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Lawmakers in Washington passed massive tax cuts and changes in late 2017. Now Iowa lawmakers are attempting a similar approach raising questions about deficits and economic growth. We sit down to talk taxes and spending with Senators Charles Schneider and Bill Dotzler on this edition of Iowa Press.

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For decades, Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Now celebrating more than 40 years of broadcast excellence on statewide Iowa Public Television, this is the Friday, February 23 edition of Iowa Press. Here is David Yepsen.

Yepsen: One of the original principles of republican tax policy was deficit neutrality, meaning any tax cuts would be met with compensating revenue increases or spending cuts. Republicans in Washington bucked that philosophy to the tune of more than a trillion dollars in potential deficit impacts in a late 2017 tax cut vote. Now republicans in Iowa have proposed historic tax cuts and changes with estimates exceeding a billion dollars in annual lost state revenue, or savings to taxpayers, depending on your point of view. So we have gathered a pair of lawmakers to sort through it all, republican Senator Charles Schneider of West Des Moines chairs the Senate Appropriations Committee and democratic Senator Bill Dotzler of Waterloo serves on the Senate's Tax Writing Ways and Means Committee. Gentlemen, welcome back to Iowa Press. It's good to have you with us.

Schneider: Thanks for having us.

Dotzler: Great to be here.

Yepsen: Across the table, Erin Murphy is Des Moines Bureau Chief for Lee Enterprises and Kay Henderson is News Director at Radio Iowa. Gentlemen, I'd like to open our conversation today with just a simple question. And Senator Schneider I'll start with you. What does this Senate tax bill do? It's a huge bill. What is all in it? What are the high points in it?

Schneider: Well, basically to state it simply, what this tax plan does is it charts a course to move us from one of the worst tax climates in the United States to one of the best, most attractive. Our tax code over the last several years has become a hodgepodge of tax deductions, credits and exemptions that have largely been put in place to mask high tax rates. We have the fifth highest personal income tax rate in the U.S., we have the highest corporate income tax rate in the U.S. ad that makes us uncompetitive. So what we're trying to do is lower rates, make our tax code simpler by fully coupling with the federal tax changes that have been made. That will result in less time and paperwork for families and small businesses to file their taxes. And we level the playing field, we modernize our sales tax code, we sunset tax credits which we won't need anymore because we have more competitive rates. So to sum it up, what we're trying to do is bring our tax code into the 21st century and make us more competitive.

Yepsen: Senator Dotzler, what is the democratic view of what the republicans are trying to do?

Dotzler: Well, I think first of all Senator Schneider didn't tell the whole story when it comes to our tax structure because we have something called federal deductibility that lowers that apparent rate. But the real question is I think we're sitting on a billion dollar bill that is really a true mystery to what is all in it and how it's going to work. And so we really think that we ought to spend more time to look at this, look at the ramifications and move through the process. And may I add that Senate, or House republicans in their recent newsletter, said that they had no idea or no cooperation with the Senate on this bill and it would take them several days for them to even figure out what was in it. And so we really think we ought to spend more time and slow the process down and really truly understand what a billion dollar tax bill would do to Iowa.

Yepsen: Well, we'll get into the weeds now. Kay?

Henderson: Senator Schneider, the Governor unveiled a plan last week which cut individual rates by 23%, you folks cut it by 30%, hers was a six year phase in, yours is immediate and you include all sorts of other things that the Governor didn't do. What was wrong with her plan?

Schneider: There was nothing wrong with her plan. There are different ideas. I think it's healthy to have different perspectives on the same issue. The same issue we're trying to address is an uncompetitive tax system. We rank 40th out of the 50 states according to the Tax Foundation. Senator Dotzler mentioned federal deductibility, nobody knows what that is. We're one of two states I believe that still has this archaic deduction. The Wall Street Journal ran an editorial in December that listed the top 10 or 15 or 20 different states with their tax rates, they didn't even have an asterisk next to our rate which was there at number 5. So some organizations when they list different tax rates don't even pay attention to federal deductibility or try to understand it.

