislature, it has always been will states the state revenue still align with what we need to be able to spend.

And those lines still with the with the bill that we have now they match up and we can meet our ongoing liabilities and our ongoing commitments.

And so I'm excited to see what plan she may come out with.

There was one in the Senate last year.

The Ways and Means Chairman Dan Dodson had to sort of phase out the income tax over time, similar to what we've done in mechanism or the corporate tax.

But there are ways to do this.

Now, how long that takes, what other decisions need to be made along the way.

But there are ways to accomplish this.

So let's get into that, because to Mike's point, in the 2023 state budget year, the income tax was 48.6% of state general fund revenue, so almost literally half of the state budget.

So if if you get to a point how many every year that happens where literally half of your revenues are gone, how does the state continue to fund all these things that it does now?

Well, I kind of think of this into two phases, I guess is one is immediately the state continues to collect far more in tax revenue than it needs to operate.

We're running billion dollar plus surpluses and accumulating large surplus accounts.

So but not 4 billion, which would be understood.

So there's what can we do to to right size that right now.

And I think we can probably get down that flat tax which is on pace to go to 3.9%, probably down into the mid twos or somewhere around there, even even without making any of those other adjustments that you're talking about.

And where you go from there.

It would have to trigger and phased out over time as other tax types grow.

Some of the proposals have been to make adjustments to the sales tax or flatten the tax.

Talk about credits and exemptions that are to our code to flatten it out.

But I can't stress enough the point that this is not hoping that things work out in the future.

This is a plan.

Whatever comes out.

I know that leader Whitver and speaker Grassley and governor Reynolds are going to have a plan looking at the future needs and whatever those are that's going to line up.

Yeah, Mike Owen I just want to bring you in here again and ask, you know, in other states that have no income tax for personal income tax, we see the states offset that with revenue from industries like tourism, oil and gas.

Right?

Maybe they have a lot of sales tax they collect.

I mean, what do you see happening if Iowa where to get rid of the income tax?

Well, I don't want to chart a path for them because I think it's a bad path.

I would say that the states that have done that have on balance are going to have similar taxes to what we have.

Again, you have to look at the entire tax system.

We're talking here about income tax.

But and there's a lot of, frankly, foolishness talked about about issues of competitiveness in our state.

Our state has been a competitive on the question of taxes for decades.

And that's because all states have a mix of revenues that they use to meet their needs.

So when you put all those things together, you realize that we're we've always been average or below actually on our taxes.

So, you know what will that mix be?

I don't know.

But.

But to replace the income tax, for example, with sales tax, you're going to have to raise the sales tax to 13, 14, $0.15.

I don't see a stomach for that in the legislature certainly they are having trouble even dealing with IWILL which was passed by over 60% of the voters to raise sales tax for natural resources and and and outdoor recreation.

So and that was in 2010.

So.

So let's talk about the sales tax a little bit.

Thank you for kind of setting up the issue here.

You know, there is this this constitutional amendment that any that sales tax increases would partly go to pay for this trust fund for for water quality and things like that.

Is there is that going to come into play?

I mean, is that ever going to be funded?

I think people see discussions happening year in and year out and no agreement.

What's the solution there?

I've see I remember years of discussions on this when I was still in the legislature and what would that look like to trigger that?

And I know that has continued.

I think that the proposals I've seen are, well, what are you.

What would happen with those dollars that that come in and is that all new spending or would that replace some existing obligations we have?

Because as as folks may or may not know, the next time there's an increase in the state sales tax, 3/8 of that first penny have to go to this trust fund.

And so I think at some point, probably this gets done.

But I, I, I have no way to know whether it's this year or not because it's exactly that you're talking about a tax increase, even if it isn't the sales tax.

So I wouldn't be predicting that anything is done with that this coming year.

But you have a lot of folks, a lot of ideas and it will happen someday.

And as far as offsetting income tax revenue, I mean, do you see appetite to raise the sales tax or how do you.

Offset that loss?

I don't see an appetite to raise the sales tax coming up.

I haven't heard it discussed yet.

I think where something like that is certainly wouldn't be something like Mike talked about, but maybe a modest adjustment would have to include some of the deductions or the exemptions to the sales tax and instead of flatten that out and then it would it would have to be as part of, I think, a plan to get to zero.

So that it's a whole lot easier to stomach an increase to one tax type if you're completely eliminating another, rather than because then it just becomes another increase in and would get swallowed up.

So Iowans don't pay sales tax on food.

Yeah.

What things do they pay sales tax on are exempted that you think should be subject.

Well I don't I don't necessarily have a list because there's a there's a long list.

I mean, the most recent I remember doing on an aircraft parts or aircraft maintenance and maybe that was a maybe that was the right thing to do because people were avoiding those taxes by going to other states.

I don't know.

But there there's a forestry exemption there.

The list is long.

What about the research and development tax credit?

Well, the legislature has recently made some adjustments to that.

And Iowans for Tax Relief is focused on the individual income tax and not necessarily the corporate income tax.

But we support lower and flatter taxes for everyone, which would mean continuing to remove all of those tax credits for a lower rate for everyone.

Mike Owen mentioned the Taxpayer Relief Fund, which is one of the reserve accounts in which money has been deposited.

It's now at $2.74 billion.

Chris Hagenow, is that a responsible way to manage taxes just to hoard it?

I don't well, responsible.

I think the right thing the responsible thing to do is to figure out how to deploy those dollars for their intended purpose, which was to achieve income tax reductions back to when that fund was originally created back, I think in the 2012 tax bill.

And so begin the process of using that as the foundation for a bigger income tax bill in the future.

So no, and I think folks in the legislature realize that and are ready to start using those dollars.

