Before this year’s legislative session began, I thought the Democrats in the Iowa Senate would more easily find common ground with Governor Terry Branstad than with the Republican-controlled Iowa House. Branstad dealt with a Democratic or divided legislature for 14 of his 16 previous years as governor, while most of the House Republicans weren’t serving in the legislature at that time.

This week Branstad proved me wrong, rejecting key provisions of a compromise bill that passed both chambers unanimously and a Democratic offer to meet him halfway on biennial budgeting. Follow me after the jump for more on those stories.

Branstad vetoed two sections of Senate File 209 yesterday. That bill made supplemental appropriations to cover the state’s indigent defense bills and support community colleges, and included some tax provisions important to Republican and Democratic legislators. The deal took more than a month to hammer out in a House and Senate conference committee. It included a “taxpayer relief fund” to be filled by up to $60 million in surplus revenues, a “bonus depreciation” provision sought by business interests, and an expansion of the earned income tax credit to help families earning up to $45,000 per year. House Republicans had initially resisted the earned income tax credit expansion and wanted a larger bonus depreciation tax break. Senate Democrats had initially opposed putting surpluses into a new fund designated for tax cuts.

From Branstad’s veto message:

“I am pleased to sign Senate File 209 to provide indigent defense funding, funding for the Department of Public Safety, Department of Human Services and Department of Corrections,” said Branstad. “I commend the House and Senate for making these supplemental appropriations in areas where the cuts would have adversely affected the health and safety of Iowans.”

In a letter to Senate President Jack Kibbie, attached to this email, Branstad stated:

“I am unable to approve the item designated as Division I. […]Any temporary economic stimulus effect of bonus depreciation is primarily accomplished through the federal tax code.  Iowa should instead focus its energies on improving our state’s long term competitive tax position for new job creation.  With our limited budget, that is best accomplished by reducing our commercial property taxes which are second highest in the country and our marginal corporate tax rate which is the highest in the nation.

“I am unable to approve the item designated as Division II.

“As earlier indicated, it is my desire to approach tax policy in a comprehensive and holistic manner.  As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state’s ability to compete for new business and jobs.”

Senate Ways and Means Committee Chairman Joe Bolkcom responded sharply in a written statement:

“I don’t how the Governor can sleep tonight after vetoing a bi-partisan tax cut that would have helped 240,000 working Iowa families making less than $45,000 a year. He is thumbing his nose at his own party and at middle-class Iowans struggling to recover from the national recession.

“Every penny would have been spent at Main Street businesses, and it would have helped Iowa recover from the deep national recession.

“The Governor is sending a clear message that he will only support tax cuts that give away hundreds of millions of Iowans’ hard earned money to out-of-state corporations and the richest handful of Iowans.

“In his veto message, Governor Branstad says “…it is my desire to approach tax policy in a comprehensive and holistic manner.”

“This excuse doesn’t hold water.  The governor has already signed a tax cut for Iowa’s wealthiest citizens, one worth almost exactly as much to them as what the working families tax cut would have provided to a quarter of a million Iowans.*  And today he approved the section of Senate File 209 that creates the 60 million dollar Taxpayers Trust Fund.

“Let’s stop wasting time.  Governor, are you or are you not in favor of the tax cut for 240,000 working families that every member of the Iowa Legislature has already voted for?”

* Senate File 512 was signed by Governor Branstad on April 12.  This tax cut provides $13.1 million dollars to Iowa individuals making at least $83,000 and Iowa married couples with a joint income of more than $166,000.   The increase in the Earned Income Tax Credit which the governor vetoed would have cost $14.7 million and would have benefited 240,000 Iowa taxpayers making less than $45,000.

Here’s the text of Senate File 512, which Branstad signed without demanding that it be part of a “holistic” tax reform. It’s also worth noting that Branstad didn’t veto the part of Senate File 209 that creates the Republican-backed “taxpayer relief fund,” even though he wasn’t a big fan of that idea.

Iowans for Tax Relief President Ed Failor, Jr., a big supporter of Branstad since the Republican gubernatorial primary, issued a rare statement criticizing the governor yesterday:

“It is discouraging to see Governor Branstad’s item- vetoes which remove significant tax relief options in place to help Iowa job creators and Iowa families. A bi-partisan group of Legislators have worked for over six weeks on the compromise bill, and it is built with the best intentions for the taxpayers of Iowa.” […]

First, the Governor is discouraging Iowa job creators from further investing in their business. The item-veto of the Bonus Depreciation provision is unfair – Iowa’s small businesses should be encouraged to increase business investment, not be penalized by the Governor. Government needs to get out of the way of Iowa’s businesses, both small and large, and taking away this tax relief provision could end up slowing Iowa job creation.

Second, Governor Branstad took away important tax relief specifically targeted at low-income Iowa families with his veto pen. The Earned Income Tax Credit (EITC) would have helped Iowa working families make ends meet through a tax credit which would pay for important needs, like child care and groceries.

When Branstad hinted earlier this week that he planned to veto parts of Senate File 209, Republican House leaders and Senate Democratic leaders warned that resolving differences over the state budget would become harder if the governor failed to sign the whole package. Senate Majority Leader Mike Gronstal pointed out that

the governor and his key aides had worked to mediate much of the S.F. 209 compromise and it “would be a horrible mistake” for him to turn around and veto some items. “I don’t really call that an honest effort at being a broker mediating the differences between the House and the Senate,” he said.

After Branstad’s veto announcement, House Speaker Kraig Paulsen said he was “disappointed” by the governor’s choice and promised that “House Republicans will continue to fight for tax relief for Iowans.”

