IA-Gov: Ron Corbett says "exclusively Republican" push for tax reform would be "big mistake"

When Cedar Rapids Mayor Ron Corbett kicks off his Republican campaign for governor on June 20, tax reform will be a major part of his “new game plan for Iowa.”

Iowa has no shortage of Republican politicians seeking to lower taxes for those with high incomes or replace a progressive income tax structure with a flatter tax. State House and Senate leaders have promised to push for income tax cuts next year, and in her first speech as governor last month, Kim Reynolds identified “reforming Iowa’s tax structure” as her “first priority.”

But Corbett frames the case for tax reform differently from the usual GOP rhetoric about spurring investment or putting money back in people’s pockets. In a wide-ranging interview last week, the mayor repeatedly called for addressing inequities in the tax code, which now favor the wealthiest Iowans over middle-class taxpayers. He also warned it would be “a big mistake” for Reynolds to lead an “exclusively Republican” push for tax changes next year.

Corbett has given dozens of speeches about tax reform around the state since forming his think tank, Engage Iowa, in late 2015. Several chapters of the political memoir he has been promoting for the last month and a half, Beyond Promises, discuss past work on tax policy.

While gearing up to run for governor, the mayor has emphasized the issue in media interviews and guest editorials. Engage Iowa pushed income tax reform in an online ad campaign earlier this year. So I had lots of questions for Corbett about taxes. For those who want to listen, here’s the audio clip of that section of our June 14 telephone interview:

Corbett started talking about tax changes in the context of providing an “annual, sustainable, ongoing revenue source” for the environment. He has long been on record supporting a 3/8th of a cent sales tax increase to fill a trust fund for natural resources, still empty more than six years after voters approved its creation. Corbett mentioned that during his years in the Iowa House, funding for environmental programs was never a priority, whether the legislature was under Democratic, Republican, or split control.

I asked whether Corbett had concerns about funding a public good through a sales tax increase, since Iowa already has a regressive tax system, with people on the lower end of the scale paying a larger share of their income in taxes.

Yeah, I have a little concern about that, but remember in Iowa, when it comes to the sales tax, people that rent, there’s no sales tax on rent. There’s no sales tax on groceries. There’s also no sales tax on prescription drugs. And as far as utility bills at the state level, there’s no sales tax on that. So the state has taken off the sales tax on many items where, you know, people don’t have a choice, it’s just part of their, you know, basic cost of living. So it is less regressive in Iowa than it would be in other places.

And I know the issue of the income tax–you’re correct about that particular tax in Iowa. Historically, Iowa had a progressive tax system. But that no longer is the case, and it hasn’t been the case for quite some time, really. It’s a bell curve where someone that makes 40,000 dollars a year actually pays a higher effective rate than, you know, someone that makes a million dollars a year, because most of the deductions and credits have a tendency to favor those at the higher end. So that, that issue needs to be solved, whether the [natural resources] trust fund is funded or not, that needs to be solved.

But if you were going to link them, and that’s kind of what my policy has done with Engage Iowa, you can link the two so as you raise the sales tax and modernize your income taxes, you have an ability then to put some trigger levels in for low income on when they would start paying income taxes.

You can–the regressivity issue is something that can be fixed, or addressed in any plan, if people, you know, want to.

In Corbett’s book (pp.66-7), he describes voting against a sales tax hike in 1992:

I argued that the Legislature should have contained spending and raised some revenue by increasing the tax on cigarettes and wine coolers. Yes, wine coolers were popular then. I was not going to vote to pay for uncontrolled spending with a permanent sales-tax increase.

This sales-tax hike wasn’t like local-option sales taxes, which voters must approve. Nor was it like my support in 2017 for a three-eighths of 1 percent increase in the Iowa sales tax to fund the voter-approved, state constitutional amendment that created the Natural Resources and Outdoor Recreation Trust Fund in 2010. Those sales taxes don’t end up in the state general fund to be gobbled up by big government bureaucracy. They go for specific initiatives OK’d at the ballot box.

Corbett encouraged GOP candidates for the Iowa House in 1992 to denounce the sales tax hike. He traveled the state to campaign against Democrats who had supported it.

He also recalls (p. 67) more good “campaign fodder” that helped Republicans pick up enough seats in 1992 to regain the Iowa House majority. To raise money for the road use fund, statehouse Democrats had increased the annual registration fee on minivans and sport-utility vehicles. Those vehicles had been subject to the same “alluringly low” annual fee of $75 levied on pickup trucks.

