Iowa House speaker: Federal coronavirus aid may stymie Iowa tax cuts

Iowa House Speaker Pat Grassley speaks with the press after his swearing in on Jan. 13, 2020, at the Iowa Capitol. (Iowa Capital Dispatch photo)

Iowa Republican lawmakers’ plans to cut taxes this year may be stymied by language in the new federal coronavirus relief package.

House Speaker Pat Grassley, R-New Hartford, said Thursday the federal aid might prevent Iowa and other states from cutting taxes this year. Iowa is expected to receive an estimated $2.7 billion from the American Rescue Plan for state and local governments.

“I think there’s a lot of unanswered questions that exist right now. I think first and foremost, we need to get an answer on what the feds passed, the states taking that money if you even have the ability to pass tax cuts,” Grassley said during a meeting with reporters.

The federal bill approved by Congress this week prohibits states from using the federal dollars “to either directly or indirectly offset a reduction in the net tax revenue” or delays the imposition of any tax or tax increase.

Other states have been raising questions about what that means for tax-cut plans.  In Georgia, which is expected to receive $8.9 billion for state and local governments, Gov. Brian Kemp and other top GOP officials raised alarms about the potential effect on a state tax cut.

“Democrats in Washington and in the White House are not going to tell me, or the Georgia General Assembly, that we can’t cut taxes for hard-working Georgians,” Kemp said at a press conference Wednesday, according to the Georgia Recorder.

Republican U.S. Sen. Pat Toomey of Pennsylvania also said on Fox News Wednesday that the language in the $1.9 trillion relief package could block state tax cuts.  “That’s what this is about: dramatic expansion in the size of state and local governments that the federal government will control,” Toomey said, according to Fox News. “It’s terrible.”

The Iowa Senate Ways and Means Committee advanced a bill this week to phase out the state inheritance tax over three years and leaders are also working on plans to accelerate the 2018 income tax cuts. Gov. Kim Reynolds has called for action to eliminate requirements that hold off the next round of tax cuts until state revenues grow at least 4% compared to last year and hit a certain dollar amount in of just over $8.3 billion.

If that happens, the top income-tax rate will fall from 8.53% to 6.5%. The number of tax brackets will also be reduced from nine to four. Offsetting the tax reductions somewhat would be the loss of taxpayers’ ability to deduct from their state income taxes the amount they pay in federal taxes.

Lawmakers will receive a new official revenue estimate next week. If the state has reached the so-called revenue “triggers,” the expanded tax cuts would take effect without any legislative action. That situation would be unlikely to run afoul of the American Rescue Plan, the American Tax Foundation indicated in a recent analysis of the issue.  But passing a bill to remove the triggers might.

Grassley said even if the federal coronavirus relief wasn’t an issue, lawmakers in the House might not feel comfortable passing a $90 million to $100 million inheritance tax cut if the income-tax cuts are also being expanded.

“We’d like to work towards that. But, you know, (that’s) maybe a little bit more aggressive than we would be interested in at this point,” he said.

Grassley said GOP leaders are also not incorporating plans to spend the new federal money in their budget. “And the reason being is I think it’s going to make it very difficult without having all of those federal questions answered on us to be able to put together a budget,” he said.

Last year, the Legislature gave Reynolds the authority to determine how the federal CARES Act and other coronavirus relief money would be spent. But that happened after the Legislature suspended its session from mid-March to early June because of COVID-19.