GOP leaders say tax cuts and budget are final priorities

DES MOINES, Iowa — As Iowa lawmakers look to wrap up the 2018 session, the two major hurdles left are passing a budget and cutting taxes.

Republican leaders in control of the House and Senate released spending targets this week, but the two chambers haven't reached an agreement yet. There are no planned actions Thursday so legislative leaders can focus on reaching a deal.

The amount of tax cuts is likely to be a key factor in the budget. Here's a look at some of issues at play:

THE COST

Gov. Kim Reynolds initially proposed a tax bill that would cut tax revenue by $1.7 billion over six years. Senate Republicans then passed a bill that would cut $1 billion annually.

Last week, House Republicans advanced a bill that would cut $1.3 billion over five years. The Senate introduced a new plan that would cut $2 billion over the same period.

The new plans — which haven't yet faced key votes — come as legislative leaders are working to finalize a nearly $7.5 billion state budget that goes into effect in July.

FEDERAL DEDUCTIBILITY

Iowa is unusual because it is one of three states that allow individual taxpayers to deduct the full amount of their federal income taxes from their state income tax returns, a process known as federal deductibility.

That means federal tax cuts approved last year by Congress would raise the state income tax owed by many Iowans. Returning those dollars to taxpayers is a key argument in support of a state tax cut bill this session.

Lawmakers also are debating whether they should eliminate federal deductibility, which keeps money going to federal taxes from being taxed at the state level. Opponents of the policy say it complicates Iowa's tax code while helping higher income taxpayers.

ECONOMIC TRIGGERS

Reynolds originally made tax cuts contingent on revenue targets, described as a "safeguard" if there's an economic downturn. Significant economic growth would have triggered additional tax cuts.

The House proposal removes triggers, while the Senate plan uses a trigger to eliminate federal deductibility and cut corporate taxes — two features that aren't included in the lower-cost House plan. Reynolds has said she favors ending federal deductibility but waiting on corporate tax cuts.

Democrats have raised concerns about the possible economic impact on Iowa of a U.S. trade war with China. Democrats also question the effect of Republican proposals that would eventually phase out so-called "backfill" payments to local governments, which offset lost revenue from 2013 tax cuts for commercial and industrial property owners.

TAX MODERNIZATION

Beyond tax cuts, GOP proposals would make a variety of other changes, including requiring online merchants and other aspects of the digital economy — such as streaming services like Hulu and Netflix — to collect sales tax.

Two contested issues are whether sales tax will be applied to taxis and ride-sharing services, such as Uber and Lyft, and whether to tax credit unions, especially large credit unions competing with banks.

Other proposed changes include expanding college education savings plans to include private K-12 tuition, increasing Iowa's standard deduction and adjusting a key tax depreciation provision used by farmers and small businesses.

CONSEQUENCES

Tax cuts will directly affect how much money the state has to spend going forward.

In recent years, Iowa's state universities have increased tuition, as have the state's community colleges. The state crime lab faces a backlog of DNA testing. Fewer troopers patrol the highways than recommended.

Mid-year cuts the past two years have stretched state dollars further. Democrats have expressed concern that passing tax cuts this year would result in further spending cuts in the future.

Reynolds has said the state would have enough revenue to protect budget priorities.

House Speaker Linda Upmeyer, a Clear Lake Republican, said the state has enough money for tax cuts while still meeting "the obligations and responsibilities and expectations of Iowans."

Upmeyer said a deal is expected soon to decide how much money the state will put toward reducing taxes.

"We're going to perhaps push our comfort a bit," she said.

It's possible, she noted, for Republicans to do more next year.

Senate President Charles Schneider, a West Des Moines Republican, said once the discrepancies over the tax bill are resolved, "then I think the numbers will fall into place in short order."

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Associated Press writer Barbara Rodriguez in Des Moines contributed to this report.