Neither Paulsen nor Gronstal publicly raised the prospect of overriding Branstad’s vetoes. The Iowa Constitution allows the legislature to pass a law over the governor’s objections if it receives two-thirds of the vote in the House and Senate. In theory, that should not be hard to achieve, since state representatives and senators unanimously approved Senate File 209 on Monday. The question is whether taking that path would further complicate efforts to reach compromise on the state budget.

Democrats and Republicans disagree about the overall amount of general fund spending and lots of specific allocations, from K-12 education to preschool and smoking cessation. But legislative leaders have said Branstad’s insistence on passing a two-year budget is the biggest obstacle to making a deal. On Wednesday, Senate Majority Leader Gronstal and Appropriations Committee Chair Bob Dvorsky proposed a budget reform to “address the budgetmaking concerns of Governor Branstad and preserve the key priorities of Iowans.” From a Senate Democrats press release:

“We are ready to work with Governor Branstad and Republican legislators on meaningful budget reforms that will shake up the budget-making process,” said Senate Democratic Leader Mike Gronstal.  […]

Senate Appropriations Chair Bob Dvorsky added: “We’ll meet the Governor in the middle. We won’t give the Governor a two-year blank check without any public accountability. We haven’t forgotten that the Wall Street meltdown was caused by Boards of Directors who gave a blank check to their CEOs.”

The budget reform compromise calls for the Legislature to approve a full budget for the upcoming fiscal year (FY12, which runs from July 1, 2011, through June 30, 2012) and a 50 percent budget for the following fiscal year (FY13, which runs from July 1, 2012, through June 30, 2013). Under this plan, the Legislature would take action during the 2012 session to determine the final, appropriate funding level for the FY13 budget.

“These new reforms will save taxpayers’ money and improve services,” Dvorsky said. “Our constituents and other fiscal watchdogs support these reforms that guard against unnecessary spending.”

“The ultimate goal is to produce the best results possible for all Iowans. That’s why we support budget reform,” Gronstal said. “In contrast, the Governor’s demands for a two-year budget focus on arcane process changes while failing to consider the negative impacts on middle-class families, Iowa schoolchildren and educators, and the state’s job-creation efforts.”

The new reform requires every government program be justified each fiscal year, instead of being on autopilot and simply basing budgeting decisions on the previous year’s funding level. In addition to saving money and improving services, the new reform will:

·        Increase restraint by the Governor and state department directors in proposing new budgets and new programs.

·        Increase oversight by providing additional opportunities for the dozens of new department directors in the Branstad Administration and legislators – including 38 new legislators — to examine the state budget in detail.

House Speaker Paulsen told IowaPolitics.com he is receptive to the Democratic offer to pass a 50 percent budget for fiscal year 2013. However, Branstad immediately rejected the idea, saying, “I’m going to be here as long as it takes and I think we need to do it right.” For the governor, “doing it right” means a full budget for two fiscal years, even though Iowa has no official revenue projections for fiscal year 2013, and evidence from other states doesn’t support Branstad’s claims on the advantages of biennial budgeting.

On Thursday Senate Democrats held a press conference to highlight the risks of passing a two-year budget. Senate Education Committee Chairman Herman Quirmbach, who is also an economics professor at Iowa State University, analyzed Iowa’s revenue projections since 1999, comparing the estimates with actual revenues that materialized.

Each December, the Iowa Legislature’s non-partisan Revenue Estimating Conference issues two estimates of state revenues.

The first estimate projects state revenue for the current fiscal year, which ends six months in the future.  Thus the December estimate of the current fiscal year combines six months of actual receipts and estimates receipts for the next six months.  Since 1999, that estimate has been off an average of just under 3 percent.

The second December estimate projects state revenue in the coming fiscal year, i.e., from 6 months to 18 months in the future.  Since 1999, the estimate for the next fiscal year has been off by an average of more than 5.5 percent.

Gronstal told reporters,

“The governor claims a two-year budget is essential to improving Iowa’s budget process.  The facts, however, indicate otherwise.  The track record of the last decade conclusively demonstrates that two-year budgets would actually increase uncertainty and miscalculation when it comes to Iowa’s budget.

“Economic projections are by no means an exact science, and that’s what we have to rely on when we write the budget. Historically, the non-partisan economic projections by the Revenue Estimating Commission have been off by 2.9% when we are looking 6 months into the future. When they are looking 18 months into the future, they’ve been 5.6% off.

“If we follow Governor Branstad’s plan, we’d be using a projection for 30 months out. That means we’d likely be using numbers that are off by even more than 6% — perhaps double or more. We’re talking about hundreds of millions, even billions, of dollars. Having to correct for that error mid-course could be disastrous.”

During last year’s campaign, Branstad slammed Governor Chet Culver for making a 10 percent across-the-board budget cut in late 2009. Yesterday Gronstal and Quirmbach asserted that biennial budgeting would lead to more frequent across-the-board cuts because spending plans would be based on less accurate revenue projections. Click here for video from that press conference and charts detailing the Revenue Estimating Conference forecast errors since 1999.

As Bleeding Heartland discussed earlier this week, biennial budgeting doesn’t prevent budget shortfalls or lead to “predictability and stability” in spending levels. Branstad needs to explain why anything less than a full two-year budget is a deal-breaker for him. I suspect Gronstal was right when he suggested this is a power grab:

“For the governor, this is about power,” he said. “This is about him having control over the budget process for two years. It’s not about more predictability. It’s about concentrating power in the hands of the executive branch.”

Any thoughts about the rest of the legislative session, state budget or tax code are welcome in this thread.