Henderson: Well your bill cuts corporate rates, it changes the taxes on financial institutions in this state, it does a whole host of things. Have you promised the moon here and made it more difficult for people like Governor Reynolds to seek re-election when you have promised the moon knowing you can't deliver?

Schneider: What we've done is we have introduced our own plan to make our tax system more competitive. The Governor has introduced hers. We still have to work with the House to put something together. We expect that we will have to negotiate and compromise, that is a part of the process. So we're looking forward to having that conversation and I hope that we can send something over to the House soon so that we can continue those conversations.

Henderson: Senator Dotzler, could you support the Governor's plan which phases things in over a six year period and has economic triggers that don't, that mean that the tax cuts don't go into effect if the state's financial position worsens?

Dotzler: Well that sounds a lot better and I would have to say that I believe democrats really believe that we need to get rid of the federal deductibility so we have more transparency in our tax code. And I do believe that some people really do look at that and also I believe that we need to have fairness in our tax code. And I really am not sure that we do have that within this bill.

Murphy: Federal deductibility is one of the few things that most of the parties agree on but there are significant differences, as Kay mentioned, in the Senate tax plan, the Governor's tax plan. The House has said they're going to work off the Governor's tax plan. Senator Schneider, does that make the Senate republican proposal kind of DOA? Have you promised something that is never going to come to fruition?

Schneider: Well what we have done is we have introduced our idea for modernizing our tax code. We want to make sure that this opportunity to have real, true, comprehensive tax reform doesn't go to waste. We want to do more than just reform individual tax rates, we want to do more than simply lower rates over a defined time period as the Governor has proposed. We think we also need to attack corporate rates. We believe we need to modernize our sales tax system right now which the Governor also agrees with and we believe we ought to start phasing out some of these tax credits which we'll no longer need if our rates are more competitive.

Murphy: Is it just, with going after the corporate tax rates on top of it, which the Governor didn't address, and the price tags are substantially different, did Senate republicans maybe take too big a bite of the pie here in something that I know republicans have wanted to do for a long time?

Schneider: Again, what we're doing is we're just putting out an idea as to what comprehensive tax reform ought to look like. We want to make sure that we're able to take advantage of the one-time growth in state income tax revenues that we're going to see as a result of the federal tax cut. We want to make sure that we're able to make our state an attractive place to invest, to grow, not only jobs but people, as companies start to repatriate money from overseas back into the United States.

Yepsen: Senator Dotzler, what is your reaction to that?

Dotzler: Well, you know, I think that it's really supposed to be about economic development and growing our state and really this philosophy has been a failure in other states. In fact, the idea is about as fresh as an old gym sock in the bottom of a locker in my view. And if you look at Forbes Magazine, which I wouldn't call the most liberal magazine in the world, they just recently had an article about Kansas's great tax experiment that crashed and burned and that was the headlines. And in there it really did talk about the only thing that they did see growth in was in some of the corporate wage increases on the CEOs and within the company. And the real problem with Iowa, the plan that came out of the Iowa Senate, is that you cannot capture that growth because now we're lowering tax rates on the highest income earners in Iowa and actually raising it on some of the lowest income earners in Iowa.

Murphy: Senator Schneider, we hear that a lot from opponents of these kind of plans, worry about Kansas, what happened in Kansas. Is Iowa in danger of seeing what happened in Kansas with their budget troubles if this plan is enacted?

Schneider: Absolutely not. Kansas provides some good examples of what not to do and we want to avoid getting ourselves into the same situation Kansas did. Their failure I think was in not managing spending. They were too aggressive with the tax cuts without also being realistic about managing spending. Look at other states that have done a good job of lowering their tax rates and managing spending, like North Carolina, Indiana, Tennessee, states that aren't all that different from Iowa in some ways, they have done well because they have done a good job of managing both and that is what we want to do too.

Henderson: So you're the leader of the Appropriations Committee. You have a billion dollars’ worth of cuts ready for next year?

