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Legislative update from Iowa Republicans

The following is a legislative update from Iowa Republicans:

House GOP Kickstarts work on Budget Bills

Action on the Fiscal Year 2019 budget kicked into high gear this week, as both the House and Senate released their proposed budget targets and the House Appropriations Committee passed the first five budget bills of the year.

On Monday, House Republicans released their budget targets for the next fiscal year. The plan proposes to spend $7.4892 billion in FY 2019, which represents an increase of $234.9 million or 3.2 percent over the current year’s budget. The total budget spends 98.1 percent of available revenues, thus complying with the 99 percent expenditure limitation law. Much of the increase is to complete the promise made to repay the funds borrowed from the Cash Reserve Fund in FY 2017. The targets also provide a sizable increase for Medicaid, as well as funding the commitments made earlier this year to K-12 education. Additional funding is also provided for the state’s judicial and justice systems.

With the release of the targets, House budget subcommittees were able to commence their work in crafting budget bills. On Wednesday, the House Appropriations Committee took action on five budget bills that the House is responsible for starting. The committee moved the following bills forward:

House File 2491 – Ag & Natural Resources Appropriations
House File 2492 – Justice Systems Appropriations
House File 2493 – Economic Development Appropriations
House File 2494 – Transportation Appropriations
House File 2495 – Judicial Branch Appropriations
Actual bill language and LSA fiscal analysis can be found at:

Later that afternoon, Senate Republicans released their spending plan for FY 2019. The two sets of targets are surprisingly close, with the House proposing to spend $5 million more. Much of this difference is due to the amount of money being repaid to the Cash Reserve Fund. The chart below shows the numbers and the differences:

US Supreme Court Hearing on Internet Sales Tax Gives No Clear Signal
States and internet retailers paid close attention to the arguments heard Tuesday in the United States Supreme Court, as South Dakota’s challenge to the Court’s 1992 decision prohibiting states from collecting sales tax on businesses without a physical presence in their state. Anyone hoping for a clear signal of whether or not the Court would overturn the Quill decision was disappointed after the hour-long argument ended.

The challenge focuses on the case of Quill Corp. v. North Dakota, where the Court ruled that states were not allowed to assess sales tax on a transaction with a business that does not have a physical presence in the state. North Dakota had attempted to collect use tax on office equipment that Quill had shipped into the state. Quill challenged the legality of the tax on the transaction, since they did not have a presence in the state. The ruling effectively prevented states from assessing sales tax on transactions via the internet. But the decision did not completely close the door on the issue, as the majority opinion said that Congress could take action to allow states to assess and collect the tax.

In 2015, Associate Justice Anthony Kennedy signaled an interest in taking another look at the Quill decision since the economy has significantly changed with the growth of e-commerce. South Dakota took the hint, and the legislature crafted a law that directly challenged Quill. As expected, several e-retailers challenged the law in court and South Dakota’s law was overturned. Last fall the US Supreme Court agreed to hear the case, starting the speculation game as to whether there were the votes to allow states to begin imposing sales and use tax on all internet transactions.

Tuesday’s hearing on South Dakota v. Wayfair Inc. was driven by South Dakota’s argument that the ruling in Quill did not make sense in the 21st century economy with a growing amount of commerce occurring on the internet every day. South Dakota was supported by the Trump Administration, with the Department of Justice appearing in support of the states’ position. Retailers countered that imposing sales and use tax on internet taxations violated the Commerce Clause. They also stated that allowing states to collect this would create a significant burden on retailers in having to comply with varying tax rates.

In order for a case to be heard by the Supreme Court, there must be at least four justices willing to hear it. Once the Court announced that they would hear South Dakota’s challenge, many began to project that the members of the Court were willing to reverse their previous stance in Quill. But after Tuesday’s arguments, even the most veteran Court observer would be hard-pressed to predict the verdict.

Four members of the Court – Justices Kennedy, Thomas, Ginsburg, and Gorsuch – have, verbally or in writing, expressed an openness to overturning Quill. Several of these members continued to question that decision. But there were an equal number of members who were suspicious of South Dakota’s arguments. This line of questioning was pushed by Justice Sotomayor, who said overturning Quill would raise another set of questions that the Court would have to settle. Sotomayor expressed a frustration that Congress had not acted to fix the issue. This led two other members – Chief Justice Roberts and Justice Kagan – to contend that Congress’s lack of action may actually be action to prevent states from collecting the tax. And Justice Alito questioned whether state and local governments were viewing the case as a fiscal lifeboat for those states that are “tottering on the edge of insolvency and municipalities, which may be in even worse position, have a strong incentive to grab everything they possibly can?”.

