IWILL or IWON’T? That’s a dilemma for Iowa Republican legislators as they open their new session in an election year that could challenge their majority. Will they raise the state sales tax a penny to pay for expensive water quality and mental-health programs? Or won’t they?
Here are a few factors lawmakers may consider as they come into session on Monday.
There are both green lights and caution flags in the state’s economic forecast. The state ended the last fiscal year with a surplus of nearly $290 million and its cash reserves are full. That may seem like a relatively comfortable position that could support some ambitious initiatives aimed at serious and expensive problems such as water quality and mental health care. But maybe not.
The increase in the official revenue forecast for the current budget year that started July 1 is only 1.4 percent, which doesn’t even cover the 2 percent inflation rate. And while the forecast for fiscal year 2021 looks better with a 2.7 percent increase, state budget officials noted Iowa farmers’ dependence on Congress ratifying the U.S.-Mexico-Canada trade agreement and a continuing workforce shortage that is slowing business growth.
And the GOP-controlled Legislature and Republican governor enacted the largest income-tax cut in state history in 2018, which is still being implemented in stages that depend on revenue growth. The potential for another major income-tax reduction in 2023 means GOP lawmakers are likely to be circumspect about how much additional spending they can sustain over time.
That brings us to perhaps the boldest initiative legislators are considering in 2020: Raising the state sales tax by a penny for every dollar spent. That would increase the state’s base sales tax to 6 cents and raise nearly $550 million in new revenue for 2021.
In 2010, Iowa voters amended the state constitution to create the Iowa Water & Land Legacy or IWILL, which requires a portion of any increased sales tax to be set aside for water quality, conservation and outdoor recreation. That’s about $200 million a year for what has often been described as a billion-dollar problem.
There seems to be a bipartisan understanding of the need to address Iowa’s impaired waterways but that doesn’t mean lawmakers will reach an accord on how to pay for it. Incoming House Speaker Pat Grassley, R-New Hartford, has stressed that GOP representatives will push for a change in how IWILL money is divided to put more emphasis on water quality instead of increasing spending on parks and other outdoor recreation.
Hashing all that out won’t be easy or quick, Grassley warns. He said in an interview it would take “a long time” to sort out – and didn’t promise to resolve it during this year’s session.
The role of Democrats in the Legislature is another wild card. Some Republicans have said such an initiative needs to be bipartisan. But minority party leaders say they’ve been excluded from discussions so far – and they don’t see unanimity in their own caucuses for a regressive tax shift.
There’s also been some bipartisan support for earmarking at least some of the remaining dollars for mental health. The Legislature in 2018 unanimously passed an expansion of mental-health services and came back last year to approve a new framework of services for children – all without identifying any ongoing source of new dollars.
However, the Farm Bureau, one of the most influential lobbying groups at the Statehouse, has proposed that lawmakers use the sales tax dollars to replace property taxes going to mental-health programs. That may be an attractive proposition to GOP lawmakers who want an offsetting tax cut for any sales tax increase. But as Iowa Capital Dispatch reported last week, Gov. Kim Reynolds is skeptical of that idea.
But if not a property tax cut, GOP lawmakers will be looking for other places to cut taxes. The governor and GOP legislative leaders have insisted on a net tax decrease. And that, on top of the 2018 income-tax cuts, could call into question the state’s ability to maintain its commitments to education and health care, let alone expand spending on needed workforce initiatives such as child care and housing.
Reynolds has not announced whether she’ll include a sales tax plan in her legislative agenda. Her leadership on this issue will be significant. This issue is also one in which Iowans who take the time to reach out to their lawmakers can have a major influence. Those who don’t, risk leaving the issue in the hands of special interests.
A long time ago, when I first started covering the Legislature, a veteran reporter told me the safest prediction would be that lawmakers will do as little as possible. But in a year when voters are fed up by government dysfunction in Washington, that may not be the safest plan for Statehouse leaders.