Week seven brought major legislative action. The legislature passed historic tax reform on Thursday, a major priority of Governor Reynolds and leadership in both the House and the Senate for 2022. These recent developments, negotiations complete on tax reform by Week 7 and budget targets released in Week 6, are uncommon this early in the legislative session, with two weeks before the March REC on March 10 and three weeks to go before the second funnel on March 18. This sets the pace for an adjournment date on the scheduled 100th day (April 19) and conjectures around the Capitol about a possible early adjournment date. 

Tax Reform

Major tax reform has been the ultimate priority for the Governor and both chambers; it was highlighted in opening day remarks by leadership in the House and the Senate and was the focal point of the Governor’s Condition of the State Address. Leaders and floor managers have been crunching numbers and putting together language for weeks, well before the 2022 legislative session began. 

The Governor introduced her tax plan (HSB551/SSB3044) in Week 2 of the legislative session, and both the House (HF2317) and the Senate (SF2206) released their tax plans Week 3. This set the table early for negotiations to begin on a final 2022 comprehensive tax reform package.  The chambers needed to find compromise on the individual income tax rate, corporate taxes, and reorganization of the local option sales tax. House Republican leaders moved the (HF2317) forward during Week 6 (funnel week) in an attempt to start conversations with the Senate about the final tax plan.

This week, a final compromise was reached between Governor Reynolds, the House, and the Senate, and lawmakers made quick work of passing a sweeping tax reform proposal.  On Thursday afternoon, (HF2317) (as amended by the final agreement S-5022) passed the Senate 32-16 (two Democrats voted with the Republicans to support the bill). 

The House took up and agreed to the amendment, passing it 61-34 Thursday evening (two Democrats voted with the Republicans to support the bill). The House immediately messaged (HF2317) to the Governor for her signature. 

Included in the final version of the bill:

• Implementation of a flat personal income tax rate of 3.9% by Tax Year 2026.
• Elimination of the tax on retirement income in Tax Year 2023.
• Removal of the tax on capital gains upon the sale of stock related to employee stock ownership plans (ESOPs).
• Phases the corporate tax rate in Iowa to 5.5% percent from the current 9.8% as annual net receipts to the Iowa General Fund exceed $700 million annually.
• No elimination of the S-Corp Apportionment Tax Credit.
• No elimination of the computers and computer peripherals exemption for any taxpayer.
• Under the Research Activities Credit (RAC), supplies and computer use expenses are phased out as qualifying expenses as part of the credit calculation.
• Refundability for RAC is phased down to 50% in 5 years.

The Legislative Services Agency (LSA) scored the bill in a fiscal note on (HF2317) that provides an in-depth analysis of the impact of the bill. 

Statements made in response to the bipartisan vote to pass (HF2317) by the Governor and Republican leaders are below.

Governor Reynolds:

When I took office, Iowa had the sixth-highest individual income tax rate in the nation at 8.98%. I believed Iowans deserved better. Since then, I’ve worked with the Legislature across multiple sessions to make transformative changes to our tax code, let Iowans keep more of their hard-earned money, and make our state more competitive. Today’s bipartisan, consensus bill shrinks individual income tax rates to a flat and fair 3.9%, the fourth-lowest in the nation. It eliminates state income tax on retirement income, overhauls our corporate tax system, and accelerates the incredible momentum we’ve built since 2018.  

There’s never been a better time in Iowa for bold, sustainable tax reform. This bill rewards work, takes care of our farmers, and supports our retirees, all while protecting key state priorities. Iowans will reinvest these dollars in our economy, communities will prosper, and families will rest a little easier. Once again, we’re putting our faith in Iowans, and they won’t let us down.

Senate Majority Leader Jack Whitver:

For years Senate Republicans have promised to provide income tax relief and today, we kept that promise again. This tax bill is the third major tax relief package the Senate has delivered in the last 4 years. A nearly $1.9 billion tax cut creates an environment for more career opportunities for Iowans, gives Iowans more of an incentive to rejoin the workforce, and helps Iowans weather the impact of record-setting inflation created by the reckless policies coming from Washington, DC.