Corbett and his close ally, State Representative Steve Grubbs, “both had young children, knew the fondness that families had for minivans and didn’t want every soccer mom at the wheel to see her vehicle registration fee jump from $75 a year.” They designed a direct-mail piece and sent it to minivan owners around the time of their birthdays, when vehicle registration fees are due. “Is raising the fee on your minivan your idea of a nice birthday present for you and your family? […] The Democratic incumbent in your district thinks it is.”

I asked Corbett about that episode.

Bleeding Heartland: I liked your story about the ’92 campaign, where you used that the Democrats had repealed the special low registration fee for SUVs and minivans. But, you know, doesn’t that just demonstrate how hard it’s going to be to get the legislature to do away with any kind of special break? I mean, I’m a mom, I drive my kids in a regular car. Why should I be paying a higher registration fee than moms who drive a minivan or an SUV? And yet, you know, you made Democrats pay a heavy price for what I would consider a reasonable, equitable policy.

Corbett: Yeah, the road lobby was really one that pushed for that. So it really wasn’t a fairness issue, because if it was a fairness issue, they would have raised it on pickup trucks. And of course, the pickup truck has been $75 and there’s no differential between a farmer’s pickup truck or an urban person’s pickup truck.

So if it was completely a fairness issue, they would have raised it and treated all vehicles equally. But they stayed away from the pickup truck registration because they didn’t want to upset all the farmers. The growing SUV market was one where they thought, well, this could bring in more revenue to the road fund. So that’s really how it started, really, was trying to get more revenue into the road fund, and it ended up singling out the SUVs and minivans, and we saw it as, you know, as an opportunity to maybe have some political gain.

Bleeding Heartland: Well, it was an opportunity. But isn’t everybody else going to see an opportunity? I mean, why would anybody in the legislature vote to do away with any special break for anybody?

Corbett: Oh well, yeah, that’s a great question. Unless it’s part of something bigger from a state standpoint. One, I think Democrats should be more outraged at the income tax system that treats people that make 40,000 dollars a year, have a higher effective rate than people that make a million dollars a year. You know, everyone talks about helping out the middle class, and oftentimes that’s associated with income inequality, but there’s tax inequality [too].

People may not like, you know, my plan, but how can they continue to support, you know, the existing system? Because it goes against, you know, Democrat values. It goes against Republican values, because it is not simple. It’s very complicated. We have, what, a system with three fewer lines [on our state tax return] than the federal IRS. So this is–it’s crazy to have a system that’s, that’s so complicated. And then the bureaucracy and the cost that goes along, you know, with the complicated system.

And frankly, it isn’t competitive. I know in Iowa, and when you live in any state, you just become accustomed to whatever the taxes are. But when you’re looking at moving to a state, that’s something that we look at and that 8.98 [percent top income tax bracket] is really kind of a sticker shock. In my time at the [Cedar Rapids Area] Chamber of Commerce, we used to be able to, you know, sit down with people individually and say, well if you move here, I know we have a high [income tax] rate, but you get all of these deductions, and then, you know, it lowers your effective rate.

We don’t have [those] opportunities anymore. People can press Siri on their telephone and ask her what the top marginal tax rate is in the state of Iowa, and within five seconds, you know, she’s telling you what the rate is.

I pressed Corbett for evidence that Iowa’s top tax bracket deters people from settling here. I moved back to Iowa to raise a family, and I’ve talked to many people who relocated here after living and working other states. Often, a job or education opportunity drew them to Iowa, or they jumped at the chance to buy twice the house for half the money they were paying in an area with a higher cost of living. Other important factors include the perceived quality of public schools, the crime rate, or amenities people want in their towns and neighborhoods. Can Corbett demonstrate that people who thought about moving to Iowa decided to go elsewhere because they learned our top income tax rate is nearly 9 percent?

Yeah, we do have some data, and just–all you have to do is just drive up to Sioux City and go over on the other side of the river, Dakota Dunes [South Dakota] and you’ll see all the wealth that has moved over to that side of the state.

We also, every speech I give, or at least–not recently, because I’ve been talking about K-12 [education]. But when I would talk about the income tax [in speeches around the state], you know, I’d ask the question: have you heard of anyone who changed their address for six months and a day to avoid Iowa income taxes? And every group, people shake their heads and say yeah, they know of people, you know, that have done that. I know people in Cedar Rapids and around the state.

Obviously, you know, your competitive aspects of a state are just more than, you know, one issue. There’s no silver bullet, magic potion […] It’s more of a variety of things that you have to work on.

So I don’t say that this is the only thing that needs to be done. I think it, it needs to be addressed so we don’t have that sticker shock. The plan that I’ve been out proposing, Laurie, isn’t some massive tax cut. It’s more of a tax modernization issue. And some of these tax deductions that people have had–say, like federal deductibility, which has been a longstanding deduction that Democrats have advocated getting rid of, Republicans have been more supportive of that–I advocate getting rid of it.

