In the first major breakthrough on tax policy this legislative session, a bill containing tax cuts and supplemental appropriations cleared an Iowa House and Senate conference committee Monday, then passed both chambers unanimously.

Details are after the jump, along with recent news on efforts to reach a compromise on the state budget for fiscal year 2012.

Senate File 209 took a long and winding road through the legislature. The Iowa Senate approved the tax bill unanimously in February. Its key points at that time:

Senate File 209 […] would “couple” Iowa tax law with the federal tax code to allow small businesses to make equipment purchases and use tax advantages to generate economic activity and job growth. Sen. Randy Feenstra, R-Hull, tried unsuccessfully to make the bonus depreciation provisions effective for the 2010 tax year to provide immediate benefits rather than delaying their implementation in the 2011 tax year.

The Senate tax relief package also proposed to raise the refundable earned income tax credit for working families making less than $45,000 a year from 7 percent to 10 percent retroactive to Jan. 1, 2011, a change that Sen. Pam Jochum, D-Dubuque, the bill’s floor manager, said would equate to a $14.7 million tax cut in fiscal 2012 for about 240,000 taxpayers.

Jochum called S.F. 209 “the first tax package of the session that focuses on helping Iowa families, growing the Iowa economy, and it does not require closing preschools to pay for it.”

“This is not Gov. Branstad’s approach to job creation through tax cuts. It is not a $200 million-plus giveaway to corporations, a tax cut where 80 percent of the money goes to out-of-state corporations. It is not a tax cut that provides little or no help for small businesses and nothing for individual Iowans. It is not a tax cut that busts the state budget, leading to calls to close preschools and put local schools and colleges on a starvation diet.”

S.F. 209 also included nearly $46 million in supplemental spending for the current fiscal year — including nearly $6 million in restored funding to Iowa’s 15 community colleges that was not included in Branstad’s budget recommendations.

The proposed spending increases of $18.5 million for indigent defense, $2.6 million for mental health institutions, nearly $3 million for public safety and nearly $10 million for corrections were included in the governor’s recommendations.

In March, the Iowa House amended the bill, eliminating the the earned income tax credit increase of $14.7 million while increasing “the bonus depreciation allowance for corporations by $98 million.” The House approved this version on a mostly party-line vote of 64 to 34. However, the Iowa Senate rejected the House amendments on a party-line 26 to 24 vote, sending the bill to a conference committee in early March.

Weeks passed with no agreement on a tax-cut package. Meanwhile, legislators tried to deal separately with the state’s mounting bills for indigent defense and other court services in Senate File 512. State Senator Rob Hogg described the back-and-forth on that issue here. The upper chamber approved a supplemental appropriation to pay those bills, but the Republican-controlled Iowa House preferred to pay for indigent defense by asking the governor to transfer funds from other programs. Eventually the Senate agreed to pass the bill with transfer authority. Governor Terry Branstad had previously said he opposed such budget transfers, and last week he line-item vetoed the relevant portion of Senate File 512:

“This method is totally unacceptable and is a continuation of the numerous bad budgeting practices that has created the fiscal mess our state currently faces,” Branstad said of the part of Senate File 512 that gave him transfer abilities.

Democratic State Representative Kurt Swaim was so frustrated over the impasse that he ripped up his paycheck, vowing, “I’m not going to cash my check as long as we’re not paying our bills.” But he won’t have to go without pay for long. Once Branstad made clear that he would accept only a supplemental appropriation to pay for indigent defense, House Republicans were willing to go that route. Supplemental appropriations became part of the conference committee agreement on Senate File 209, reached on April 18.

IowaPolitics.com summarized the key provisions of the bill, which passed the Senate 49-0 and the House 97-0 yesterday:

• TAX RELIEF FUND: Create the Taxpayers Trust Fund which would receive a maximum of $60 million per fiscal year of unexpected revenue growth after the cash reserves and economic emergency funds are full.

• BONUS DEPRECIATION: Couples with the federal government for bonus depreciation. This would cost $26.4 million this fiscal year, $99.2 million in fiscal year 2012 and $21.8 million in fiscal year 2013.

• EARNED INCOME TAX CREDIT: Increases the earned income tax credit from 7 to 10 percent, benefiting 240,000 low-income Iowa working families. This would cost $100,000 this fiscal year, $14.7 million in fiscal year 2012 and $13.7 million in fiscal year 2013.

