Iowa governor proposes sales tax increase to fund key programs, tax cuts

During her Condition of the State address on Tuesday, Gov. Kim Reynolds said she would deliver legislation to fund various programs and decrease income taxes by introducing a 1-cent increase in sales tax.


Katina Zentz

Gov. Kim Reynolds smiles during the Condition of the State address at the Iowa State Capitol on Tuesday, January 14, 2020. Gov. Kim Reynolds discussed initiatives such as tax cuts, mental health funding, and workforce training.

Caleb McCullough, Politics Reporter

DES MOINES —Iowa Gov. Kim Reynolds called for state lawmakers to add 1-cent to the state’s sales tax during her Condition of the State address Tuesday.  

A part of a legislative proposal her office will introduce, called the Invest in Iowa Act, the proposed sales tax hike would add a cushion to the state’s general-fund revenue for GOP-backed cuts in other tax areas, mostly income taxes, and funnel money into conservation efforts and mental health care.

Democratic critics, however, billed the sales tax increase as disproportionate to low-income individuals and questioned the stability of funding certain key programs and services using a larger share of state revenue sources. 

The proposal projects that the nominal sales-tax increase will bring in $540 million annually to the state’s coffers, which will be offset by reductions in taxes in other areas.

Three-eighths of that revenue (excluding revenue from use tax and digital sales tax) would go to the Natural Resources and Outdoor Recreation Trust. A constitutional amendment created the trust in 2010, but legislators have failed to provide funding for it.

Fifty-eight percent of the total annual funding to the trust would go toward efforts to improve water quality. Additional money would also be directed toward conservation and recreation.

“Funding that trust is no small investment, but I believe it’s one we need to make,” Reynolds said. “We were given this beautiful land to work but also to keep. And preserving what we’ve been given must be a responsibility of all Iowans.”

The state’s adult and children’s mental-health systems would be another recipient of the 1-cent sales tax and would offset a cut in the property taxes that currently fund most of the initiative. 

To date, funding for the state’s mental-health system has come mostly from county property taxes. Under the new proposal, property taxes would make up $40 million in the system’s funding, with $80 million coming from the state’s general fund. 

Reynolds said state funding would provide more stability for the programs than property taxes, but Rep. Mary Mascher, D-Iowa City, said state funding has not always been reliable. 

“Oftentimes when we rely on [state dollars], and then it’s gone, or it’s not there, or they reduce it, then those programs are in terrible difficulty,” Mascher said. “If you’ve got a stable property tax base, then that’s not a concern.” 

Democrats in the Statehouse were suspicious of the proposal, which they said doesn’t actually introduce any new money into the state. They feared a sales tax would disproportionately affect low-income Iowans because a sales tax is the same regardless of a person’s income.

Iowa Sen. Zach Wahls, D-Coralville, said that because Reynolds is characterizing the tax proposal as revenue neutral, she shouldn’t call her plan “Invest in Iowa.”

“You can’t have a new investment if it’s revenue neutral,” Wahls said. “If you want to call it the ‘Move Money Around in Iowa Act,’ that would be accurate.”

Meanwhile, Republicans continue to tout a balanced budget and push for an increase in income tax cuts.

Reynolds said the increased sales tax would allow the state to lower income taxes in addition to the tax cuts championed by Republicans that Reynolds signed in 2018. The current income-tax plan will contain four brackets taxed between 4.4 percent and 6.5 percent by 2023. Reynolds’ proposal calls for reducing the lowest bracket to 4 percent and the highest to 5.5 percent.

“I have no interest in raising taxes, so any increase in revenue from a sales tax must be more than offset by additional tax cuts,” Reynolds said in her address. “That starts with continuing to reduce our uncompetitive income-tax rates.” 

Reynolds said her proposed tax rates would bring a 10 percent cut for almost every Iowan, and lower-income Iowans will see a 25 percent reduction. She also aims to remove sales tax on diapers and feminine-hygiene products as well as the water excise tax.

Rep. Bobby Kaufmann, R-Wilton, said that since Reynolds’ proposal cuts income taxes, low-income Iowans would likely pay less overall, though he noted that the bill hadn’t been introduced yet. 

“The governor said, and I haven’t seen the proposal, but she said that lower-income folks, who Democrats will say are disproportionately affected by the sales tax, are going to receive up to a 25 percent income tax cut,” Kaufmann said. “So I think if you’re someone with a low income, you’re going to see a net gain from her bill, but I haven’t seen it yet, so I’m not endorsing it.”

In Reynolds’ 2018 tax cuts, most of the money was streamlined to businesses with the goal of investing more money into employees and communities. The 2018 tax cuts disproportionately favored the wealthy, according to a report from the Associated Press.

Wahls said he wants to see the math to back Reynolds’ claim that her income-tax cuts will proportionally favor lower-income individuals.

The National Alliance for the Mentally Ill in Iowa released a statement after Reynolds’ address praising her Invest in Iowa Act for cutting income taxes to, in part, fund mental-health programs.

After two years of passing progressive policy initiatives, she promised last year to address the funding crisis,” said NAMI Iowa Executive Director Peggy Huppert in a news release. “She has put forward a proposed solution, and I applaud her for that.”

Progress Iowa, a multi-issue progressive advocacy organization, released a statement after Reynolds’ address, saying that Reynolds’ priorities are backward. The organization’s Iowa Executive Director Matt Sinovic said in a statement that Reynolds “continues to push snakeoil solutions” and added that raising sales taxes disproportionately affects working-class families.

Sen. Joe Bolkcom, D-Iowa City, said that because sales tax applies equally to everyone, it would place the burden of funding the governor’s programs on lower-income Iowans.

“We all consume at about the same rate of things we buy,” Bolkcom said. “… It’s regressive in that it takes a bigger percentage of somebody’s income making $30,000 to pay for basic needs than it does somebody making $100,000.”

Julia Shanahan contributed to reporting.