Schneider: We know that from our tax plan we'll see an increase in, or some of the components of our plan will help offset the loss in revenue. So for example, getting rid of federal deductibility will mean that instead of using that increase in state revenue for government spending we're going to use it to buy down rates. Our sales tax modernization plan will result in more sales tax revenue into the state. Our leveling of the playing field and spending less on tax credits and deductions and exemptions will mean that we'll be giving away less money to try and entice companies here. We won't need to do that because rates will be lower.

Henderson: So where is the scorecard there?

Schneider: Well, we have Senator Feenstra, the Ways and Means Chair, has been working closely with the Department of Revenue to come up with an idea of what kind of revenue impact the plan is going to have. We're waiting for a fiscal note to come back from LSA. I have some idea of what we'll be able to do if we want to move forward with our full plan and we need to look outside of what is already in there.

Henderson: So what is the number? You don't know what the number is?

Schneider: Well, as you know from the plan that we released, our plan calls for about a billion dollars in tax relief. Now, some of that money will be offset, as I said, with the elimination of federal deductibility, with increased revenue from sales tax and from having to pay out less for corporate giveaways.

Yepsen: Excuse me, Senator, but that's not her question. What cuts, yeah you'll make up some, but a billion dollars’ worth? What are you going to cut?

Schneider: Well, that is part of what the conversation will have to be about, David. I'm not going to negotiate against myself as we try to work out a plan with the Governor and with the House.

Henderson: Senator Dotzler, there are Iowans who say government is bloated, please cut government and give me a tax break. What do you say to those people?

Dotzler: Well, I say that that couldn't be further from the truth. We really are kind of coming apart at the seams when you look at education funding, higher education, what that means to economic development. Yesterday in the Ways and Means Committee, and you might have not heard this yet from Senator Feenstra, but he said that in the next upcoming year, fiscal year '19, the hit to our budget, the loss in revenue, would be one-third of that billion dollars. So we're talking about the budget that you're going to have to work on, the '19 budget, more than $300 million worth of cuts. And even if there was some gain from this billion dollar proposal we would still have a time lag before that hit. And I really believe the number one issue facing our economy, and I spent 21 years in economic development and in the 21 years I've listened to Iowa's business community and to the person they have always said this one thing, the number one issue holding back economic growth in businesses in Iowa isn't our tax structure, it is the lack of talent and intellectual capacity that is out there and the workforce issues. If we end up cutting education farther, especially the higher learning part, like our universities, where actually serve as a recruitment tool to bring people into Iowa, because we have a tremendous person shortage besides a skill shortage, it would be one of the gravest mistakes we could do and I think stick a knife in the heart of economic growth.

Murphy: Well speaking of economic growth, economic development, one of the other elements of this tax break that we wanted to talk about is the tax credits that you alluded to a little bit. Part of the justification for this massive tax cut and the lowering of the corporate tax rates is to make a more even playing field and not have to pick winners and losers, so to speak. But that is not entirely done away with, there are still some programs in there, including the one that gets debated a lot, the research and development tax credit. Why are those still in there in a bill that also lowered these corporate tax rates so much? Why do we still need to pick winners and losers?

Schneider: Well, Senator Feenstra I know worked closely with the Director of the Department of Economic Development, Debbie Durham, to try and identify different programs that actually have a positive return on investment for taxpayers. This is one that the Rockwell-Collins' of the state and the John Deere's use and say they rely on. So it's, we don't want to kill a bunch of jobs and cause companies to move out of state. So that is why that particular tax credit is still in there. But we're open to considering another look at that as we move down the road and other tax credits as well. As I mentioned this is part of a process.

Henderson: Well, Rockwell-Collins just announced that they're moving the corporate offices to Florida and then only two of the six units of the new company will be based in Cedar Rapids.

Schneider: And it's interesting that Florida has no income tax. And that is probably part of the reason why they're moving the executive office down there. We have unattractive income tax rates and we're not going to win that war for talent and attract people here or keep them here if we continue to penalize income and hard work and effort. So we need to reward that and that is what our plan does.

Henderson: But what about the research activities credit which you cited Rockwell-Collins as one of the beneficiaries of, if they're only going to keep two of the six units here?

