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Kim Reynolds proposes 1-cent sales tax increase to fund water quality, mental health, income tax cuts

Des Moines Register logo Des Moines Register 1/14/2020 Stephen Gruber-Miller, Des Moines Register
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Gov. Kim Reynolds is proposing a significant realignment of Iowa's tax system to fund water quality and mental health programs while promising to lower Iowans' overall tax bill.

The governor laid out her plan Tuesday in her annual Condition of the State address, made in the Iowa House of Representatives to an assembled crowd of lawmakers and interested Iowans.

The address — the second of her elected term — includes a mix of starkly conservative and widely supported policy planks. Her call for sweeping changes to Iowa’s tax system and a "pro-life" constitutional amendment is likely to win support from her Republican base. Her backing for more state funding of mental health care and a constitutional amendment to allow Iowans with felonies to vote is expected to find bipartisan support.

a large white building: Outside the Iowa State Capitol on the first day of the 2020 legislative session on Monday, Jan. 13, 2020, in Des Moines. © Kelsey Kremer/The Register Outside the Iowa State Capitol on the first day of the 2020 legislative session on Monday, Jan. 13, 2020, in Des Moines.

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Reynolds' tax proposal, which she calls the Invest in Iowa Act, calls for a 1-cent increase in the state sales tax, part of which will be used to fund water quality and outdoor recreation programs.

The Republican governor also calls for using the state's general fund to pay for a significant portion of mental health services. That would relieve Iowa's counties of the responsibility of paying the entire cost of mental health through property taxes, theoretically lowering those taxes.

Reynolds is proposing using the remainder of the sales tax revenue to offset a 10% income tax cut for most Iowans, with the cuts reaching 25% for the lowest-income Iowans. That's on top of a 2018 tax cut package that's still being phased in.

"Two years ago, thanks to so many of you in this room, we passed the largest income-tax cut in Iowa history. And I said then, and I’ve said ever since: That wasn’t a one-and-done," Reynolds said.

Reynolds said she would introduce legislation in the coming weeks outlining the details of the proposal.

READ: Gov. Kim Reynolds' full Condition of the State address

A sales tax increase and water quality funding

If lawmakers agree to raise the sales tax, the first three-eighths of a cent will be paid into the Iowa Natural Resources and Outdoor Recreation Trust Fund, which Iowans voted to add to the state constitution in 2010. Iowa has not raised its sales tax in the last decade, and the fund has sat empty despite frequent discussions about funding the trust.

The governor's plan would put the sales tax increase into effect on Jan. 1, 2021, bringing it to 8 cents statewide. It is projected to raise about $270 million in the first six months, and three-eighths of that would flow into the trust fund.

Reynolds said Tuesday that she wants to see changes to the formula for how to distribute the money in the fund. She said her bill would put about $100 million annually, or 58% of the fund, toward water quality efforts. Another $52 million annually would go to conservation and outdoor recreation efforts, she said.

"The challenges we face today and will face tomorrow are different than what we understood them to be 10 years ago, so it’s time to amend the formula," she said.

Reynolds signed a bill in 2018 that allocated $282 million for water quality initiatives over 12 years, which advocates criticized as inadequate. Her new proposal will incorporate several of the programs from the 2018 law.

Kirk Leeds, CEO of the Iowa Soybean Association, said some groups will resist the governor’s proposed changes to the fund’s spending formula, but water quality has become a significant priority over the past decade. In 2013, Iowa adopted the Nutrient Reduction Strategy, a plan designed to reduce the nitrogen and phosphorus levels that leave the state and contribute to the dead zone in the Gulf of Mexico.

“We all live in the realities of the political world … and will have to make some concessions to move forward,” said Leeds, whose group has supported a sales tax for the trust fund.

The Iowa Environmental Council said it wants more details about the possible changes to the fund’s original formula, which also includes spending on parks, trails and other natural resources.

But the group is “pleased and excited” with the governor’s proposal. Funding the trust fund “could be a real game changer,” said Ingrid Gronstal Anderson, the group’s water program director.

“It’s huge for all Iowans – for public health, for environmental health and economic development,” she said.

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An additional 10% income tax cut

Reynolds has repeatedly said she won't sign a tax bill unless it's a net reduction in Iowans' taxes.

"I have no interest in raising taxes, so any increase in revenue from a sales tax must be more than offset by additional tax cuts," Reynolds said.

If enacted, the governor's income tax proposal this year would take Iowa from a 9% top income tax bracket one year ago to a 5.5% top bracket by 2023, Reynolds said.

Her new proposal would build on the largest income tax cut in state history, which Republicans passed and Reynolds signed in 2018. The cuts from the previous law are set to phase in over several years and will not be fully implemented until 2023 — and only if the state meets certain revenue goals. That package was expected to cut state revenues by a total of $2.1 billion over six fiscal years.

While Democrats argued at the time that the tax cuts would bankrupt the state, Republicans have pointed to a budget surplus of more than $289 million and an estimate of 2.9% revenue growth in the next fiscal year as evidence that the state has the capacity to cut taxes further.

