Introduction
The issue of tax reform is a crucial one for all policy makers in federal and state level. Tax reform is the process of changing tax policies to meet the developmental needs and economic changes by the government. Various reasons necessitate tax reforms, for example, simplifying the tax system or increasing the number of tax payers. In the US, both the federal and state governments are responsible for tax reforms. The US House of Representatives passed the tax reform in 2017 with the aim of overhauling business and personal taxes. The federal tax reform has impact on state taxation. According to Hendrickson (2018) with the Congress passing Tax Cuts and Jobs Act in December, the federal income tax burden was reduced for most Americans, but a majority of Iowans will incur more state tax burdens due to federal deductibility. Consequently, Iowa Governor Kim Reynolds came up with a plan to lower tax rates and simplify tax code in Iowa. The tax reforms will be responsible for the first income tax cuts in Iowa in 20 years of up to $1.7 billion in tax relief through 2023. The purpose of this policy paper is to evaluate the latest tax reform to identify the political actors involved, effect of the policy and make recommendations for policy implementation.
Policy Background
Tax reform makes up one of the most complicated public policies. Furman & Barro (2018) state that the last major tax reform was passed a generation ago, and in most cases the Congress has not managed to pass new reforms to overhaul the tax system in the US. After the formation of the nation, the founding fathers resisted creating income taxes and relied on tariffs. During the Civil War era, President Lincoln pushed for taxation through Congress taxing those with personal income of over $500 at 3% and those with income of over $10,000 at 5%. Congress immediately fought the income rate and it was repealed entirely in 1872. The 16 th Amendment brought income tax once again in 1913 to support the World War. The states began collecting taxes in the 1930s, and they are responsible for coming up with their own tax brackets. Iowa has one of the highest tax codes in the US, with 12% for corporate tax and a sales tax rate of 6%. Given the high rate of taxation and the recent federal reform, Iowa had no choice but to introduce tax reforms. The changes in federal tax code in December 2017 implies that Iowans will pay $148 million more in state taxes in 2019 budget year and $192 in 2020 budget year (Kaeding, 2017).
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State Policy Environment and Description of Political Actors Involved
Iowa State Legislature is a bicameral body just like the US Congress. It is made up of senate and the House of Representatives, the senate has 50 members and the House of Representatives has 100 members. There Republicans are the majority members in both houses in Iowa. The Governor acts as the chief executive officer of both houses and has the right to veto bills. The tax reform policy will be debated on both houses. The governor is the leader of the executive branch, and the other members of the executive branch include lieutenant governor, state comptroller, and the attorney general. There are other departments within the executive responsible for various functions, and the state comptroller and Iowa Department of Revenue has also drafted a plan to test the viability of the tax reform. The secretaries for different departments, particularly agriculture and commerce will also play a role as the taxation reform affects their departments.
Iowa tax reform bill was unveiled by Gov. Reynolds and acting Lt. Gov. Adam Gregg on February, 2018. A five-person subcommittee advanced the House Study Bill 671 aimed at changing Iowa’s tax structure drastically. Gov. Reynolds had given promises of tax reforms during his campaign with the aim of reducing personal income tax by $1.7 billion by 2023 and phasing out federal deductibility. The bill also seeks to reduce tax brackets from nine to eight. Gov. Reynolds is the most influential figure in the tax reform policy development, and she referred to the policy as the most significant tax reform package in decades. Like most bills, the tax reform policy will be discussed in senate after it has been put in the form of a bill by the drafting committee. Gov. Reynolds is the first female governor in Iowa. She worked as the Lt. Governor for the previous governor since 2011. Gov. Reynolds is influential given her many years in politics as she served as a senator before. Gov. Reynolds will use her experience and connection to seek support for the tax reform bill.
Republicans in Iowa Capital agree with the governor that there should be a tax reform, and they want to reduce tax rates before adjourning for the year (Hendrickson, 2018). Gov. Reynolds is working closely with the legislature to come up with the crucial pillars for the tax reforms. Iowa senators are in the process of evaluating the possible changes to the economy that will be caused by the new changes in taxation. Gov. Reynolds has attempted to sell her policy to all Iowa lawmakers regardless of their political affiliation to ensure that the plan is comprehensive and sustainable. Nonetheless, both the Republicans and Democrats still differ on the issue, which is why the Republicans came up with their own proposal for tax reforms.