House Ways and Means Chair Lee Hein:

Because of the decisions made in this chamber and the leadership from the Governor, our economy is strong. So strong that we have a historic opportunity in front of us. With a billion-dollar surplus, another billion in the Taxpayer Relief Fund, and our rainy-day fund and cash reserves full – we can deliver the largest tax cut in Iowa history while continuing to fund Iowans’ priorities.

Democratic Response to the Tax Bill

Democratic senators proposed amendments that would expand the Child and Dependent Care Tax Credit and the Earned Income Tax Credit, keep current tax rates for Iowans with taxable income over $250,000, and limit retired farmer benefits to those who rent their land to beginning and young farmers.  Republican senators rejected all of those amendments.

Senator Wahls said that Democrats offered a fair tax plan that, “rewards work, not wealth. The Iowa Republicans’ tax plan rewards wealth, not work. The Republican plan rewards the ultrarich 100 times more than the average Iowa taxpayer. This plan is not fair, it’s out of touch, and it is completely disconnected from the lives of everyday Iowans. The Governor should scrap this plan, start over, and bring forward real solutions to the workforce crisis ravaging our state.”

Senate Democrats said that the Republican tax plan increases “the gap between the ultra-rich in our state and the average Iowa taxpayer is 112 to 1.” They said that the 3,000 Iowans making more than a million dollars annually will get a tax cut of about $67,000 and at the median income, Iowa households will get a tax cut of about $593.

Representative Jacoby said that the tax bill is being rushed forward to allow Governor Reynolds to sign the bill before she gives the Republican “State of the Union” response on Tuesday.  Jacoby said that 485,000 Iowans will get no benefit from the tax cuts and said that many other Iowans will get very little benefit from the bill.  Other House Democrats said that the bill is unfair and said that the average Iowan will need a century to get the same tax benefit as the wealthiest Iowans.

Budget Update

Typically, budget targets are not released until after the March Revenue Estimating Conference (REC). The March estimate represents the most current assessment of what will be available to spend so the legislature will build its budget using this as a baseline. Based on predictions from budget experts that the March 2022 REC will not be materially different than the December 2021 REC.

Both chambers released their budget targets last week. The House proposed spending $8.27 billion for the state budget which is about $70 million more than the $8.2 billion contemplated in the Governor’s budget and the Senate targets. A $70 million difference in targets is not regarded as significant and the expectation is that negotiations will close this gap quickly.

State of the Union Response

On March 1, President Biden will deliver his first State of the Union address.  On Monday, Senate Republican Leader Mitch McConnell (R-KY) and House Republican Leader Kevin McCarthy (R-CA) announced Governor Reynolds was selected to deliver the Republican Address to the nation from Des Moines, Iowa following the State of the Union.

Governor Reynolds made the following statement in response to her selection to deliver the Republican response:

Republican Governors across America are leading the charge in defending liberty and securing unmatched economic prosperity in our states. The Biden Administration is governing from the far-left, ignoring the problems of working-class Americans while pushing an agenda that stifles free speech, free thought, and economic freedom. The American people have had enough, but there is an alternative and that’s what I look forward to sharing on Tuesday evening.”

What’s next?

Next week (week eight), marks the halfway point in the legislative session and three weeks until the second funnel. Here is what we can expect:

• Continued floor action on House and Senate policy bills in advance of the second funnel deadline of March 18.
• With the release of budget targets in both chambers, there is a possibility of budget bills being introduced. If this occurs it will be very early relative to past legislative sessions.

Despite the quick progress on tax and budgets, there are still several priorities of the Governor and House and Senate leadership that need to be settled before adjournment, as well as several contentious issues. These priorities and issues could stand in the way of an early or on-time adjournment.