• SUPPLEMENTAL: The bill has $45.8 million in supplemental appropriations for indigent defense, corrections, judicial districts, public safety, public health and mental health institutions.

• MENTAL HEALTH: Provide $20 million to eliminate the mental health waiting list.

Republicans agreed to remove from the bill a requirement that state employees pay at least $100 a month towards their health insurance premiums. They removed a requirement that the Revenue Estimating Conference meet to provide a second-year revenue estimate. They also removed a provision prohibiting the Department of Natural Resources from purchasing land through the end of fiscal year 2011 and cutting REAP by the same amount.

James Q. Lynch and Rod Boshart reported more details on the supplemental appropriations in the final compromise:

$5.9 million for community colleges, $14.2 million for the state Department of Corrections, $18.6 million for the public defender and indigent defense programs, nearly $3 million to restore cuts to the Iowa State Patrol and public safety functions, $1.2 million for public health, and more than $2.6 million for mental health institutions with the state Department of Human Services.

The overall tax relief included in the package was $141 million not including the $60 million that eventually will flow each year into the newly created taxpayers’ trust fund.

The “Taxpayers Trust Fund” was a central feature of a budget-cutting bill House Republicans approved early in this year’s session. The original GOP plan was for all surplus state revenues to flow into that fund. However, the Iowa Senate removed that and many other parts of the spending-cut bill. The final version of Senate File 209 seems like a reasonable compromise, directing some surplus funds toward tax cuts but capping the amount at $60 million per year.

Branstad indicated yesterday that he would sign Senate File 209, but “hinted he might use his item veto authority to reject the tax proposal Democrats had advanced.” Both House Appropriations Committee Chair Scott Raecker and Senate Ways and Means Committee Chair Joe Bolkcom expressed hope that the governor will sign the whole package:

House Appropriations Committee Chairman Scott Raecker, R-Urbandale, called the agreement hammered out by a House-Senate conference committee “an excellent package of both tax relief, supplemental appropriations and long-term tax relief support.”

“I would be hopeful that (Branstad) would sign it,” Raecker said. “I think this is actually a very good piece of legislation for Iowans’ benefit.”[…]

“It sounds like he is reserving his right to make decisions,” Bolkcom said. “We worked in good faith with the governor’s office. Our advice to him is, ‘Sign it.’ Take the deal.”

However, if Branstad line item vetoes that or any other part of SF 209 it may not bode well for reaching agreement on other parts of the budget, Bolkcom said.

“Frankly it would make kind of a rugged ending here,” Bolkcom said. “If he vetoes some of this, I think its’ going to create kind of a challenging environment.”

Raecker told IowaPolitics.com,

“There’s not anything in this conference committee report that the governor has not been aware of for weeks, and he has not affirmatively stated publicly or to us privately that he would veto portions of this,” Raecker said.

If Branstad vetoes the earned income tax credit expansion, it will be a sad commentary on his priorities. That proposal doesn’t cost as much as the business tax cuts in Senate File 209 and would help working families. As Bolkcom indicated, a line-item veto would give Senate Democrats little incentive to compromise on larger budget issues that need to be settled before the legislature adjourns.

The biggest point of contention is whether the next state budget will cover only fiscal year 2012 or fiscal year 2013 as well.

As I mentioned above, one point Republicans agreed to give way on in the conference negotiations on Senate File 209 would have required Iowa’s non-partisan Revenue Estimating Conference to project revenues two fiscal years in advance. The Revenue Estimating Conference currently projects revenues for the current budget year and the one that follows. Since Iowa reformed its budget process in the early 1990s, lawmakers have drafted state budgets based on the REC’s estimates. General fund appropriations cannot exceed 99 percent of projected revenues for the fiscal year.

Branstad has insisted that the legislature adopt two-year budgets. Last week he vetoed a transportation appropriations bill because it covered only fiscal year 2012.

“When I announced my intention to once again seek the governor’s office I made a pledge to Iowans to end the past budgeting practices that were sending shockwaves throughout our state,” Branstad said. “I promised to restore predictability and stability to the state budgeting process.”

Democrats have rejected a two-year budgeting practice for several reasons.  One of them is that the state’s Revenue Estimating Conference has not made projections for the fiscal year that begins July 1, 2012.  Another is that a separate bill that would limit a governor’s transfer authority has not been made law.

Without the concessions it’s not only difficult to accurately budget for the future but also to hold a governor’s actions in check with legislative intent, Democrats said today.

