Among the many examples of corporate cronyism Governor Terry Branstad’s administration has provided these past five years, getting the Iowa Department of Revenue and Finance to rewrite tax code without legislative approval “on behalf of the Iowa Taxpayers Association” is among the most brazen.
Not only does this unprecedented use of the rule making process usurp legislative authority, it may end up being more expensive than “the worst economic development deal in state history.” At least tax incentives benefiting Orascom (for a fertilizer plant the company would have built anyway) have an end point. The Iowa Department of Revenue’s proposed sales tax cut for manufacturers will cost the state of Iowa tens of millions of dollars in revenue every year, indefinitely.
Democratic state lawmakers weren’t happy that the Branstad administration unilaterally decided to let private insurance companies manage the state’s Medicaid program, especially since some corporate representatives were briefed on that managed care plan long before state officials informed lawmakers or the general public. But state lawmakers didn’t have a way to block the Medicaid privatization.
In contrast, the Iowa House and Senate could stop the Iowa Department of Revenue’s proposed rule and thereby assert the authority of the legislative branch to approve tax code changes. Alas, signs from Tuesday’s meeting of the legislature’s Administrative Rules Review Committee (ARRC) point to House Republicans going along with the Branstad administration’s ”serious overreach of executive power.”
For background on the sales tax cut proposal, Jon Muller’s guest post is essential reading.
The Iowa Department of Revenue and Finance had proposed enacting the rule on January 1, 2016, but agreed during Tuesday’s ARRC meeting to delay its implementation until the start of the next fiscal year on July 1, 2016.
In his statement to the five Republican and five Democratic state lawmakers who serve on the ARRC, Iowa Senate Ways and Means Committee Chair Joe Bolkcom noted that state legislators rejected the same corporate sales tax cut when it came before them in 2013,. He also emphasized that “we don’t know how much this tax change will cost”; even the non-partisan Legislative Services Agency, which provides fiscal notes to lawmakers, can’t put a firm number on how much sales tax revenue will drop under the new definition. I’ve enclosed Bolkcom’s full statement at the end of this post, but this warning struck me as particularly important:
“What Governor Branstad and every other Iowa governor up to now cannot do is re-write existing law to get his way after failing to win Legislative approval.
“And that is exactly what Governor Branstad is trying to do in this case. Having failed to convince the legislature to change the tax code, he’s trying to change it by rule.
“If Governor Branstad is successful in this maneuver, he’s making history.
“If you let this one slide by, you are setting a precedent that will be there for all future Governors, be they Republicans, Democrats or independents.
“This rule is an overreach. This rule is bad precedent. The Branstad Administration should withdraw the rule.
“This seems unlikely. So, members of the committee, I want to strongly encourage you to stand up to the legislature’s role and prerogative to establish tax policy and any other policy it deems appropriate.
“And not allow the executive branch to usurp our constitutional powers, and in this case, illegally establish an enormous, costly tax policy that will continue to undermine our ability to educate our kids.”
Once upon a time, Republicans pretended to care about the separation of powers and limited executive branch authority. However, on a party-line vote of five to five, ARRC members failed to pass Iowa Senate President Pam Jochum’s motion to object to the rule change. According to Iowa Senate staff, if that motion had passed with at least six votes, “the burden of proof in a lawsuit challenging the rule would have been on the Department [of Revenue] rather than the challenger. In a lawsuit, the Department would have to prove that the rule change was not arbitrary, capricious, or beyond the authority of the Department.”
Des Moines Register reporter Brianne Pfannenstiel pointed out that ARRC member State Senator Mark Chelgren was the “most vocal” supporter of the rule change during Tuesday’s meeting. He happens to own two manufacturing companies that would benefit from the tax cut.
The Department of Revenue will hold a public hearing on this rule sometime this fall, and will bring the proposal back to the ARRC in December. But the only way to stop the rule from taking effect next July will be for the Iowa House and Senate to take action during the 2016 legislative session. They could either pass a resolution to disapprove the rule, or they could pass legislation that would preempt how the Department wants to define manufacturing equipment subject to the sales tax. Either action would require a majority vote in both the Republican-controlled Iowa House and the Democratic-controlled Iowa Senate.
Iowa House Republicans seem inclined to let this huge corporate tax cut take effect. Their latest newsletter praised the proposal:
According to the Department [of Revenue], the rule changes are likely to have a positive impact on jobs. […]
Clarifying the rules eliminates a significant amount of unnecessary administrative burden for both manufacturers and the department while and providing taxpayers with more certainty and consistency. House Republicans remain committed to supporting a fair, consistent, and predicable tax system for not only Iowa’s manufacturing sector but also for all Iowa taxpayers.
