Anatomy of a rare and costly strategic error by Mike Gronstal

The Iowa legislature is wrapping up its work for this year with the usual frenzy of appropriations bills. Months of stalemate over K-12 education funding and social safety net programs ended late last week with a deal that gave Iowa House Republican leaders what they wanted on overall state spending ($7.168 billion) and “allowable growth” for local school district budgets (up by only 1.25 percent). A $125 million supplemental spending bill will allocate one-time money for K-12 schools and some other Democratic priorities.

It will take a while to sort through the wreckage and identify the good, bad, and ugly line items hiding in the appropriations bills for fiscal year 2016. Democrats can only pray that Governor Terry Branstad won’t veto the supplemental spending bill like he did last year.

What’s already clear: Republicans have many more reasons to celebrate. House Speaker Kraig Paulsen was all smiles about the budget deal, while Senate Majority Leader Mike Gronstal admitted candidly, “I think there’s plenty of disappointment to go around, but we fought long and hard for what we thought was important and I think we, in the end, had some success.” Speaking to reporters earlier this week, Gronstal noted, “If left to our own devices, we would pass a very different budget. But it is our duty to work together to come to common ground between the two sides.”

Why did this “common ground between the two sides” end up so much closer to the Republican negotiating position? Because months ago, Gronstal gave House leaders what they wanted on tax bills, without securing any concessions on spending. Even a brilliant politician can make a mistake.

Gronstal is one of the most skillful legislators I’ve observed at any level of government. He has led the Iowa Senate Democrats for more than 15 years, the last nine as majority leader. Despite having only a one-seat majority in the upper chamber since 2011, Gronstal has kept his caucus remarkably united. He’s not perfect on every issue of importance to progressives, but he has held the line against a slew of horrible bills to emerge from the Republican-controlled House, most of which Branstad would have been happy to sign.

For as long as anyone alive has been following Iowa politics, Republicans have wanted to spend less than Democrats on education and on government programs targeted to the less fortunate. Each of the last five Iowa legislative sessions has gone into overtime, largely because of disagreements over the state budget between the GOP-controlled House and the Democratic-controlled Senate.

Although Iowa’s spending in some key areas has remained inadequate, I have generally felt that Senate leaders secured the best budget deals they could have from 2011 through 2014. Like the saying goes, elections have consequences. Gronstal and his team were up against House leaders who are arguably more stingy and mean-spirited than even the previous GOP Iowa House Speaker Chris Rants–which is saying something. Compounding the problem, our Republican governor is largely disengaged from legislative battles and hostile to Democratic priorities when he does get involved.

For the first time since Iowans elected a divided legislature in 2010, I believe Democrats are settling for much less than they needed to on state spending.

The roots of this year’s budget problems go back to the expensive commercial property tax cut lawmakers approved near the end of the 2013 legislative session. I don’t want to get bogged down relitigating that point, but it’s worth recalling that two years ago, Gronstal was strongly committed to making a deal on commercial property taxes. A lot of Senate leaders’ time and energy went toward resolving the very different Iowa House and Senate approaches to the issue. The final deal passed with strong bipartisan support, including all but six Senate Democrats. At the time, many people warned that the property tax cut was too expensive and would lead to cuts in public services down the road.

Side note: ask some small business owners whether they have benefited from the “largest tax cut in Iowa history.” In all likelihood, they haven’t, because they rent the space they use for selling goods or services. The big tax savings went to commercial property owners, most of whom didn’t pass their windfall down the food chain.

Back to the issue at hand: the lousy budget deal Senate Democrats are in the process of swallowing. A 2014 analysis by the Iowa Fiscal Partnership explained,

The property tax cuts will continue to eat into revenue for years to come, shrinking future surpluses and eliminating money that could have been used to fund new initiatives or restore past budget cuts. These cuts are estimated to increase each year and cost the state $3.1 billion over the 10 years ending in FY2024. Dipping into the surplus to fund annual appropriations is not sustainable in the long term – at some point the surplus will be gone. Any slowdown or recession will wipe it out if state policy does not, and the increasing cost of the tax cuts will ensure that the state is in a weaker position to weather such a slowdown or recession without yet another round of harmful cuts in state services.

For fiscal year 2016 alone, the commercial property tax cut was estimated to cost $277.4 million. That built-in expense limited legislators’ room to maneuver when negotiating the state budget. It gave Iowa House Republicans cover as they insisted and insisted and insisted that we can’t afford to increase K-12 education budgets by more than 1.25 percent for the next year.

I apologize for burying the lede. The 2013 property tax law wasn’t the strategic error I had in mind.

If we’ve learned one thing about House Speaker Kraig Paulsen these last five years, it’s that tax policy is important to him. His default position is always spend less money, cut more taxes, and don’t use Iowa’s state budget surplus to expand government programs, even if those programs were slashed during the lean years. House Republicans’ refusal to go higher than $7.168 billion in state budget spending for the next fiscal year put them at odds with Branstad as well as with Senate Democrats. I assume Paulsen was committed to leaving as large an ending balance as possible in order to bolster the case for more tax cuts during next year’s legislative session.

Knowing all this, Gronstal did his part to get two tax bills approved quickly this year.

A bill harmonizing Iowa tax code with federal law passed both chambers unanimously in early February. That bill was expected to reduce Iowa revenue by $98.98 million in the current fiscal year. Its provisions included a $250 tax credit for Iowa teachers who spent money on classroom materials, but the bulk of the expected price tag ($83.5 million) came from extending favorable depreciation expensing to business taxpayers.

Tax preparers were breathing down legislators’ necks to get this bill to Branstad’s desk before tax season. The Iowa Senate passed the bill even before the GOP-controlled House acted on it–a bit of a surprise, since Republicans are usually more eager to give business owners another tax break.

