Conflict over size of tax cuts in FY 20



District 11, R-Storm Lake

Chairman of the Justice Systems Appropriations Subcommittee

On what would normally be a bustling morning with the chamber full of Representatives, clerks and pages, on Thursday, April 19 the chamber was nearly deserted with just a few Representatives present. As of Tuesday, the last scheduled day and the 100th day of the session, we are in overtime. Our clerks’ jobs were done as of Tuesday and Thursday was the last day for the pages except for a handful that are assigned to the back offices. The large majority of Senators and Representatives have gone home for the weekend while leadership of both chambers and the Governor’s office negotiate the last few items of business required to shut down this session of the General Assembly.

At this time in the session, negotiations on the final details of the budget would be the impediment that would be blocking adjournment. This year that is not the case, it is tax reform that has stalled our progress. While there are continuing negotiations and compromise required to finish the final details of the budget we are very close on both the overall size of the budget, targets for the budget committees, and even down to the departmental budgets. We have been able to accomplish this much because tax reform will have very little effect on the Fiscal Year 2019 (FY 19) budget. The holdup has been the insistence by the Senate that the tax reform package be finished before they will agree to final budget numbers.

The conflict between the House and the Senate is in the size of the tax cuts that will begin in FY 20. Until last week, the Senate’s tax cut was double the size of what the House is proposing. The source of conflict is the assumptions made by each chamber in crafting their proposals. The Senate’s proposal could be achieved without affecting total revenue only if several variables all fall into place.

The first variable is to meet the Revenue Estimating Conference’s (REC) projection. House Republicans are very uncomfortable with this assumption because the revenue has fallen short of the REC’s estimate for the last four years.

The second variable is the estimate of the revenue increase the state will realize from federal tax reform. While our Legislative Service Agency’s reputation for accuracy in their projections is exemplary there are so many moving parts in the federal tax changes we want to err on the side of caution when it comes to predicting the increased revenue to the state.

The third area of concern is that the Senate has used projected revenue from sales tax on internet sales in their revenue forecast. Taxation of internet sales is currently before the U.S. Supreme Court and the outcome is not guaranteed. Also, projecting the revenue from this tax is problematic. There currently are no good models to predict how much Iowans are spending on line which makes projecting the revenue tenuous at best.

Another area that concerns many of us is the uncertainty in the agriculture economy. We have seen in just the last couple of weeks some major swings in agricultural commodity prices due to the volatility in world trade policy. While we have a solid and growing manufacturing segment and record low unemployment we are well aware that as goes agriculture, so goes Iowa.

With these concerns House Republicans decided that we needed to be much more conservative than our Senate counterparts. The House plan for tax cuts will leave an adequate cushion to absorb the fluctuations that can and will occur due to the aforementioned factors. At the same time it will maintain revenue growth to the state at a level that will sustain a responsible budget.

As of last week the Senate has come much closer to our number and the House has agreed to an increase in our proposal for tax reductions. While agreeing to increase our number will cut into the cushion that we had built into our plan we feel that there will still be adequate reserves to cover any contingency.       

Negotiations were ongoing through the weekend and as soon as a final agreement is reached on tax reform the budget will fall into place fairly rapidly. The logistics of moving the budget bills through committee and onto the floor in each chamber will probably prevent us from adjourning this week but we should be done by next week.