During Tuesday’s meeting, ARRC chair and GOP State Representative Dawn Pettengill said, “I think the Department of Revenue is within their purview to make a definition change.”
Any relevant comments are welcome in this thread.
Current members of the Administrative Rules Review Committee: State Senators Wally Horn (D), Pam Jochum (D), Tom Courtney (D), Mark Chelgren (R), and Mark Costello (R), and State Representatives Dawn Pettengill (R), Megan Jones (R), Guy Vander Linden (R), Lisa Heddens (D), and Rick Olson (D).
Iowa Senate press release, October 13:
The no-vote tax cut rule is an overreach, bad precedent, and should be withdrawn
Prepared remarks to the Administrative Rules Review Committee by Senator Joe Bolkcom,
Chair of the Senate Ways and Means Committee
“I appreciate the opportunity to talk about the unprecedented proposed rule to create a massive corporate tax cut that is before you today.
“I’m here because I believe this proposed rule is an extreme example of Executive Branch overreach.
“If the current Governor was a Democrat, and if she proposed a rule that would change the state’s tax receipts by as much as 70 million dollars a year, I would also ask you to oppose that rule.
“I am a Democrat, but I am also proud to be a little ‘d’ democrat.
“The increasing use of ‘government by executive order’ at the federal and state level is not a good thing for our democracy.
“And that is the issue before you today. The issue is about protecting the Legislature’s prerogatives and the Legislative process.
“For more than 15 years, the definition and practice on how to apply the sales tax on consumables has been in place.
“I was chair of the Senate Ways and Means Committee in 2013 when Governor Branstad’s Director of the Department of Revenue submitted legislation to change how the sales tax would be collected on consumable supplies used in the manufacturing process.
“The House passed that legislation. In the Senate, we did not move that bill out of committee.
“You may remember 2013 as the year that the Legislature approved a $300 million industrial and commercial property tax cut.
“There were people in the Senate interested in the sales tax changes suggested by the Branstad Administration. However, the majority on the committee believed it would be fiscally irresponsible to approve a large additional, on-going corporate tax cut on top of this historic property tax cut.
“Was our caution justified? Let’s pay attention to what Governor Branstad had to say about the state budget on July 2 of this year.
“On that day he vetoed the bipartisan compromise to invest $56 million in one-time money in our local schools. He didn’t say it was a bad idea or that the money wasn’t needed. He said the state of Iowa couldn’t afford it.
“I was shocked when, less than a month ago, Governor Branstad’s Department of Revenue filed for a rule change to make the same tax law changes rejected by the Legislature two years earlier.
“Months after vetoing $56 million in one-time money for education, Governor Branstad now claims he can cut corporate taxes by as much as $70 million a year without legislative approval.
“I want to stress that we don’t know how much this tax change will cost. In 2013, Governor Branstad’s Administration said the cost could be between 25 and 70 million dollars.
“At that time, the nonpartisan Legislative Services Agency said it did not have enough information to estimate the size of this tax cut. That is still LSA’s position today.
“There is not enough information to estimate the size of this corporate tax cut. If you need a reason to vote for a delay, that’s a good reason right there. What’s the rush?
“Of course, the Governor can veto legislation he does not like. No one challenges his power to do that.
“What Governor Branstad and every other Iowa governor up to now cannot do is re-write existing law to get his way after failing to win Legislative approval.
“And that is exactly what Governor Branstad is trying to do in this case. Having failed to convince the legislature to change the tax code, he’s trying to change it by rule.
“If Governor Branstad is successful in this maneuver, he’s making history.
“If you let this one slide by, you are setting a precedent that will be there for all future Governors, be they Republicans, Democrats or independents.
“This rule is an overreach. This rule is bad precedent. The Branstad Administration should withdraw the rule.
“This seems unlikely. So, members of the committee, I want to strongly encourage you to stand up to the legislature’s role and prerogative to establish tax policy and any other policy it deems appropriate.
“And not allow the executive branch to usurp our constitutional powers, and in this case, illegally establish an enormous, costly tax policy that will continue to undermine our ability to educate our kids.”
UPDATE: Radio Iowa’s O.Kay Henderson reported on October 19 press that the governor is “confident” state lawmakers will not block the new administrative rule.
“They [Republican state legislators] have supported it and passed the bill twice that would do something similar to that,” Branstad said this morning during his weekly news conference. […]
“This is no change in the law,” Branstad said. “This is merely a clarification to modernize the definition under what modern manufacturing is all about.” […]
Branstad told reporters he’s “very careful” when taking this kind of executive action.
Sure he is. Just like he’s “very careful to recognize the separation of powers and to work with the Legislature.”