Justices also complained that neither side had presented an effective or understandable argument on how difficult it would be for a government to collect the tax and on just how much money could be generated from allowing its collection. The cost of complying with South Dakota’s law could range from $12 to $250,000. Justice Breyer’s concerns over the lack of reliable information brought a surprising response from Justice Ginsburg, who speculated that the entrepreneurs of America would create a solution.

The breakdown of ideological lines in this case makes predicting the result very difficult. With free-market conservatives like Thomas siding with liberal-leaning Ginsburg to voice doubts in Quill, and Alito, Sotomayor, and Kagan forming an unusual coalition in support of limiting state taxation, there is no clear message from the Court’s interactions on the case. It is likely that the Court’s decision will be one of the last ones announced late in June.

Inside the Numbers of Iowa’s Nation-Leading Graduation Rate

Iowa’s graduation rate has been a source of pride for some time now, leading the nation yearly and being the first state in the nation to surpass the 90% mark a few years ago. The latest data out of the Department does show a slight dip this latest year (91%, down from 91.3%) but it’s certainly no indication of a failure. The trend is increasing, not only statewide but in nearly every subgroup. And that’s worth digging into a bit further, as the Department of Education did last week.

Since 2011 Iowa’s 4-year graduation rate has climbed 2.7%. Within that number there has been significant long-term gains in nearly every student demographic subgroup. The graphic created by the Department shows these results:

House Ways & Means Passes Sweeping Middle Class Tax Cut

House File 2489 passed the House Ways and Means Committee by a party line vote this week as Iowa Democrats appear to be taking their cues from Nancy Pelosi and Washington, D.C. The Republican plan reduces income taxes for 90 percent of middle class Iowans with an average reduction of nearly nine percent. A family of four making $52,000 a year would see their taxes cut by 14.4 percent. That is real money going back to Iowans.

The bill starts with changes to tax year 2018 that most people would think of as traditional coupling provisions. A few of the tax year 2018 provisions are directly related to the tax reform passed by congress last December. One of the highlights of the 2018 changes includes an expanded definition of qualified education expenses under the 529 education savings plans. This change will let Iowans withdraw money (with no penalty) from a 529 plan to pay for K-12 tuition expenses. Probably the biggest coupling provision in tax year 2018 is the Section 179 coupling. House file 2489 raises the Section 179 limit to $100,000/$400,000, a number up from current law’s $25,000/$200,000.

House File 2489 then moves on to provide additional reforms in tax year 2019 (as well as continues the 2018 provisions). Those reforms include:

– Raising the standard deduction to $3,000 single/$7,500 married up from $2,070/$5,090.
– Allowing 25 percent of the federal qualified business income deduction from Iowa taxable income (an effective 5 percent deduction).
– Decoupling with the federal repeal of like-kind exchanges (1031).
Additional coupling provisions.
– Reducing individual income tax rates. Starting in tax year 2019—reducing all individual income tax rates between 1 to 5.6 percent.

House File 2489 then turns to tax year 2020 and makes two important changes. It increases the Section 179 limit to $250,000 and does another round of rate reductions. This time the rates are reduced another 1 to 11.1 percent.

The House Republican plan does not address corporate income tax rates. It does not use state dollars currently going to local governments as part of the commercial property tax backfill. The plan also does not impact the House Republican commitment to repay all money borrowed from the cash reserve accounts this year.

Aside from a tax cut for the middle class, the bill modernizes Iowa’s sales tax code by bringing it into the digital age. Additional sales tax revenue generated by this modernization continue to flow to schools through SAVE (Secure an Advanced Vision for Education). SAVE dollars are used for school infrastructure purposes or local property tax relief. There are additional provisions that expand Iowa’s Sales Tax base by more than $100 million when in place for a full fiscal year.

House File 2489 is fair and sustainable tax reform that puts money back into pockets of hard-working Iowans. It directs an income tax cut to the middle class taxpayers while maintaining a responsible state budget. House File 2489 will reduce state revenue by about $100 million in fiscal year 2019 and about $200 million in fiscal year 2020. These numbers fit into the House Republican budget targets and are a long-term sustainable mechanism for returning money to the hard-working people of Iowa.

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