As of April 2018, two proposals on changing Iowa’s tax plan had been developed by different stakeholders with vested interests (Powers, 2018). Another bill was proposed by the Republicans in the senate on February 2018. The second bill (senate bill) initially suggested an aggressive tax plan to cut $1.2 billion in tax annually before settling on $2 billion in tax cuts in the next 5 years. The bill also features in built calculations to calculate inflation and reduction of tax rates over the years. The bill created by the Republicans also suggests the reduction of tax brackets from nine to five. The difference between the bill proposed by the Governor (Reynold’s plan) and the senate bill is on the taxation of high income earners. The senate proposal suggests that high income earners at $75,000 and above should be taxed at a final rate of 6.3%, whereas in the Reynold’s plan, those earning $75,000 and above are in the seventh highest tax bracket taxed at a rate of 6.3%. The Reynold’s plan has an additional tax bracket for those making $160,965 and above where they are taxed at a rate of 6.9%. The senate bill was founded on the Governor’s bill and it touches on other issues such as federal deductibility, corporate tax rates, franchise taxation, agricultural taxation, funding the taxation reforms among other crucial issues. Alternatively, the Democrats continue to be skeptical about the plan claiming that tax reforms will jeopardize the state’s economy.
As of February 28, 2018, Iowa senate approved the tax reform bill. The Republicans cheered the move as a bold move that will slash the state revenue by approximately $1.2 billion (Pfannenstie, 2018). The bill was sponsored by Sen. Randy Feenstra, a Republican from Hull and also the Chairman of tax-writing Ways and Means Committee. The bill titled “Iowa Working Families Tax Act” passed because it was supported by Republicans who form a majority of Iowa legislature.
Policy and Political Analysis
The tax reform has received widespread support and criticism from different stakeholders pointing out the advantages and disadvantages of the bill. Gov. Reynolds and Republicans who pushed for the reform state that the reform will reduce the tax burden of Iowans. The quest for tax reforms started after federal reforms that would see Iowa’s tax burden go up by hundreds of millions. The Republicans supported the tax reform after it was introduced by the governor claiming that it was their responsibility to shield Iowans from increasing taxes. Gov. Reynold’s focused on reducing individual income tax, but the senate plan also reduce top corporate tax rate from 12% to 7% leading to a reduction in corporate taxes by an estimate of $267 million annually. Thus, the advantage of the reform is reduced income and corporate tax rates, and this will encourage entrepreneurship.
Another advantage of the bill is that Iowans will start experiencing tax cuts immediately in 2019. The bill will be in effect as early as 2019, but progressive reductions will be experienced over the years depending on the state revenue growth. Senators who passed the bill are open to further changes on the bill after a public hearing on the bill and other constructive criticism on the bill (Pfannenstiel, 2018).
The Democrats who opposed the bill felt that Iowa has a responsibility to balance the federal bill, and by passing the bill to get rid of federal deductibility and to reduce tax rates, Iowa will be neglecting its responsibility. According to Rep. Todd Prichard, the bill will reduce the state’s budget drastically when the state is in the process of balancing the budget (Pfannenstiel, 2018). Iowa is in the second year of de-appropriation, and by creating over $300 million tax cuts over the next five years, Iowa will have a problem in balancing its budget. Iowa will have a problem meeting its responsibilities to the residents if it reduces its budget drastically.
The tax reform bills affects all Iowa constituencies and a host of interested parties. The public hearing took place on April 9 2018 at Iowa state capital building. The public and representatives from banks, interest groups and unions engaged with House committee sponsoring the bill to explore the effects of the bill on respective interests. For instance, representatives from the bank were not pleased with the new state tax code that taxed banks for their profits while credit unions enjoyed “free ride” under the new state tax code (Lynch, 2018). Alternatively, the head of the credit union was pleased with the tax reform bill.
Other interested parties such as the Iowa State Education Association also voiced their concerns. Iowa State Education Association is worried that the massive tax cuts will have negative effects for public education (Pfannestiel, 2018). Education lobbyists presented the concerns of Iowa students, parents and members of the association. With the tax cuts, Iowa will have to reduce its spending, and the public education sector is likely to suffer the most.
The nonpartisan Iowa Policy Project (IPP) has criticized the republicans pushing for the tax reform bill claiming that it will benefit the upper class more than the middle and lower class. Supporters of the tax reform bill used the fact that the tax cuts will benefit the public, and yet the middle class is the biggest loser. According to the Tax Policy Center (TPC), by 2025, more than 50% of the tax cuts would go to the top 1 percent households, whereas middle class households get modest tax reduction of less than $800 in 2018. The top 1 percent will get an average of $37,000 in 2018. The politicians often support the interests of the top 1 percent who fund their campaigns. The middle class and the lower class stands to lose a lot as they will get modest tax reduction, and yet the accessing public services will be difficult as the state’s budget will be in a crisis.
Some of the interest groups that have been influential in lobbying for the tax reform bill. Iowa Taxpayers association lobbyists supported the bill (http://www.iowataxpayers.org/). The association is a business sponsored organization, hence it represented the interests of business people who wanted individual and corporate tax reduction. Americans for Prosperity, funded by Koch brothers also lobbied for the inclusion of corporate side in the bill, which is why the senate proposal included corporate taxes unlike the Gov. Reynold’s proposal (Russell, 2018).
