Kim Reynolds wants more tax cuts, and she wants to do that by removing the 'triggers.' What does that mean?
Specifically, Reynolds, a Republican, called for removing certain revenue goals that the 2018 law requires the state to meet before some of the income tax changes can be implemented.
"We aren’t looking at tough budget cuts, and we’re certainly not looking at raising taxes," Reynolds said, praising Iowa's fiscal health amid the COVID-19 pandemic. "If anything, we need to continue the conversation about cutting taxes, and we can start by getting rid of the unnecessary triggers that were put in place in 2018."
Here's what the triggers are and what it might mean to remove them:
What kinds of taxes are we talking about here?
The pending changes all involve income taxes. Many aspects of the 2018 tax law are already in effect, but other taxes were meant to be slowly reduced over time.
There are three main provisions in the law that currently won't be activated until the state has certain cash amounts in its budget and the state's economy hits specified highs.
Those trigger-dependent tax changes are:
- Lowering the top individual income tax rate from 8.53% to 6.5%.
- Reducing the number of Iowa income tax brackets from nine to four.
- Ending the ability to deduct individual income taxes paid to the federal government.
(That last point, ending so-called federal deductibility, would raise state income taxes for individuals who have been allowed to deduct what they paid in federal income taxes from the income they list on their state returns. But because their state tax rate would be lowered, many would still come out ahead. Economic development leaders have argued for the change, saying federal deductibility makes Iowa's income-tax rates appear artificially high when compared to those of other states.)
Reynolds, who signed the 2018 law, has also left open the possibility of considering further tax cuts.
In documents outlining her policy and budget proposals for the legislative session, Reynolds says the state can look at making tax cuts even sooner, in 2022, and "reassess the budget and look for opportunities to reduce income taxes even further."
So what are the triggers?
The triggers are a pair of revenue goals included in the 2018 law to make sure that the state budget is healthy. The goals are:
- Iowa's general fund revenue must equal or exceed $8,314,600,000.
- State revenue must grow by at least 4% from the previous fiscal year.
Both triggers must be met for the changes to take effect Jan. 1, 2023. If they are not, the next phase of the tax cuts has to wait until at least the following January — assuming both triggers are met before then. So, failure to meet both triggers would delay the implementation of the changes by at least a year, as the law is currently written.
Has Iowa met the trigger requirements?
Iowa's latest revenue projections, from the state Revenue Estimating Conference, estimate that the state will take in $8.266 billion in fiscal year 2022, falling short of the first trigger.
The REC projects that state revenue will grow by 3.7% from fiscal year 2021 to fiscal year 2022, which would also fall short of the second trigger. Those predictions could change as the effects of the pandemic on Iowa's economy become clearer.
If it hadn't been for the pandemic, Reynolds' staffers believe the state would have been on track to meet both the triggers in fiscal year 2022. As it is, they expect the state will meet the triggers the following year. That means removing the triggers would move the timeline up by one year and allow the tax cut to go into effect in 2023 instead of 2024 or even later.
How would the tax changes affect state revenue?
An analysis of Reynolds' proposal by the nonpartisan Legislative Services Agency estimates that removing the revenue triggers and implementing the tax changes in 2023 as Reynolds is calling for would decrease state revenue by $157.2 million in fiscal year 2023.
A separate analysis conducted by LSA in November, before the most recent revenue estimate, predicted that implementing the relevant section of the 2018 law beginning in 2024 would cause the state to lose more than $1.6 billion in revenue between fiscal year 2024 and fiscal year 2027.
By year, the $1.6 billion in revenue loss breaks down like this:
- FY 2024: $9.9 million
- FY 2025: $344 million
- FY 2026: $502.3 million
- FY 2027: $788.1 million
The corresponding reductions in individual income taxes over those calendar years are estimated at:
- 2024: $341.5 million
- 2025: $291.3 million
- 2026: $762.1 million
- 2027: $825.6 million
(UPDATE: On Jan. 19, LSA published an updated estimate of the reductions to state revenues and individual income taxes, based on projections from a new tax model created by the Iowa Department of Revenue. The new model predicts the state's revenue would be reduced by about $1.25 billion over four years, rather than $1.64 billion.
The updated projections for the reduction in state revenue by year are:
- FY 2024: $124.5 million
- FY 2025: 294.3 million
- FY 2026: $378.5 million
- FY 2027: $455.4 million
The new estimates for reductions in individual income taxes are:
- 2024: $239.6 million
- 2025: $286 million
- 2026: $415.5 million
- 2027: $440.3 million)
What do lawmakers think of removing the triggers?
Democrats, who opposed the 2018 law and will likely oppose removing the triggers, have noted the loss in revenue and highlighted that the wealthy will receive a larger share of the tax cuts.
"The triggers aren’t going to start taking effect for another three fiscal years, but when they do take effect the impact will be staggering and they are going to dramatically hamper our ability to make these kinds of investments like we need in broadband, in child care, in health care, in affordable housing and so many of the other things that we heard about tonight," Senate Minority Leader Zach Wahls, D-Coralville, said Tuesday following Reynolds' Condition of the State speech.
Reynolds may also face a split among Republicans on the issue. While GOP lawmakers generally say they are interested in pursuing further tax cuts, leaders in the House and Senate are divided on the triggers.
Senate Majority Leader Jack Whitver, R-Ankeny, said Tuesday night that Senate Republicans have wanted to eliminate the triggers for years, and he believes the governor’s proposal is “a great starting point” for a wider discussion on tax relief.
“There are many other areas of our tax code that need improvement, and I know the governor is willing to work with us on what those areas might be,” he said.
House Speaker Pat Grassley, R-New Hartford, said House Republicans want to be involved in discussions about tax cuts but have historically supported the triggers.
“That was something that has been very important to our caucus, and when the tax bill was passed, that was one of the pieces of it,” he said.
Correction: A previous version of this article misstated the rate at which Iowa's revenue is expected to grow between fiscal year 2021 and fiscal year 2022. The projected rate of growth would not be enough to meet the second trigger.
Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at firstname.lastname@example.org or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.