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Friday, March 13, 2020
This week, we've seen way too many headlines announcing another cancellation. Do you know one cancellation notice we haven't seen yet?

Canceled: high tax rates

There is a long-term economic risk if our policymakers or the public continue with inaction and lack of urgency for income tax reform. 

High income taxes will continue to act as a flashing “Keep Out” sign to people from out of state. Have you paid attention to our state’s population? People aren’t exactly flocking across our borders.

So, can we just cut spending and cut taxes?

Sure, but the reality is spending won’t be solved in one year in Iowa’s legislature. Spending changes alone also can’t be the sole tool to fix an income tax burden well above the national average. According to the Tax Foundation's 2020 Business Climate Tax Index, Iowa’s income tax burden ranks 42nd in the country, and Iowa’s tax climate ranks 42nd overall.

Can income tax reform that isn’t accompanied by major spending cuts actually work?  

Of course it can. Let’s look at what North Carolina has been able to accomplish since they tackled income tax reform in 2013. Prior to reforms in the Tar Heel State, North Carolina was ranked 44th in the Tax Foundation’s 2012 Business Climate Tax Index.

By combining a series of revenue triggers, expanding the sales tax base, and capping or eliminating tax credits, North Carolina steadily reduced its top personal income tax rate from 7.75% to 5.499% and reduced its top corporate income tax rate from 6.9% to 2.5%. North Carolina ranks 15th in the Tax Foundation’s 2020 Business Climate Tax Index.

North Carolina Tax Rates Reduction and Budget Growth:
While North Carolina was improving their tax code, the state budget kept growing at a rate of 2.7% in most years.

Tax reform isn’t always about slashing government’s budget--it’s about crafting a tax code that promotes growth, rewards productivity, and allows citizens to keep more of their hard-earned money. Government budgets can grow alongside the incomes of the people who fund them, while those individuals are able to keep a greater percentage of their income.

Controlling the growth of spending is necessary and reasonable, but good tax policy does not necessarily mean that the amount of revenue a state takes in will shrink; it simply means that the people of a state are able to improve their financial situations more rapidly than the government budget grows.

Gov't Red Tape Slowed Virus Testing

This section is not to spread political blame during a crisis, but only to point out how rules intended to help can become harmful when they are excessive and unnecessary.
After more than a month tracking the COVID-19 outbreak in China, it would be natural to expect the United States to have been prepared when the virus appeared here. However, early testing was slowed by regulation. 

According to The New York Times, an infectious disease expert from Seattle proposed repurposing tests from a flu research project to monitor for the coronavirus in late January. To do so, many federal and state officials would need to approve the idea.

The Centers for Disease Control and Prevention (CDC) told her she and her team could not test them unless their laboratory test was approved by the Food and Drug Administration (FDA). The FDA refused to approve Dr. Chu's test based on the fact her lab, according to the Times, "was not certified as a clinical laboratory under regulations established by the Centers for Medicare & Medicaid Services, a process that could take months."

The Times article noted: 
The Seattle Flu Study illustrates how existing regulations and red tape—sometimes designed to protect privacy and health—have impeded the rapid rollout of testing nationally, while other countries ramped up much earlier and faster. 
The CDC and FDA perform valuable work and are tremendously effective organizations. Once again, the intent of this email is to point out flaws in the regulatory structure, inform our members, and encourage lawmakers to create a more efficient government.

Iowa's Regulatory State

According to a Mercatus Center study, Iowa has 160,000 restrictive terms, such as “must,” “shall,” and “may not,” in state regulations. This is more than every neighboring state except Illinois, which is notorious for being a high-regulation state.
Administrative rules serve to supplement law where interpretation is in question. Some regulations are reasonable and necessary, but as the number of rules grows, the scope of government increases.

These rules can become overly complex and burdensome. Too many regulations drive up the cost of doing business beyond what is reasonable to protect health and safety. Those costs hinder economic growth and increase prices for consumers.

What's the Solution?

Iowa does require a legislative review of administrative rules, but as regulations continue to increase, the ability to thoroughly review every rule becomes extremely difficult. 

Regulatory changes in Iowa would not have impacted the coronavirus. However, legislators should consider methods of reducing state regulations that do affect Iowans. Lowering them to more reasonable levels will help Iowa grow and prosper, both for businesses and consumers.

Iowa's State Budget

Iowa's Revenue Estimating Conference (REC) said the state financial position is sound, but cautioned it is too early to calculate the impact of the coronavirus. 

The panel did lower their estimate for FY 2021 General Fund revenue to $8.236 billion, an increase of 1.8% over FY 2020. This amount is what legislators and the Governor will use to create the state's budget.

This amount sets the ceiling for spending, not the floor. By law, they will be limited to 99% of this total. Just because the state has money doesn't mean they need to spend it -- especially in uncertain times. 