“It’s pretty clear that the constitution gives the legislature appropriation power and House Democrats have concern about giving up that power by passing a two-year budget,” said Rep. Tyler Olson of Cedar Rapids, the highest-ranking Democrat on the House Appropriations Committee.

The second-year budget proposed by House Republicans is based upon a calculation of a 3.5 percent growth factor.  They acknowledge that will likely need to be adjusted and can be easily done in the next legislative session.

“It’s not a number out of thin air,” said Rep. Scott Raecker, R-Urbandale and chairman of the House Appropriations Committee. “Very honestly, what we’re going to do is we’re going to work with Democrats and the governor to get budgets that everybody is in agreement on.”

Without two-year revenue projections, it seems absurd for Branstad to pretend that two-year spending plans would be more responsible. Todd Dorman noted that Minnesota has an enormous budget gap to close despite its biennial budgeting. The full list of states that use biennial budgeting includes some with massive projected shortfalls for the coming budget year, such as Nevada and Texas.

Yesterday Senate Democrats hinted that they might accept a two-year budget if Republicans give way on their efforts to impose no allowable growth for K-12 school budgets. From an April 18 press release:

Statement by Senate Education Committee member Tod Bowman of Maquoketa

“Governor Branstad is engaging in budgetary ‘bait and switch’ that could end up starving Iowa public schools for two years.

“It is true that he campaigned for two-year budgets, but I never heard candidate Branstad tell Iowans that by two year budget, he meant two years of firing teachers, increasing class sizes, and closing local school buildings.

“Yet that is exactly what he is demanding. Governor Branstad and the Republicans insist on breaking 40 years of bipartisan support for local schools. They want to give local K-12 schools NO new state aid next year, and then lock the state into doing it again the second year!

“At a time when prices for gasoline, food and other essentials are rising, no Iowa family would plan for the future by creating a two-year, flat-lined household budget. It’s fiscal insanity for families and it’s the same for our state budget and our priorities.

“I think Democratic Senators are open to a two-year budget, but we are not willing to impose two years of unprecedented, unnecessary financial hardship on local schools and local students.”

Branstad repeated his insistence on a two-year budget yesterday, and it doesn’t sound like he is willing to agree to more education funding in order to reach a deal with state senators. However, that could change, especially if House Republicans agree to a budget that increases education spending. The Associated Press reported yesterday,

Legislative leaders say they are narrowing their differences over writing a new state budget and hope to agree to deals soon that will enable them to adjourn by the end of April.

Negotiators won’t talk about details, but the broad outlines are clear. Lawmakers will approve a budget of about $6 billion that will include a tax cut and will increase spending on local elementary and secondary schools.

Share any relevant thoughts in this thread.

UPDATE: In her latest Des Moines Register column, Kathie Obradovich slams the “tax relief fund” concept:

Gov. Terry Branstad says he’s determined to prevent lawmakers from sliding back into budget “chicanery,” such as creating special funds and then raiding them.

Yet he’s willing to accept House Republicans’ gimmicky tax relief fund, which leaves the door open wide to the same sort of budgeting mischief that he claims to be rooting out.

The taxpayers trust fund, contained in Senate File 209, is expected to reach the governor’s desk this week. It’s designed to capture the first $60 million of any revenue above the official estimate, after reserve funds are filled, and set it aside to be used for future tax cuts. Normally, surplus money from the previous year is available for spending when lawmakers return to approve the next year’s budget. Note: This is a corrected description of the fund.

There’s nothing wrong with insisting that taxpayers get the benefit of surpluses, particularly when the economy is growing. There is bipartisan support this year for cutting property taxes, and the state will have to spend some money to soften the blow to local governments. None of that requires creation of a special fund.

Lawmakers typically have honorable intentions when they create special buckets of money. They are generally aimed at sheltering some worthwhile budget priority from the fickle political winds. The Senior Living Trust Fund, created to improve long-term care options for seniors, is just one example.

Such funds may work as intended for a few years. Eventually, though, revenue shortfalls or more pressing budget priorities make these pots of money irresistible to sticky-fingered lawmakers. They scoop the money for other purposes, as they did with the senior living trust, sometimes circumventing the 99 percent spending limitation in the process. The funds make it easier for lawmakers to break one of Branstad’s cardinal rules: Thou shalt not spend one-time money for ongoing expenses.