It’s true: in 2009, the Democratic-controlled legislature was close to passing tax reform. Federal deductibility was the big hangup that sank the bill in the Iowa House after a major lobbying effort by Iowans for Tax Relief (then led by Ed Failor, Jr., who is now the top aide to Senate Majority Leader Bill Dix).

Back to Corbett’s point:

It’s hard. Once they [deductions] get in the tax code, it’s very difficult to get rid of them. So it is–it isn’t going to be an easy task. But it’s doable if you get the public behind you. If it’s just going to be a debate in the legislature controlled by special interests, then probably there’ll never be any changes.

But if the citizens can see that, you know, our state is hurting, or not moving as rapidly along as it should be–I mean, you look at the census data for the last year, it showed that Nebraska grew by more than Iowa. That’s, that’s not good. We have a slow-growth economy. We’re the only state that hasn’t doubled its population since 1900. 73 counties out of 99 are losing population.

You talk about creating jobs, but if a company can’t fill the jobs they have open now, they’re not going to add ten more. If they can’t fill the ten they have, they’re not going to add ten more. So you’re really at risk of companies that have multiple locations around the country looking at their expansion plans somewhere else, if Iowa can’t feed those jobs with population.

So really, that’s what we’re advocating for on this income tax side, is just to make us a little more competitive, so we can be more attractive for people that want to stay here and move here. And as you said, there’s other issues that go along with it. That’s a piece of it.

I asked whether Corbett was proposing a revenue-neutral tax reform plan, in contrast to the huge tax cuts passed in Republican-controlled states like Kansas and Louisiana, with disastrous impact on those states’ ability to fund basic services.

Well it is–you’re right, it is, it is more of a modernization, revenue-neutral approach, from getting our top rate down, so it doesn’t look so high, from a perception standpoint, sticker shock. But also, we advocate for, you know, raising the, the sales tax by a full penny, where three-eighths of it goes in to fund the Natural Resources and Outdoor Protection Trust Fund, and then the balance is used to provide some equalization so people aren’t seeing a tax increase.

You know, what they did, what they did this year on the coupling bill, it basically took people’s deductions away but didn’t lower their rates. I think you’ve written about this.

Indeed I have. See here and here for past coverage of tax coupling, which harmonizes Iowa’s tax code with federal law on policies such as Section 179 expensing. The Iowa legislature approved coupling bills in 2015 and 2016 but not during this year’s legislative session, because of the cost.

Corbett continued,

Where, you know, the [Section] 179 [expensing]–I mean, it’s a complicated thing, but teachers used to be able to deduct $250 for classroom expenses that they would incur, and everybody knows teachers do that. They lost that deduction, but they don’t get the–their [tax] rate stays the same.

People that have mortgages on their homes, that don’t have a lot of equity, they couldn’t put a down payment, a big down payment on–they have to buy mortgage insurance. And that mortgage insurance was always deductible. Well, that’s 70, 80 bucks a month for some company–for people. You know, they lost that deduction. So I’m–

Bleeding Heartland: That’s expensive. That coupling bill is 100 million dollars a year. I mean, we don’t have it right now.

Corbett: No, I understand. But, so, the teachers have it? The teachers have the money? And the homeowners have the money? The point is, is they lost their deduction.

Bleeding Heartland: Right.

Corbett: And they lost their deduction, with the rates staying up, they’re all paying more. I understand the affordability argument that the state made, but that doesn’t mean that the teachers and the homeowners can afford it.

Bleeding Heartland: Right.

Corbett: I mean, someone could advocate that they can’t afford it either. But that’s an example of losing a deduction where the net effect is a left-handed tax increase on those people. That’s why, when we advocate the whole penny [sales tax increase] that we are able to compensate and get rid of some of those–because they got so many tax brackets. And you’re right, everyone’s going to be looking at–this is one where every taxpayer will look to see whether they benefit or do they not. And that’s really the concern when you look at getting rid of deductions like that.

(UPDATE: After this post was published, Corbett contacted me to clarify: “maybe I did say I blamed the legislature on not coupling. Actually blame administration for not recommending. The administration boxed the legislature.” Then-Governor Branstad actually did recommend that state lawmakers approve most of the coupling provisions, other than Section 179 expensing, which is the most costly. In January, representatives for then Lieutenant Governor Kim Reynolds did not respond to my inquiry about whether she would make the same recommendation in next year’s draft budget.)