The estimate also shows how close state revenue is to meeting one of the triggers needed to reduce income tax rates. Tax reform passed in 2018 will reduce Iowa's top individual income tax rate of 8.53% to 6.5% in 2023 if:
  1. State revenue grows to over $8.3 billion (FY 2021 estimate is $8.236)
    AND
  2. State revenue increases at least four percent that fiscal year
If BOTH items don’t happen, rates will remain high until those targets are met.

A Cedar Rapids Gazette article summarizes the tax reform positions of the Governor, Senate GOP leadership, and a member of the Iowa House. Senate President Charles Schneider says the Iowa Senate is working on one budget plan and doing various runs through the Iowa Department of Revenue that include accelerating 2018 income tax “triggers."

This year's legislative session is set to end in five weeks, and the budget is usually the last item addressed.

Eliminating the welfare cliff

Businesses across Iowa face a workforce shortage. House File 2424, a bill addressing the child care welfare cliff, was approved by a 99-0 vote last week in the Iowa House and is awaiting action in the Iowa Senate. This legislation is one solution to Iowa’s workforce problem.

In his weekly email, Rep. Chris Hagenow said, "The biggest piece of legislation that we are considering this year moves toward removing the ceiling on Iowans’ ability to be successful by addressing the “cliff effect” that many families face. The child care cliff effect occurs when an individual is stuck in welfare dependency and is limited in their ability to take a raise or promotion at work for fear of losing benefits."
"Our goal should be to empower Iowans to advance their careers, not create artificial barriers that disincentivize personal achievement." - Rep. Chris Hagenow
The bill would reduce the impact of the cliff and create an off-ramp, so benefits aren’t removed all at once. Workers can advance in their careers while gradually easing their way off government programs and toward self-sufficiency.

Stopping public assistance fraud

Next week is the second legislative funnel, a procedural deadline requiring legislation to advance to a certain point to remain eligible for passage in a given year. One bill that could fall to that March 20th deadline is SF 2272. Passed by the Senate on February 26th, the House has yet to take action on this bill that aims to improve the program integrity for various forms of public assistance. 

Program integrity means that Iowa’s Department of Human Services (DHS) would need to ensure that dollars for programs like Medicaid and SNAP would be spent on those who truly need assistance. Right now, these eligibility checks are being done manually, but the technology exists that would allow these checks to be automated, only flagging recipients whose paperwork shows discrepancies. DHS would need to upgrade computer software to automate eligibility checks for Medicaid and SNAP programs, and these checks would occur with much greater frequency, and likely much greater accuracy.

DHS workers do their best to prevent fraud, human error makes mistakes much easier. Unfortunately, these errors have added up to millions of lost taxpayer dollars. Just last August, the USDA found that Iowa had overpaid SNAP benefits by $40 million dollars and fined our state $1.8 million for the overpayment. Every dollar spent on someone who is drawing benefits in multiple states (dual enrollment), for instance, is a dollar that can’t fund services for those with truly urgent needs. 

What this bill DOES NOT attempt to do is implement work requirements for those utilizing public assistance programs. That is a separate issue that is considered in separate legislation. Program integrity efforts in other states have found shocking results that were costing taxpayers millions. It is time that Iowa upgrade their eligibility verification system within DHS to ensure tax dollars are being spent on those who are truly in need.

Legislation advancing this week:

  • Occupational licensing reform - SF 2392
  • Eliminating the welfare cliff - HF 2424
  • Limiting noneconomic damages against health care providers - SF 2338
     

No action taken so far this week:

  • Governor's comprehensive tax reform bill - SSB 3116/HSB 657
  • Stopping public assistance fraud - SF 2272
  • Inheritance tax elimination - SF 307
  • Spending limitation amendment - SJR 20
  • Income tax supermajority amendment - SJR 22
  • Occupational licensing reform (2) - HF 2470 and SF 2393
  • Taxpayer-funded lobbyist transparency - SF 2395
  • Motor vehicle mileage tax pilot program - SF 2107 (ITR opposes)
Take a look at our Legislative Update page for more details on and links to these bills. 

Speak Up and Be Heard!

Legislators are casting votes that will determine how much you pay in taxes. Be an advocate. Attend your legislators' local forums and speak up. 
 
FIND YOUR LEGISLATOR'S FORUM
If you can't attend a forum, click here to easily send them an email. We've done the work of looking up their email addresses. All you need to do is write your message and click send!

Recent ITR Watchdog Updates

March 6 - Government's moneyball

February 28 - Changing America with good ideas

February 21 - Government wants to ride in your car

February 14 - Unnecessary and excessive
It’s easy for politicians to yield to noisy special interest groups when the taxpayer keeps quietly paying the bills.
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