Intergovernmental Relations
The tax reform affects three levels of the government. Iowa tax reform bill was inspired by the federal tax reform that overhauled the national tax code. The federal tax code meant that Iowa would pay more tax, hence Iowa tax reform was a response to the federal bill. Iowa tax reform bill is a detailed bill, three pages short from the federal tax reform bill (Walczak, 2018). The main issue of contention is the fact that Iowa would have paid an additional $138 million as of 2018, but with the new law, Iowa will not pay the extra tax to the federal government. Iowan’s aggregate tax federal tax liability will fall by $1.5 billion under the new law.
The law will also repeal federal deductibility which ties Iowa’s tax code to the federal policy in many ways. With the federal deductibility, Iowa’s taxes go up when the federal tax goes down, therefore, Iowa is often penalized for federal preferential treatment such as child tax credit. The federal government is not only affected by the reform as the local government will also feel the impact. The local government will have to make due with reduced budgets. By 2023, local governments will lose about $7.9 million in tax help. The local governments will have to look for alternative income to fulfill their responsibilities to the citizens.
Options and Recommendations
It is undeniable that Iowans have called for tax reforms in the past, which is why most of them supported Gov. Reynold’s to reform Iowa’s tax code. Individual income and corporate tax rates in Iowa were higher, and Iowans wanted changes because the previous tax structure was high, burdensome and confusing. According to Montgomery (2018) tax reforms would increase Iowa’s competitiveness, encourage investment and save money for Iowans.
A notable recommendation of the tax reform would be the elimination of wasteful spending on tax breaks that have little or no economic benefit to transform the regressive system. After the reforms, Iowa state government requires a stable revenue stream to fund public services.
Another recommendation is that economists, policy makers and interest groups should take more time to evaluate the tax reform bill as it was passed in a hurry, and the full financial effects are yet to be understood. According to Montgomery (2018) the bill was drafted with a lack of transparency by the Republican senators without including Democrats in the process such that the full financial impact of the bill remains a mystery.
In conclusion, Iowa tax reform bill is an ambitious piece of legislation aimed at eliminating federal deductibility and reducing tax rates. The tax reform was motivated by the federal tax reforms that would Iowa tax burden rise. The bill was supported by Gov. Reynolds and other republican representatives who believed that tax reforms would increase Iowa’s competitiveness. Some legislators and interest groups were not satisfied with the tax reform legislation, and hopefully their concerns will be address in future through amendments.
References
Barro, R. J., & Furman, J. (2017).The macroeconomic effects of the 2017 tax reform. Brookings Papers. Retrieved from: https://www.brookings.edu/wp- content/uploads/2018/03/4_barrofurman.pdf
Hendrickson, J. (2018, Mar.5). Tax reform delay will result in increases. The Gazette . Retrieved from: http://www.thegazette.com/subject/opinion/guest-columnist/tax-reform-delay-will- result-in-increases-20180305
Lynch, J. (2018, Apr. 9). Iowa tax plan - and what's not in it - debated at public hearing. The Gazette . Retrieved from: http://www.thegazette.com/subject/news/government/iowa-tax- plan-x2014-and-whats-not-in-it-x2014-debated-at-public-hearing-20180409
Kaeding, N. (2017, Dec.18). What Tax Reform Means for States. US News. Retrieved from: https://www.usnews.com/opinion/economic-intelligence/articles/2017-12-18/federal-tax- reform-will-have-impact-on-state-budgets
Montgomery, J. (2018, Feb. 27). Business officials react to Iowa tax-reform efforts. Telegraph Herald . Retrieved from: http://www.telegraphherald.com/biztimes/articles/article_79da7755-6e88-5b45-b2a8- 3d46081f147b.html
Pfannenstiel, B. (2018, March 1). Reynolds' plan to slash taxes gets first stamp of approval. Des Moines Register. Retrieved from: https://www.desmoinesregister.com/story/news/politics/2018/03/01/reynolds-plan-slash- taxes-gets-first-stamp-approval/386050002/
Russel, J. (2018, Mar. 1). War of the GOP Tax Cuts: House Takes Up Reynolds Plan. Iowa Public Radio . Retrieved from: http://iowapublicradio.org/post/war-gop-tax-cuts-house- takes-reynolds-plan#stream/0
Walzcak, J. (2018, Feb. 14). Iowa Governor Outlines Plan to Cut Rates and Repeal Federal Deductibility. The Telegraph . Retrieved from: https://taxfoundation.org/iowa-cut-rates- repeal-federal-deductibility/