They're one time dollars, though, and it would be very useful for maybe accelerating the implementation of a tax bill or but it's not we're not just going to give them back to Iowans as part of foundational the foundational part of structural tax reform in the future.

And micro.

And that's a lot of money.

The people who align with Chris Hagan's view on this say it's proof that the state is over collecting and there should be tax cuts.

But your question to Chris also got to the point that the money is being hoarded and in fact, there are things that could be done with that fund right now to pay for tax credits that are on the books.

I've read the law.

You could actually use revenue from the Taxpayer Relief Fund to pay for the $400 million in tax credits we have in the book right now.

Each year.

That isn't done, we need serious tax credit reform.

I'm glad you raised the research activities credit.

There were improvements made on that, but it's still it's still a real big benefit to very wealthy corporations who do not need Iowa taxpayer's help in meeting their basic needs.

Now, when you talk about the taxpayer relief fund, that's going to be up over $4 billion by the end of the decade.

And, you know, that corresponds to almost certainly over a third of what the budget will be at that point where it is now.

And it means that we are budgeting basically one out of every four or five out or one of every $5 for tax cuts.

These are revenues that are coming in one time revenues, as you mentioned, in large part generated by federal support of our economy from following the pandemic.

That's one this we have these surpluses right now because of the federal aid that helped Iowa's economy, not just to state and local governments, but also to individuals.

We had the Paycheck Protection Program.

Paycheck Protection Program, so that there were people were able to stay at work.

People are able to keep their their folks employed.

That all boosted the Iowa economy.

So we avoided a recession because of this kind of help.

At the same time, continuing to hold down spending, investments and things that matter to Iowans.

School funding has been held exceedingly low for over a decade.

It's been about 13 years.

We've been averaging about 2% on our per pupil growth.

That does not keep up with costs.

In the decade before that, it was 3%, which was better.

So we're creating these one time funds with things that do not sustain the responsibilities we have.

The governor can say all she wants, that we are meeting our responsibilities.

In fact, we are not.

And if she were to talk to school districts around the state, she would understand that better.

Chris Hagenow, I'm going to give you a chance to respond to that because this gets at the heart of the you know, I hear often, like you said, folks say this money isn't evidence that the state is over collecting.

There are people who would say the state is underfunding in different areas.

So so how can you talk to those people, tell them why they should feel confident that Iowa is funding all the services and needs that it and it should be.

At the heart of it is really a philosophical just difference of opinion.

Do you want a limited government that honors the taxpayers and lets them keep as much of their hard earned money as possible?

Or do you want to grow government services and programs and and reasonable, well informed folks will fall on different sides of that that debate.

But but what is clear is the state is currently collecting more than it needs, not just for its current obligation but we're talking about still a reasonable historical average growth in the size of the state budget where it's I think last year was close to a 4% growth and the overall size of the state budget and there have been regular increases to school funding in this state.

Is it as much as some folks would want?

Clearly, clearly it hasn't been, but it has been steady growth.

And if the cost drivers for those things are increasing faster, well then we need to look at the cost structure of these these obligations that we have.

And if inflation is impacting that and then we can have a broader conversation about what are the drivers of inflation nationally, which would be what the federal government is doing with money and its debt, which all comes back to.

The core point is that things are working great in Iowa.

Our economy is going along great.

Our state tax collections are great and we're in a position to do this for our taxpayers in stark contrast to what's happening at the federal level.

More taxes to talk about.

We've just got a couple minutes left, and I want to get both of your thoughts on property taxes.

So this year, the legislature passed a bill to cut property taxes, in part by holding down how much city revenues can grow.

Republican mayors in the state, I think it was the Council Bluffs mayor said that the legislature is trying to limit what cities can spend on services.

Chris Hagenow, I want to start with you.

Why?

You know, local voters elected those officials to spend their local budget.

Why should the state be telling them what they can and can't spend?

Well, the state of Iowa has always been tasked with setting levels of taxation at every level of government in the state.

And if the mayor of Council Bluffs wants to spend his money on whatever items he wants, he's welcome to do that.

And he needs to have that conversation with his voters of why that comes over other priorities in his budget.

But let's be clear what that bill did last year.

It did not cut local government budgets.

It just said they couldn't grow as fast as they wanted to.

And city and county budgets are growing far faster than Iowans ability to pay.

And the fundamental problem here is that Iowans are fed up, go around anywhere in the state and ask Iowans about their property tax burden, and you will get an earful.

And because local governments weren't addressing that issue, the legislature took it on and said, okay, well, we're going to put some limits on how fast you can grow.

I mean, that's the answer.

And so he will need to have that conversation with his voters.

Mike Owen, I want to get your view on the property tax bill that passed the legislature this year.

Well, fundamentally, it interferes with the economy.

So I find it interesting when we see folks who support the free market supporting this kind of interference by the government, by state and local decisions that can, you know, help a local community respond to the needs right in front of them.

I mean, if you have a growing community and you have a need for more services that exceeds the level the legislature wants you to spend, what are you supposed to do?

What again, what do you give up.

In regards to the endgame here?

What do you think the legislature will do in the next legislative session?

Which tax do you think they'll address?

Chris?

I think it's an income tax year, maybe some small property tax adjustments, but this feels like an income tax year going into the next session.

Mike Owen, What's your prediction?

That seems to be where, where things are headed and the governor's proposal is and Senator Doss's proposal are high on the block and they're going to cause a big threat to Iowa down the road.

Will we ever address those tax credits that we were talking about earlier?

Will we have a more holistic reform on that?

Chris Hagenow.

I, I will remain optimistic, but I'll believe it when I see it.

Well, I have I'm seeing the clock.

And folks, we're out of time for this discussion.

We'll have to have you back to talk about tax credits at another time.

Thank you both for being here today.

Thank you Kay.

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