Legislative Republicans are working on a massive tax deal. Here’s where they disagree.

GOP legislative leaders are still negotiating a major tax bill as lawmakers end a second week of session overtime. Shown here are House Majority Leader Matt Windschitl, left, House Speaker Pat Grassley and Senate Majority Leader Jack Whitver, R-Ankeny, in March 2020 at the Iowa Capitol. (Photo by Kathie Obradovich/Iowa Capital Dispatch)

Lengthy tax proposals are advancing in both the House and the Senate, each with intractable differences, as the Legislature trudges through its second week of overtime.

On many issues, the two chambers agree: accelerating income tax cuts, expanding eligibility for  child care tax credits, mandating telehealth parity and more. It’s a few big-ticket items, like the mental health property tax cut and the elimination of the property tax replacement “backfill,” where things get tricky.

Sen. Dan Dawson, bill leader for the Senate proposal, has been adamant that the Senate’s more expansive plan is the “pathway out of here.” Gov. Kim Reynolds spoke last week in favor of the plan, which she said represents $400 million of tax cuts for Iowans.

House Speaker Pat Grassley, R-New Hartford, has said his caucus already compromised on income tax cuts and is not comfortable making major mental health funding changes without more time to plan. 

House and Senate still far apart on some priorities

Mental health funding: The most controversial difference between the two plans is the Senate’s proposal to fund mental health services through a state appropriation, rather than county property taxes. Shifting the system would eliminate $100 million in property taxes statewide.

Advocates for the plan say the change would allow for more equitable service across the state and a steady source of funding while reducing burdensome property taxes. Critics, including House lawmakers of both parties and Senate Democrats, say the state is not prepared to run the mental health system.

Property tax backfill: The Senate plan would phase out the “backfill,” a promise to pay local governments back for property tax cuts enacted in 2013. The proposal includes language to ensure schools stay funded at the same level after the backfill ends.

“That was never meant to be a promise in perpetuity,” Dawson, R-Council Bluffs, said. “But if those (previous lawmakers) did make a promise on this, then that was a promise that was disrespectful to the Iowa taxpayer and disrespectful from an appropriations standpoint.”

Democrats have pointed to this proposed backfill change as evidence that the state may not uphold its commitment to fund mental health programs.

“The Legislature does not… have a good track record on keeping its promises on funds that we’ve promised to other communities,” said Sen. Pam Jochum, D-Dubuque.

Taxpayer Relief Fund: The fund was created in 2011 to set aside excess revenues after the state’s reserve and emergency funds are full. Money in the fund can be spent only for temporary cash-flow purposes or tax relief. The House would set a cap of $120 million for the Taxpayer Relief Fund. If the fund exceeded that amount, the money would become a tax credit for Iowans who filed individual income tax returns.

Rural economic development tax credit: The House proposal creates a new tax credit for businesses that open in rural Iowa. 

Food bank sales tax exemption: Nonprofit food banks would not need to pay sales tax on purchases for charitable use under the House bill.

Volunteer firefighter/EMS/reserve officer tax credit: Volunteer firefighters, emergency medical responders and reserve peace officers can claim a $250 tax credit instead of $100 under the House bill.

Consumer loans: The House proposal would raise the maximum interest rate of a consumer loan from 21% to 36%, matching the federal Military Lending Act.

Downtown Loan Guarantee Program: The Senate proposal would create a new program to encourage investment in main street areas. The program would receive funding through the Iowa Economic Development Authority (IEDA). 

Manufacturing investments: Under the Senate bill, the IEDA could issue grants up to $75,000 for manufacturers using smart technology.

Beginning farmer tax credits: The Senate plan would expand the Beginning Farmer tax credit program, removing a $50,000 overall cap and allowing farmers to participate for 15 years instead of 10.

Education and recreation property tax cut: The Senate plan would repeal the Public Education and Recreational Levy, which allowed school districts to receive extra funds through property taxes. 

Elderly property tax credit: Some Iowans over 70 will be able to receive a tax credit for their property taxes under the Senate bill.

Transit funding: The Senate proposes a hotel/motel tax with the goal of reducing property taxes for public transit. The plan would need to be approved by voters in the next general election. 

Same spirit, different execution

Inheritance taxes: The Senate proposal would phase out Iowa’s inheritance taxes by 2024. The House bill would take it slower, phasing out the tax over eight years.

Workforce housing tax credit: House would increase the workforce housing tax credit, a program to promote new housing developments in Iowa, from $25 million to $30 million. The Senate proposes $40 million for the upcoming fiscal year,  $35 million the next year, and then $30 million onward. 

High quality jobs tax credit: The bills would decrease the tax credit for the high quality jobs program from $105 million to $70 million. The program rewards businesses that bring new jobs and investment in Iowa. The Senate proposal also reduces the renewable chemical production tax credit from $10 million to $5 million. 

Many identical measures across proposals

2018 tax cut triggers: Both bills will remove the so-called “triggers” from a 2018 income tax bill. That will allow income tax cuts to take place in 2023, rather than waiting for the state’s tax revenues and growth rate to reach a certain threshold. When Reynolds signed the 2018 bill into law, lawmakers said the average state tax reduction for Iowans would be $300 annually.

Child care tax credits: Both bills raise parents’ income limitation from $45,000 to $90,000 for eligibility for child care tax credits. These tax credits reimburse parents for 25% of the first $1,000 spent on child care.

Telehealth parity: Insurance companies must reimburse mental health providers for appointments conducted electronically at the same rate they would for an in-person visit.

COVID-19 grant tax exemption: The proposals will exempt COVID-19 grants from income taxes.

High Quality Jobs Program: The IEDA can grant waivers to High Quality Jobs Program awards that were not compliant due to COVID-19. 

Housing Trust Fund: The Housing Trust Fund provides grants for low-income housing developments and funds local housing trust programs that help people purchase homes and maintain neighborhoods. Lawmakers propose to raise the cap from $3 million to $7 million in both bills.

Disaster housing and eviction prevention programs: Both bills would create housing programs to assist after a natural disaster and to prevent eviction.

Brownfields/grayfields redevelopment: The program to redevelop abandoned buildings and construction sites would be increased to $15 million.

Energy infrastructure loans: Both bills would create a loan program for energy infrastructure projects.

Paycheck protection program: Loans from the federal paycheck protection program are tax-exempt, even though some business expenses paid with those loans are still deductible. 

Bonus depreciation: Iowa law will conform to federal law for businesses claiming depreciation on equipment and capital assets.

Child care for high quality jobs: The IEDA could consider onsite child care as a bonus criteria for the High Quality Jobs Program.