Tax Policy and the Race for the Governor’s Mansion: Iowa Edition

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will highlight 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for governor in Iowa.

The gubernatorial race in Iowa pits veteran incumbent Terry Branstad (R) against challenger Jack Hatch (D). Branstad, 67, is asking Iowa voters to reelect him to an unprecedented sixth term as governor; if he wins, he will be the longest-serving governor in American history. In addition to his career in political office, Branstad has been an attorney, financial advisor, and president of Des Moines University. Hatch, 64, is a state senator from Des Moines and a former member of the Iowa House of Representatives. He is a real estate developer and businessman who founded Hatch Development Group, a company that builds affordable housing.

With an $850 million revenue surplus, it’s no surprise that both candidates favor tax cuts. However, the two men offer Iowans very different visions when it comes to overall tax policy. Hatch wants to target tax cuts to the middle class. His tax plan would raise Iowa’s per-child tax credit from $40 to $500, give two-earner households a credit of $1,000, and raise the filing threshold for individuals and families by $11,000. Hatch would also collapse Iowa’s eight tax brackets into four, and reduce the top rate from 8.98 percent to 8.8 percent, and eliminate Iowa’s federal deductibility provision. Iowa is one of five states that allow residents to deduct federal tax payments from their taxable income on their state returns. Hatch argues that this provision makes Iowa’s rates appear artificially high, since most Iowans pay a much lower effective rate. As ITEP has reported, the provision is also costly and regressive, and its elimination would be a huge victory for Iowa progressives. Hatch’s tax reform proposal would cost $615.3 million over two years, which he claims will be offset by the state’s existing budget surplus and future revenue growth.

Branstad, meanwhile, has not made tax policy a centerpiece on his reelection campaign. However, Branstad pushed for and signed into law the largest tax cut in Iowa’s history last year, when the legislature approved a compromise that cut property taxes for businesses, limited residential property tax increases, and expanded a number of individual credits, including the Earned Income Tax Credit (EITC). Critics of the bill point out that while low-income workers gained $35 million in tax relief from the EITC expansion, property owners gained ten times as much. They further charge that the property tax changes will strain local government budgets and hamper the ability of state officials to meet citizens’ needs. The total cost of Branstad’s property tax reform alone is $3.1 billion over ten years, to FY 2024.

Branstad has also backed efforts to enact an optional flat tax system, though he declined to endorse House Speaker Kraig Paulsen’s flat tax proposal during this year’s legislative session, bowing to political realities. Under the proposed plan, Iowans would have the option of paying a 4.5 percent flat tax without deductions (including federal deductibility), rather than using the current income tax schedule. It would overwhelmingly benefit wealthy Iowans and impair the state’s ability to fund crucial services. Opponents fear that Branstad will revive the flat tax if he wins reelection, and that his current wishy-washiness is a front.

On the issue of the gas tax and infrastructure, Hatch wants to raise Iowa’s state fuel tax by 2 cents each year for five years. He also wants to capture 20 percent of the state’s budget surplus (and 20 percent of any future surpluses) for road improvements, bridge repairs, school renovation and construction, and broadband internet infrastructure. Branstad has chosen to remain on the sidelines of the gas tax debate, declining to endorse an increase in the tax but saying he would not veto an increase either.

In a June Quinnipiac poll, Branstad led Hatch 38 percent to 14 percent, but 47 percent of voters remain undecided. The number of undecided voters has increased in recent months, after a spate of bad publicity for Branstad’s administration; it remains to be seen if Hatch can capitalize on the incumbent’s woes and reluctance to take firm policy positions, or if Branstad’s cautious campaign will win the day.