While Republican lawmakers have talked eagerly about tax cuts this year, some leaders, like newly elected Speaker of the House Pat Grassley, R-New Hartford, say the priority needs to be implementing the tax cuts that the Legislature passed two years ago.

► MOREIowa lawmakers begin 2020 legislative session touting workforce, child care plans — and a leadership change​​​​​​​

Senate Majority Leader Jack Whitver, R-Ankeny, called the governor’s tax proposal “a good starting point” for Republicans who have been supportive of making additional changes to make the state’s tax climate more competitive.

“It’s definitely a bold plan that has a lot of moving parts,” he said. “To put together all of the moving parts is going to be difficult, but that’s why we’re here: It’s to solve difficult issues.” ​​​​​​​

Senate Minority Leader Janet Petersen, D-Des Moines, said Reynolds has given Republican legislators their wish of a large-scale tax proposal, but she said she’s concerned about what effects raising the sales tax and reducing income tax would have on Iowans who are retired or have low income.  

"We want to take a close look on how that will pan out," she said. 

Funding mental health through the general fund 

Another aspect of the proposal would alter how mental health services are funded, taking the formula from a regional system funded entirely by county property taxes and bringing the bulk of it into the state's general fund.

Under the proposal, the state would pay about 70% of the expected $135 million annual cost of the mental health system, with counties responsible for the remaining 30%.

Reynolds said the establishment of a children's mental health system in Iowa, which she signed into law last year, is an important step "to putting Iowans on the path to wellness." Funding much of it through the state will provide stability and allow counties to lower their property tax levies, she said.

"No parent, family member, or friend should be told that treatment isn’t available for their loved one. And by establishing a dedicated and stable fund for mental health, we’ll give hope to so many who are suffering in silence. It’s a promise we made, and it’s a promise I intend to keep," she said Tuesday.

Petersen said Democrats want to make sure the funding for mental health will be available consistently.

“When we met with the governor’s office briefly before her speech, there was nothing in her proposal that guaranteed the state dollars would be there year after year," Petersen said. "For the state to be saying they’re going to pick up more of the cost, but then not assure local regions that those dollars will be there every year, is probably not going to make very many Iowans happy." 

Constitutional amendments on felon voting and abortion

Reynolds also renewed her call for the Legislature to pass a constitutional amendment automatically granting the right to vote to felons who have completed their sentences.

The Iowa House passed the measure on a 95-2 vote in 2019, but a Senate committee declined to take up the measure, killing its chances for the year.

Iowa is the only state in the country where felons have to apply individually to the governor to get their voting rights back.

Reynolds told the story of William Burt, a Waterloo man whose rights she recently restored. Burt now runs a barbershop.

"I recently called William to tell him that I was restoring his voting rights. And hearing those words brought tears to his eyes. You cannot imagine the gratitude and dignity that Iowans like William feel when they’re told that they can once again exercise what Ronald Reagan called 'the crown jewel of American liberties.'"

Burt said it was "mind-blowing" to hear his name mentioned by the governor. He said he was overwhelmed when Reynolds called him to tell him she had restored his voting rights.

"I was totally unaware that I was getting a call from the governor, and to hear her call, ask for me and tell me what she was doing, I shed tears instantly," he said.

Reynolds also called for the Legislature to pass a constitutional amendment stating that the Iowa Constitution does not protect the right to an abortion. That would nullify a 2018 Iowa Supreme Court decision that found the state constitution does protect abortion rights. Reynolds voiced her support for a similar amendment last year, although it ultimately did not pass.

"We must protect life by making it clear, through an amendment, that our constitution does not grant a right to abortion," Reynolds said.

House Minority Leader Todd Prichard, D-Charles City, said the proposal will be contentious.

"My position is that we respect a woman’s right to make health care decisions for her own body so I think that will definitely be a flashpoint," he said.

Constitutional amendments must be approved in two consecutive two-year sessions of the Iowa Legislature and then voted on in a statewide election, meaning the earliest either proposal could be put before voters would be 2022.

In the speech, Reynolds also proposed:

  • An additional $20 million for flood relief.
  • Making state early childhood tax credits available to families making $90,000, up from $45,000.
  • Eliminating the child care "cliff" by gradually phasing out assistance to higher earners (currently, a family loses all assistance after reaching a certain income level).
  • Streamlining Iowa's professional licensing system
  • An additional $2 million for the Renewable Fuels Infrastructure Program and an expanded E-15 Plus Promotion Tax Credit
  • $15 million for broadband internet
  • $103 million in new K-12 education funding, more than the $90 million approved last year
  • A $2.8 million increase each for the Last Dollar Scholarship and Employer Innovation Fund, part of Reynolds' Future Ready Iowa program, aimed at improved education and training for Iowa's current and future workforce.

Register reporters Ian Richardson and Donnelle Eller contributed to this report.

Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at sgrubermil@registermedia.com or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.

This article originally appeared on Des Moines Register: Kim Reynolds proposes 1-cent sales tax increase to fund water quality, mental health, income tax cuts

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