Schneider: Well that's where they're doing a lot of the research already.

Murphy: You saw a couple of folks from the solar industry, that was an example of people and any time you go through something like this, as you both know, you take away programs there's going to be people who are concerned at a loss of that. Volunteer firefighters and EMT's was another one, a tax credit for them. How do you work through that? And how do you justify in particular on the solar one? It's a program that I believe only has a $5 million cap. In a billion dollar tax cut bill and in a bill that is keeping another more, far more expensive program, why was the solar one that was picked to be eliminated?

Schneider: What we're trying to really do is look at the big picture and make our state overall a better tax environment and tax climate, a better place for companies to want to invest and grow their businesses, a place for people to want to live and stay. And if we start worrying about all the special interests and let them pick us apart on different special benefits they get under the tax code we'll never get anything done. And that's part of the reason I think why it has been so long since we have done anything on income tax.

Murphy: Senator Dotzler, how do Senate democrats want to tackle this?

Dotzler: The solar credit thing was a real mistake because really that helped, and if you listen to the testimony where I was at the public hearing, they really talked about how they're helping agriculture in rural Iowa to reduce their costs in grain, cattle and pork production in Iowa because solar really does help cut their costs with electricity.

Yepsen: Senator Dotzler, what do you say to people who look at these tax credits, the pattern is this, you have a big story about the state giving a grant or tax credits to some corporation and then a few months later it seems like they leave. We've seen that pattern over and over again. You're a good democrat, you come out of the labor movement, you've been involved in economic development. At what point do Iowa political leaders stand up to these companies and say, don't let the door touch your fanny?

Dotzler: Well, they do have clawback procedures. But I'm going to tell you, we have been way over aggressive with a lot of our corporate giveaways. There are tax programs out there that have a tremendous return for investment. Another one that was cut was historic tax credits which have an initial five to one return on your dollar and thirty to one when they mature.

Yepsen: Senator Schneider, what about that? Do no political leaders in Iowa have the fortitude to tell corporations who want these things to heck with you?

Schneider: Well that's what we're doing in our bill. We're lowering rates, we're sunsetting a lot of the corporate tax giveaways and deductions and exemptions and we're not letting the special interests pick us apart on this. We're looking forward to having a dialogue with the House and with the Governor's office to come up with an overall plan. They may not agree with everything that is in ours and they probably won't agree with everything that is in ours. But it's a part of the conversation and at some point we do need to stand up to the special interests and that is what we're trying to do in our plan.

Yepsen: One idea that you could do would be to, you've got about 42 of these credits I understand, let's have 42 amendments to your bill, each tax credit yes or now how the legislature feels about this. How about that?

Schneider: I like our bill the way it is.

Dotzler: I don't.

Henderson: There is also a discussion at the Statehouse that is yet unresolved to cut the current year's budget. Why isn't it resolved, Senator?

Schneider: Well, again we have differences of opinion on how to best go about that. We sent over what we believe to be a fiscally responsible plan to the House and they have amended it. I don't know when they're planning to call it up to the floor for a vote. But we'll wait for that and continue to work with them to come to some kind of resolution.

Henderson: Are you waiting for this three member group that makes an estimate of state tax revenues to meet on March 9th and tell you all that they have redone the estimate and you don't have to make any cuts?

Schneider: We're waiting on the House. I don't know what they're waiting on. You'd have to ask Representative Grassley.

Henderson: In regards to this deappropriation, isn't it wise to wait to see what the true picture is on March 9th?

Dotzler: Well, March 9th is certainly coming and I think we ought to wait on this billion dollar tax bill until we understand because one of the democrats' position is to make sure that we know what our budget is and it's going to be balanced. I believe that we ought to get this resolved with the clawbacks for the '18 year as soon as possible because the longer we wait the more difficult it is going to be for state government to make up those cuts. And really we haven't also settled the state aid problem. So I'm surprised that Senate republicans haven't been working on the issues that we need to resolve immediately instead of spending their time on a monster bill that is a mystery to most Iowans.

Yepsen: Senator Schneider, how do you react to that?

