Massive tax proposal, with changes to mental health funding, passes House and Senate

Iowa lawmakers sent a sweeping tax proposal Tuesday to Gov. Kim Reynolds that will accelerate income tax cuts, eliminate the inheritance tax and fund the state’s mental health and disability services system through state appropriations.

“This is an easy vote for me,” Rep. Dustin Hite, R-New Sharon, said. “I’m going to side with the Iowa taxpayer.”

The House voted 61-27 to pass the bill early Tuesday evening. The Senate passed the same bill Monday by a 29-15 vote. Senate leaders said the plan would save Iowa taxpayers $1 billion over the next eight years. 

“Iowans asked for tax relief and the Iowa Senate has answered those calls,” Senate Majority Leader Jack Whitver, R-Ankeny, said in a press release.

House Democrats still oppose mental health funding changes, phaseout of the backfill

House lawmakers were initially skeptical of the Senate proposal to fund mental health and disability services through a state appropriation, rather than the current system of regional property taxes. Rep. Dave Jacoby, D-Coralville, urged his caucus members to vote against the proposed compromise and instead fight for the initial House proposal, which did not change the mental health funding system.

“Support the bipartisan House bill that we all worked hard on,” Jacoby said. “Don’t cave to the Senate.”

(The House did “cave” to the Senate by a 54-38 vote.)

The tax plan also phases out a 2013 “backfill” that replaced some previous cuts in property taxes. Democrats in the House and Senate pointed to the change as evidence that the legislature cannot be trusted to keep funding promises, though Republicans responded that the backfill was never necessarily a promise.

“The proposal in the bill strikes a fair compromise between property tax payers as well as the rest of the taxpayers that fund the state budget,” Hite said. 

What’s in the tax bill?

• 2018 tax cut triggers: The bill removes the so-called “triggers” from a 2018 income tax bill. That will allow income tax changes to take place in 2023, rather than waiting for the state’s tax revenues and growth rate to reach a certain threshold. The nonpartisan Legislative Services Agency estimated that the changes will represent a $297.6 million reduction in state income tax liability in 2023, and then more modest reductions in future years.
• Inheritance taxes: The proposal phases out Iowa’s inheritance tax by 20% a year over four years, resulting in a fully-eliminated tax in 2025.
• Workforce housing tax credit: The bill proposes a maximum Workforce Housing Tax Credit of $40 million for the upcoming fiscal year and then $35 million for future years.
• High quality jobs tax credit: The bill would decrease the tax credit for the high quality jobs program to $70 million. The program rewards businesses that bring new jobs and investment in Iowa. The tax bill will also reduce the renewable chemical production tax credit from $10 million to $5 million. 
• Mental health funding: The bill will fund mental health services through a state appropriation, rather than county property taxes. Shifting the system over the course of two years will eliminate $116.8 million in property taxes statewide.
• Property tax backfill: The bill will phase out the “backfill,” a promise to pay local governments back for property tax cuts enacted in 2013. Some cities and counties will phase out the backfill over four years, while others will have seven years to prepare.The proposal includes language to ensure schools stay funded at the same level after the backfill ends.
• Food bank sales tax exemption: Nonprofit food banks will not need to pay sales tax on purchases for charitable use.
• 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.
• Downtown Loan Guarantee Program: The bill creates a new program to encourage investment in main street areas. The program would receive funding through the Iowa Economic Development Authority (IEDA), but the tax bill does not appropriate any new funds. 
• Manufacturing investments: Under the bill, the IEDA could issue grants up to $75,000 for manufacturers using smart technology. The bill does not appropriate new funding specifically for this program.
• Beginning farmer tax credits: The bill expands the Beginning Farmer tax credit program, removing a $50,000 overall cap and allowing farmers to participate for 15 years instead of 10.
• Elderly property tax credit: Some Iowans over 70 will be able to receive a tax credit for their property taxes.
• Child care tax credits: The bill raises parents’ income limitation from $45,000 to $90,000 for eligibility for child care tax credits. These tax credits reimburse parents for up to 75% of child care expenses if the parents make less than $10,000 annually. Under the new bill, parents making up to $90,000 a year can claim a 30% tax credit for child care costs.
• 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 proposal 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 raising the cap from $3 million to $7 million in both bills.
• Disaster housing and eviction prevention programs: The bill would create housing programs to assist after a natural disaster and to prevent eviction.
• Redevelopment tax credit: 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.