Legislature will have hands full

The Iowa Legislature plans to reconvene June 3, two weeks from now, in a state much changed from when it recessed in mid-March.

The biggest question it will face is how to handle the budget for the coming 2020-21 fiscal year, which begins July 1.

The COVID-19 pandemic has sharply reduced taxable incomes of both individuals and businesses. The reduction will therefore cut state revenues from both sales and income taxes, which provide 90 percent of those total revenues. That in turn throws into limbo the revenue projections on which the Legislature, as required by state law, computes its budget.

A week ago, Gov. Reynolds and Iowa legislative leaders publicly asked the Iowa Revenue Estimating Conference (IREC) to meet again before the Legislature reconvenes on June 3. The three-member IREC is the agency that projects state revenues on which the budget is based.

The IREC meets regularly three times a year, including every December and again the following March. The December estimate gives legislators the general direction of state revenues so that budget planning can begin for the forthcoming fiscal year, but the March estimate is the one required by law as the official basis for budget drafting.

Because COVID-19 has wreaked such havoc with Iowa’s economy in the past couple months, the IREC is now asked to meet again to assess the damage. 

The IREC’s March estimate predicted Iowa economic growth at a slow 1.8 percent for the 2020-21 year, a reduction of $12.3 million from its December projection. 

That’s not a very impressive picture, but IREC said at that time that the state’s rainy-day accounts are full, and that the state should take a wait-and-see attitude toward the effects of a possible pandemic. It was too early to tell how the 2020-21 revenues would be affected.

That was just before the Legislature recessed because of COVID-19, and it proved prophetic.

Before its recess, lawmakers gave Gov. Reynolds the authority to extend the current year’s budget spending levels through August instead of the end of June. 

Gov. Reynolds back in January unveiled her blueprint for the 2020-21 budget in the form of her Invest in Iowa Act. The proposal generally follows one suggested two years earlier by Ron Corbett, former mayor of Cedar Rapids and former speaker of the Iowa House. 

At that time, Corbett founded Engage Iowa, a conservative think tank which advocates the basis of what Reynolds is now requesting: a one-cent state sales tax increase, with three-eighths of a cent to go for environmental improvements and the remaining five-eighths of a cent to reduce state income taxes. 

Reynolds’ Invest in Iowa proposal includes a one-cent sales tax increase, a 10 percent state income tax reduction, appropriations to improve water quality, and a reduction in local property tax rates by shifting mental health costs from counties to the state.

Whether now is a good time to increase sales taxes and reduce income taxes, given the significant effects of the pandemic on state revenues, will be the subject of intense debate in the Legislature if the governor’s Invest in Iowa proposal serves as the foundation for the 2020-21 budget.

Both parties’ legislative caucuses are divided on the proposal. 

Republicans, while most would favor reducing income taxes, are reluctant to increase any tax rates, including the sales tax. Democrats would like to support water quality improvement, but generally oppose replacing the income tax, which taxes incomes of the well-to-do at a higher rate, with a sales tax increase, which weighs proportionally heavier on Iowans of modest resources.

There are many moving parts to the proposal. Last year, the Republican-dominated Legislature adopted, and Gov. Reynolds signed, legislation that would reduce state income tax levels once a “trigger” level of a state revenue increase is reached. 

Some Republicans now would like to eliminate the trigger and immediately institute those state income tax reductions. To do so in the Time of Coronavirus is a dicey proposition, especially since Iowans with higher incomes received most of the benefits of the federal trillion-dollar income tax reduction last year.

What’s more, Iowans a few years ago overwhelmingly approved the amendment to the state constitution which provided that the first three-eighths of one percent of any sales tax rate increase would go for environmental improvements. 

The governor’s proposed budget agrees to that, but shrinks its effect by using much of the new sales tax revenue simply to replace existing environment expenditures from the general fund. That’s not what Iowans voted for with the constitutional amendment.

Also hanging out there is the “backfill” money with which the state every year replaces the funding that local governments lose from the local property tax rate reduction that the Legislature enacted several years ago. Local governments have been chronically nervous that the backfill funds might disappear. That possibility is probably more likely when state revenues dry up, as they are likely to do now.

What’s more, Iowa law requires the Legislature to set the level of school funding early in the session each year so that school boards can budget for how much state aid they will receive for the coming year. Lawmakers did that this year, with a promise of a 2.3 percent increase in 2020-21. Will legislators leave that figure as is, or will they be tempted to reduce it?

Another question: Iowa officials have decreed that state income taxes for 2019 can be delayed until July 31. That’s a month after the current fiscal year ends, and it includes many millions of dollars on which the state depends for its current 2019-20 fiscal year budget. How will those funds be treated for budget purposes?

Everyone in state government, and local governments as well, will be anxiously awaiting the IREC’s revised revenue estimate for 2020-21.

A whole lot hangs in the balance, for millions of Iowans.