Why didn’t Gronstal ask House leaders for something in exchange for passing a bill that would take nearly $100 million in revenue off the table? Every dollar not collected by the state is a dollar that can’t be spent on K-12 education or anything else Democrats care about funding adequately.

Later in February, a bill to raise Iowa’s gasoline tax for the first time since 1989 moved rapidly through the legislature.

Paulsen wanted the gas tax hike passed, badly. So badly, he yanked one House Republican off the Ways and Means Committee and temporarily replaced another in order to get the bill through. No Iowa House speaker had pulled that kind of power play in recent memory.

Seeing Paulsen go all-in for a tax increase is strange until you remember that he works for a trucking company. The trucking industry has a strong interest in road repairs and road construction. Anyway, the gasoline tax is regressive, so raising it doesn’t primarily come at the expense of wealthy people.

In late February, the gas tax increase cleared both chambers of the legislature on an unusual bipartisan vote, with Democrats and Republicans in favor and opposed in both chambers.

Again, without getting anything from Republicans in return, Gronstal allowed a bill that was important to Paulsen to reach the governor’s desk.

I can’t understand why. During the 2014 session, statehouse leaders hammered out a deal on global budget targets (total state spending and topline numbers for each department) by the first week in March. Gronstal should have kept all tax bills off the Senate floor until House Republicans agreed to move toward the Democratic position on K-12 school funding and other contentious issues.

Several months of budget negotiations ensued with no progress. The legislative session went more than a month past its scheduled ending date. School districts were forced to plan their budgets for the coming academic year without knowing how much state funding they would receive. (House Republicans didn’t care–they had already accomplished a big education policy goal of putting the desires of Iowa’s tourism industry ahead of local government power to set academic calendars.)

As far as I could tell from conversations with Iowans in both parties, Democratic budget negotiators had trouble making headway, in part because House Republican leaders didn’t want anything other than to spend less money.

Last week, the Quad-City Times editorial board slammed those leaders:

Instead of doing the work of legislating, House Republicans hung fast to their session-opening position of limiting education funding to less than the rate of inflation, assuring unnecessary and harmful education cuts for Iowa schoolchildren.

Senate Democrats tried several approaches, including a compromise that accommodated the House Republican position, but added some additional, one-time funding to help close the gap.

House Republicans were unmoved, yet failed to offer any other substantive compromise. […]

Iowa’s House Republicans have been intransigent on a budget issue they should have resolved weeks ago. They know their positions do not have the votes to succeed. Yet they’ve simply refused to offer meaningful compromises.

The joke’s on the Quad-City Times editors. House Republicans succeeded without having the votes. They didn’t need to compromise in any meaningful way. They’ll begin next year’s budget negotiations in a stronger position, knowing that Democrats were forced to accept “one-time” money in a supplemental spending bill instead of higher line items in the regular appropriation bills.

Even a brilliant politician can make a mistake. I’m hopeful Gronstal will learn the right lesson from the disappointing end to the 2015 legislative session.

JULY UPDATE: As I feared, Branstad vetoed the most important portions of the supplemental spending bill, House File 666. Erin Murphy and Rod Boshart reported that “all the big deals” were struck down:

Using his line-item veto authority, Branstad nixed funding dedicated by state lawmakers for K-through-12 public schools, two of the state’s three public universities, and to keep open two mental health institutes.

Since writing this post, I’ve received lots of feedback from people who spend more time at the Capitol than I do. Some agreed with me, while others offered constructive criticism. The two most persuasive counter-arguments:

1. Holding up the tax alignment bill wasn’t a realistic option for Democrats. Similar bills have passed without controversy many times before. If Democrats had dug in their heels, Republicans could have accused them of politicizing a measure that had never been bogged down in partisan rancor before. If the stalemate had dragged on for months, thousands of Iowans might have been forced to file their tax returns twice, once before and once after lawmakers had approved the bill harmonizing the state and federal tax codes. Democrats would have been blamed for that inconvenience.

That’s a fair argument. It’s plausible House Republican leaders would have called Democrats’ bluff on this issue.  

2. The gas tax hike couldn’t have been a bargaining chip either, because Speaker Paulsen didn’t want it badly enough to give way on education spending. Furthermore, the coalition supporting the tax increase was precarious, and some Republicans would have bolted if budget concessions had been attached.

Not being mind-readers, we can only guess whether Paulsen would have walked away from raising the gas tax rather than move toward the Democratic position on state budget targets. I still think the tactic would have been worth a try. If it blew up the gas tax increase, so be it. That was less important than securing adequate funding for education and other priorities.

During the 2016 legislative session, Republicans are likely to push for big tax cuts. Democrats should not agree to any such bills without a firm deal in hand on spending targets. That compromise should involve increasing allocations in the regular appropriations bills, not supplemental spending bills like the ones Branstad has vetoed two years running.

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  • Excellent reporting

    Thanks for this analysis.  

  • A Question..

    Who does Gronstal rely on for advice? Who is his Yoda? It seems like the entire Iowa Democratic team lacks unity and suffers  a dirth of strategic thinkers.

    It’s becoming embarrassing. By the way, is there no united voice for K-12 education in Iowa. If I was still an Iowa public school parent, I’d be ready to put the Branstad and the rest on a permanent time-out.  

    • no idea

      who is his “Yoda,” if he has one. In general, my perception is that Gronstal is strong on strategic thinking, so this legislative session has been odd to watch.

      Part of the problem on education funding is that the Republican lawmakers who quietly think more money should be spent on K-12 are not willing to say that out loud or challenge their leadership in any way.  

  • Good post !

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