As Iowa House speaker in 1997, when Republicans finally had control of both legislative chambers, Corbett championed an across-the-board income tax cut. He writes in Beyond Promises (p.89) that he pushed for a 15 percent cut, eventually settling for 10 percent. During our interview, I noted that Corbett left the legislature in 1999, at a high point in the economic cycle. Those who stuck around after the economy turned saw revenue shortfalls. In fact, state lawmakers had to come back for a one-day special session in May 2002 to plug a $200 million hole in that current year’s budget and account for $200 million in reduced projected revenue for the following year.

Wouldn’t that 2002 budget crunch have been even worse if Corbett had gotten his way and Iowa had cut income taxes by 15 percent in 1997?

I don’t think so, because you have no way of scoring the dynamic modeling, and that’s something that Iowa doesn’t consider, and it’s been–it’s going to be a challenge with any type of tax modernization is how do you factor in dynamic scoring, into your models. And right now in the fiscal bureau, the Legislative Services Bureau, it’s just all static modal.

Jon Muller explained the dynamic scoring concept here, in the context of federal budgeting. Democrats are generally skeptical about dynamic modeling, which makes tax cut proposals appear to cost the government less in total revenue. Evidence about the relationship between tax cuts and economic activity is mixed. Notably, Republicans never call for dynamic scoring of government spending proposals, even though some clearly generate additional consumer economic activity.

Back to Corbett’s point:

We can look back and say well, the tax cuts actually helped spur the economy and prolonged the economic run. You could advocate that, and there’s evidence to show that. And you could also advocate that the reason that the legislature got into that position [in 2002] is they were having revenue growth of 5 and 6 percent, and they were, ended up spending that 5 and 6 percent. And that growth, that compounding spending, you know, wasn’t sustainable when revenue [growth] fell to 3 percent.

I mean, you’re seeing that now. I mean, the state budget is $7.2 billion. I think it was 3 billion when I left. The spending over the last 20 years has doubled, even though our population hasn’t.

Bleeding Heartland: We’re spending less on higher education, though. I mean less even in absolute terms, let alone real terms.

Corbett: All valid points, all really worthy of discussion and debate in the state of Iowa. And I’m hopeful that through the course of a campaign, at least on the Republican side, but even just the whole general side of public policy and discussion that you can have debates like we used to have on public policy, versus yelling and screaming and calling each other names, and you know, throwing out labels. When you throw out labels, that puts barriers in people’s minds. […]

I asked Corbett whether he perceives the legislative culture to have deteriorated since he served in the Iowa House. He agreed that the dialogue has “gotten worse”; legislators don’t get to know colleagues from the other party as much anymore, and that’s probably one of the reasons “fight as much as they do.” He went on:

But yeah, the civility of the institution certainly has changed, and it is hyper-partisan. And everything is done in a partisan way.

It’d be a big mistake if the governor leads a tax reform effort next year that’s exclusively Republican. Because you need predictability and stability out of your government, especially when it comes to, you know, tax policy.

So if tax policy is done exclusively by the Republicans, and against all the Democrats, what they want to do, and then if the election turns, and goes the other way, next time there’s no ownership in the tax policy, and so Democrats try to change it and do something different with it. And that’s really not what you need as a state. We really need predictability and sustainability from public policy, and so it would be a mistake not to, you know, include the Democrats in that.

[State Senator] Joe Bolkcom has been the leader on the Democratic side on the tax issue. He’s probably a little more to the left than I think, the general caucus. So you’d, you know, you’d have to get a couple of representatives from the Democratic caucus, you know, in addition to Joe that would have a seat at the table, to discuss the tax plan.

Otherwise for them to try to do it with just Republicans, it–one, they probably can’t muster the votes, because there’s always going to be, you know, a handful of dissenters within the caucus. They’re just going to need Democrat votes.

Republicans have fairly large majorities now; 59 of 100 seats in the House and 29 of 50 in the Senate. They didn’t seek out Democratic votes for any of the far-reaching legislation that passed this year. Why would they look for Democratic votes next year?

Well, for the reasons that I–yeah, you’re right, I think at first blush, they’d probably say, well, we’re just going to go into our back room and come up with a tax plan.

But again, for the reasons of long-term stability in tax policy. I mean, Obamacare is the perfect example at the federal level, where it was basically passed exclusively with Democrat votes, and ever since, Republicans have been, you know, trying to change it. And even though they haven’t been successful at this point in time, you know, it’s provided–the fact that they are advocating for change in it, it just puts so much uncertainty in the, in the health care, you know, market. Every day we wake up and see something different. But everything’s been turned upside down, and, you know, people that I talk to kind of just want it to get back to normal.

Later this week, Bleeding Heartland will publish more of Corbett’s comments on Iowa’s individual health insurance market and his work inside and outside the legislature, including his record on labor issues, which is likely to become a hot topic in the Republican primary for governor.

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