Iowa Senate votes to shift mental health funding to state, eliminate 'backfill' payments to cities
The Iowa Senate has passed a sweeping tax proposal that would revise Iowa's mental health funding system, phase out property tax replacement payments to local governments and ensure Iowans see a series of income tax cuts begin in 2023.
The bill, Senate File 587, also includes a handful of changes affecting school funding and various state tax credit programs. It passed Tuesday evening on a 30-17 party-line vote.
"People need property tax relief. People also come forward year after year and say we need a better way to fund mental health. We do that in this bill right here," said Sen. Dan Dawson, R-Council Bluffs, the bill's floor manager.
The bill is the second major tax cut package Senate Republicans have passed in less than a month. On March 17, the Senate unanimously passed a bill to eliminate Iowa's inheritance tax and a pair of state revenue "triggers" that, under a 2018 tax cut law, state would need to hit by next year in order forincome tax changes to go into effect in 2023.
So far, the Iowa House has not taken up the previous proposal, and House leaders have has expressed caution at removing the tax "triggers," which Senate Republicans are also attempting to eliminate as part of Tuesday's bill. The new proposal will also face an uncertain future in the House.
►More: What are the income tax "triggers?"
Tuesday's passage also comes as uncertainty continues surrounding how funding from the federal stimulus package will affect Iowa's ability to cut taxes.
While Senate Democrats have voted for removing the triggers and the inheritance tax, they heavily criticized the new bill Tuesday. Sen. Joe Bolkcom, D-Iowa City, said he found it ironic Republicans want to end the "backfill" funding for local governments — which lawmakers promised to local governments when they approved sweeping commercial property tax cuts in 2013 — while making a commitment to take on mental health funding.
"This bill is a shell game," Bolkcom said. "It starts by breaking a promise that will result in a property tax increase and cuts to local essential services. It also makes a new promise that will be broken, as sure as I am standing here today."
Bill would change mental health funding, 'backfill,' income taxes
As proposed, the bill includes several changes to Iowa's tax laws, including:
- Shifting mental health and disability services funding from county property taxes to a fully state-funded system.
- Phasing out commercial and industrial property tax replacement payments given to local government over a period of four to six years.
- Starting in the fiscal year beginning July 1, 2023, increasing the level of school foundation aid from 87.5% of the state cost per pupil to 88.4% to offset revenue loss from the property tax replacement payments.
- Eliminating the "triggers" included in the 2018 tax law, which the state must hit in order for Iowans to see more income tax cuts in 2023.
- Eliminating the voter-approved Public Education and Recreation Levy, which is for building and maintaining public recreation spaces.
- Creating a property tax credit for Iowans 70 or older who make under 250% of the federal poverty guidelines.
- Repealing the charitable conservation contribution tax credit, which applies to property donated for conservation purposes, at the end of the current fiscal year.
- Adding restrictions to property tax exemptions for Iowa forest and fruit tree reservations.
The Senate approved an amendment with several technical changes to the bill Tuesday evening.
According to the nonpartisan Legislative Services Agency, the totality of the changes in the original proposal, prior to the amendment, would have decreased the state's general fund by approximately $60 million in the fiscal year that begins July 1. In the following two fiscal years, it would lead to a more than $270 million drop each year, with well over half of that attributed to the income tax cuts.
Bolkcom criticized the elimination of the backfill, saying that cities would need to raise property taxes or cut services to make up the difference. He called the mental health changes a "Des Moines takeover" of the system and said the state funding could be unreliable.
Sen. Jackie Smith, D-Sioux City, a former Woodbury County supervisor, said she also believes that local counties are best poised to oversee the mental health system.
"I believe the farther away the decision makers are — which in this case if you move this funding to the state — the less the decisions are going to match what the local needs are," she said.
Sen. Roby Smith, R-Davenport, during debate criticized Democrats of being the "boy who cried wolf," pointing to their criticism of the potential financial consequences of the 2018 tax cut package when it was passed. Those have not come true, he said.
"When it comes to predictions on budgets and taxes and other bills that might run here in this chamber, your track record is zero. Over and over and over again, you're wrong," he said.
Dawson said the bill would provide more money for mental health and would free the funding from local politics, treating Iowans across the state with equity.
He also said it's an ideal time to eliminate the backfill because Iowa cities are receiving funding through the pandemic relief bill and could be receiving a boost in federal infrastructure funding, as well, if Congress passes a package.
As Iowa files lawsuit, questions remain on tax cuts
Iowa's tax cut conversations have come as legislative leaders have acknowledged that questions remain as to how the latest federal stimulus package will affect Iowa's ability to cut taxes this year.
The state government expects to receive approximately $1.4 billion in new federal relief, which it will be able to spend on expenses through the end of 2024.
However, the federal government is prohibiting states from using the COVID-19 relief funding to cut taxes, directly or indirectly.
Iowa last week joined several other states in suing the Biden administration, saying that provision in the stimulus package "impermissibly seizes taxing authority from the states." Iowa has joined the suit at the request of Republican Gov. Kim Reynolds, but Attorney General Tom Miller, a Democrat, is not named in the suit like many Republican attorneys general are.
"Iowa’s fiscal health is strong and we are in a position to continue to cut taxes for hardworking Iowans next year," Reynolds said in a statement Tuesday. "We’re not going to stop, and we can’t have the federal government telling us no."
U.S. Treasury Secretary Janet Yellen said last month the act doesn't "deny states the ability to cut taxes in any manner whatsoever" but simply says the funding received through the package couldn't be used to offset such a reduction. She said the Treasury Department is creating more guidance.
Iowa's legislative leaders have indicated they're still seeking clarification on what the new federal funding means for their ability to cut taxes this year. Speaking with reporters on Thursday, House Speaker Pat Grassley, R-New Hartford, said legislative leaders continue to discuss how to handle the federal funding.
"That doesn't necessarily mean we can't do something," he said. "At some point as a legislature we're going have to decide what priorities we still have as a legislature that we would like to address, and we would be just hopeful that we would have some level of clarity. But it may get to a point we have to make decisions without the clearest picture that we may want to have."
Grassley and House Republican leaders have also been noncommittal on removing the tax-cut "triggers." The state's Revenue Estimating Conference on March 19 projected Iowa would fall just shy of hitting a key revenue growth goal to automatically trigger the tax cuts in 2023.
Grassley also indicated last week he wants to be engaged in conversations on restructuring Iowa's mental health funding but cautioned it's "a much bigger conversation" than funding. The conversations also include the governance structure and the services and differences from region to region, he said.
"It can't just be the conversation of the money; it has to be the conversation of the services because ultimately, that's what this is about," he said.
Senate Republicans have indicated they plan to propose a $60 million increase in mental health funding. House Republicans have not released a budget target for mental health.