Legislative leaders still uncertain about effect of tax-cut plans on federal COVID relief

Iowa lawmakers may have to decide whether to proceed with plans for tax cuts before knowing for sure if the action could jeopardize federal coronavirus relief dollars, House Speaker Pat Grassley said Thursday.

Grassley, speaking with reporters before a Senate committee meeting, said the status of any tax cuts remains uncertain because of restrictions in the latest federal coronavirus relief measure.

The federal legislation prohibits states that accept the federal money from using it to offset revenue losses due to tax cuts.

Iowa is expected to receive about $1.38 billion for state government from the federal program and $153 million for state infrastructure or other capital projects. More money will be  earmarked for local governments or made available to individual Iowans or businesses.

Grassley questioned whether the state would have obtain guidance from the Treasury before lawmakers decide how to proceed. The 2021 legislative session is scheduled to end the last week of April.

“I don’t know if we’re going to actually have a decision and an actual solid ruling from the feds on that,” Grassley said. “So I think it’s going to have to be a decision as a Legislature: Do we want to make that decision that we’re still going to look at what options are available to us here at the state and what potential tax adjustments may be out there to do?”

The Senate has passed a bill eliminating Iowa’s inheritance tax and accelerating income-tax cuts under an a law passed in 2018. The income-tax measure is also in a separate bill that passed the Senate Ways and Means Committee Thursday, addressing a variety of property taxes.

Grassley suggested Iowa and other states may have to make decisions on tax cuts without detailed guidance from the U.S. Treasury.

“I know that Iowa is not the only state facing this level of uncertainty. And so at some point, legislatures will have to make the decision at the time they have as much information as possible,” Grassley said.

Asked whether GOP legislative leaders might consider turning down the federal money, Grassley said,  “Well, I’m not saying that the state wouldn’t take the money.”

U.S. Treasury Secretary Janet Yellen offered a brief interpretation of the tax provision this week in a letter responding to Republican attorneys general from 21 states who wrote to question the tax-cut restriction.

“Nothing in the Act prevents States from enacting a broad variety of tax cuts,” Yellen wrote. “… It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.”

She said states that use the federal funds to offset a reduction in tax revenue wouldn’t forfeit their entire allocation of federal coronavirus relief, just the portion used to offset the tax cuts.

However, Yellen did not say how Treasury would define an “offsetting” net revenue reduction. She said the agency is crafting further guidance.