As a taxpayer, did you know that the state of Iowa is currently holding close to $4 billion of your tax dollars in a unique fund that is only supposed to be used for income tax relief? The Taxpayer Relief Fund is projected to have a balance of $3.5 billion in fiscal year 2024, which is a direct result from the overcollection of income and sales taxes. This fund, originally created for the specific purpose of income tax relief, now has such an enormous balance that policymakers and special interests are tempted to spend the money rather than use it as intended. Constitutional protections would guarantee the Taxpayer Relief Fund is only used for tax relief that benefits taxpayers and not special interests.
The Taxpayer Relief Fund originated in 2011 as the Taxpayer Trust Fund, which the legislature created to capture excess revenue for the purpose of income tax relief. Lawmakers believed it would ensure surplus tax collections ended up back in the pockets of taxpayers, not used for more state-level spending. The fund was originally capped at $60 million, and Iowans received credits on their state tax returns each year there was a balance.
A 2018 tax reform renamed the Taxpayer Trust Fund as the Taxpayer Relief Fund, removed the $60 million cap, and ended the automatic return of excess revenue to taxpayers. Instead, the legislature is now tasked with returning those dollars through tax relief measures of its choosing. Tax dollars only flow into the Taxpayer Relief Fund after the state’s Cash Reserve Fund and Economic Emergency Fund (Iowa’s “rainy day funds”) are both filled to their statutory requirements. Both have achieved that level, holding a combined $961.9 million. The Taxpayer Relief Fund has consequently grown from $8.4 million in fiscal year 2018 to $2.7 billion in fiscal year 2023. