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Iowa Legislature Sends Wide-Ranging Tax Plan To Governor's Desk

John Pemble
IPR file
The Iowa Legislature gave final approval to a wide-ranging tax bill Tuesday, sending it to the governor’s desk.

This story was updated Tuesday, May 18, at 7:50 p.m.

The Iowa Legislature gave final approval to a wide-ranging tax bill Tuesday, sending it to the governor’s desk. It will shift the responsibility for funding mental health services from counties to the state, ensure more income tax cuts take effect in 2023, phase out “backfill” payments to local governments, and expand tax credits related to child care and housing.

The Iowa House of Representatives passed the bill 64-28 Tuesday evening with nine Democrats joining Republicans to vote yes, and one Republican joining the majority of Democrats in opposition.

The Iowa Senate passed the bill 29-15 Monday evening, with just two Democrats joining all Republicans present in support of the bill.

Republican Gov. Kim Reynolds praised the bill Tuesday evening in posts on Twitter.

“This legislation is a win for Iowans and addresses critical needs for our state,” Reynolds said.

The bill is expected to reduce income, property and small business taxes by a total of $1 billion over the next eight years, according to Senate Republicans.

“This is big. It’s bold,” said Sen. Dan Dawson, R-Council Bluffs. “And while other states limp out of this pandemic, Iowa is setting the example of accelerating out of this pandemic with policies that launch the state forward.”

A statement from Iowa House Republicans said the tax changes are financially responsible.

“Because of the disciplined budgeting practices of Iowa House Republicans over the last decade, Iowa is in a strong fiscal position to further reduce the tax burden on Iowans,” said House Speaker Pat Grassley, R-New Hartford.

Senate Democrats said they agreed with a lot of provisions in the bill, but most voted against it because of concerns about ending the “backfill.”

In 2013, the state cut commercial property taxes and started making payments to cities, counties and schools to make up for that lost local revenue. The payments are known as the backfill, and they total $152 million each year. The bill would phase out those payments by 2030.

The bill includes a funding boost to offset the impact to schools. But cities would lose a total of $52 million per year, and counties would lose nearly $30 million per year.

Sen. Jackie Smith, D-Sioux City, said local governments will have to make cuts or raise property taxes.

“People want services. Taxpayers don’t want the burden shifted to them,” Smith said. “…This is the one thing your residents, your neighbors, are going to want you to do. They don’t want you to raise their property taxes, and in effect, that’s what this action will lead to.”

Dawson said the backfill payments make up less than 2 percent of the average local government budget. And he said cities and counties are receiving far more funding from federal pandemic relief programs than they are from the state backfill payments.

“These numbers are mind-blowing,” Dawson said. “To think that cities and counties can’t—through a predictable and reasonable phase out on a five or eight year cycle—phase out this backfill is laughable. And more importantly, it’s disrespectful to the taxpayers.”

Dawson said the state is going to use that money to create a better mental health system.

Democrats noted the federal money is one-time funding that has to be use fairly quickly, while the backfill has been a steady source of funding.

Mental health funding shift

Iowa’s mental health system is currently funded through county property taxes and managed by 14 mental health and disability services regions. The tax bill will eliminate that property tax levy, and the state will take on the full cost of the mental health system next July.

Peggy Huppert, executive director of National Alliance on Mental Illness—Iowa, supports these changes. Iowa is the only state that still funds mental health services with property taxes.

“And what that’s resulted in is a lack of equity and a lack of sustainable and reliable services throughout the state,” Huppert said.

Under the bill, the Iowa Department of Human Services will distribute the funding through performance-based contracts with the regions. Huppert said that will give the state the ability to enforce laws that require regions to provide certain mental health services.

The Iowa Farm Bureau has also lobbied for this change as a form of property tax relief.

Some Democrats said they are worried about the state’s ability to fund mental health services in the future.

“There is no guarantee—none—that the state will make good on its promise to adequately fund mental health and disability services,” said Sen. Pam Jochum, D-Dubuque. “It is not constitutionally protected.”

Jochum said Iowa’s budget is also “artificially inflated” because of billions in federal pandemic relief funding. Dawson argued there’s money available to support tax cuts because of conservative budgeting by the Republican-led legislature.

Here are some of the provisions in the tax bill:

  • Eliminates revenue “triggers,” ensuring income tax cuts in 2018 tax legislation tax effect in 2023
  • Expands eligibility for child care tax credits from families earning maximum $45,000 to those earning maximum $90,000
  • Phases out state inheritance tax by 2025
  • Exempts COVID-19 assistance grants from income tax and expands tax exemption for Paycheck Protection Program recipients
  • Increases funding for housing trust funds
  • Requires health insurance companies to reimburse mental health care providers for telehealth services at the same rate as in-person services
  • Creates a Manufacturing 4.0 program to help small manufacturers with technology investments
  • Increases funding for workforce housing tax credits from $25 million per year to $40 million next fiscal year, and $35 million the following fiscal years
  • Extends brownfield/grayfield tax credits for redeveloping properties with environmental concerns
  • Creates a Disaster Recovery Housing Assistance Program that will give forgivable loans and grants to people with disaster-affected homes and help prevent evictions
  • Expands the beginning farmer tax credit
  • Gives a sales tax break to food banks
  • Increases tax credits for volunteer firefighters and reserve peace officers
  • Creates a homestead adjustment property tax credit for low-income Iowans over 70

Click here to read the nonpartisan Legislative Services Agency’s analysis of the bill.

Katarina Sostaric is IPR's State Government Reporter