Schneider: Well, we have taken our time to focus on the priorities and we only have 41 days left in the legislative session as of today. And as Senator Dotzler said, it is going to take time to work through the bill and to talk to the House and the Governor's Office and come up with some kind of reconciliation bill. And we want to make sure that we have enough time to do that. If we wait any longer to send something over we may run out of time.

Yepsen: Isn't there a danger of unintended consequences, Senator Schneider? You've got the federal government passing a huge bill. Who knows what is in it. You've got a big bill, 130 pages. Is there a danger here that you'll make some mistake, do something wrong? Maybe you ought to take a slower approach to get this right, at least to find out what the effect of the federal tax cut is.

Schneider: Well sending something over to the House now gives us the time we need to find some kind of solution within this legislative session. We can't just wait.

Murphy: You'll also have to get to next year's budget during this session. We don't know what the revenue will be until the March 9th estimate, but knowing that there will be likely some revenue taken out for the tax cut bill. How is public education going to fare in next year's budget? Will you be able to fund K-12 schools and the Regents universities?

Schneider: We have already agreed with the House to increase spending for K-12 by about $50 million next year. And I want to be clear, our priority is to make sure that we're adequately funding education, Medicaid, public safety, critical state services. And if there are some portions of our bill that need to change in order to make sure that we're adequately funding those that is going to be clear as we negotiate with the House and with the Governor’s Office.

Dotzler: That really sounds good but the reality is that's not what is happening and this is a big risk. It's kind of like a gambler putting all their money on a roulette wheel and hoping that that one number is going to come up right. By the way, the odds are 37 to 1 in that case.

Henderson: Senators, you both were involved in development of the state's medical marijuana program. Are you comfortable, Senator Schneider, with just having one manufacturer? And do you think that a board should make the decision about THC levels and which conditions should be covered?

Schneider: I think the fact that there is only one company that is supplied to produce medical cannabis in the state is an indication that the bill we passed out of the Senate with I think it was a 45 to 5 vote was probably the right way to go, to give companies flexibility to have enough market share to be profitable in what they're producing to help sick Iowans.

Henderson: What about giving another board autonomy to make the decisions about which conditions are covered?

Schneider: I think that is what we put in our Senate bill last year and I think we ought to leave it in the hands of experts.

Yepsen: Gentlemen, we've got just a minute left. I want to switch the topic to guns. In the wake of what happened in Florida do either of you see any legislation coming out of this session of the legislature to deal with gun issues? Senator Dotzler?

Dotzler: Well, to tell you the truth I don't see much. The good news is that we're stopping some of it and some cooler heads have prevailed, especially on constitutional carry that said that you didn't even have to get a permit, everybody could. And we know what happens with people with mental health problems. And I've got to tell you, the number one thing that could hurt with this budget that is planned is what we're doing for mental health in Iowa. We need to invest in those.

Yepsen: Senator Schneider, 30 seconds. Do you see any legislation emerging?

Schneider: I see us focusing on mental health. In fact, there is a mental health bill that is working through both chambers right now that adds critical access centers, six critical access centers throughout the state and includes some other things too. We just passed a bill with I believe a unanimous vote the other day that requires suicide training for teachers in our schools. We'll continue to find ways to make sure that our school children are safe.

Yepsen: Gentlemen, I'm out of time. Thank you very much --

Dotzler: We need more.

Yepsen: Thank you both for being with us.

Schneider: Thank you.

Dotzler: Thank you.

Yepsen: And thank you for joining us. We'll be back with another edition of Iowa Press next week at our regular times but on our .3 World channel instead. Our main IPTV channel will bring you live coverage of the Girls' State High School Basketball Championships. But you can catch Iowa Press Friday night at 7:30, Saturday morning at 8:30 and Sunday morning at Noon on our World channel or online at iptv.org. So for all of us here at Iowa Public Television, I'm David Yepsen. Thanks for joining us today.

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Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are there is an Iowa banker who is ready to help you get where you want to go. Iowa Bankers, allowing you to discover the genuine difference of Iowa banks.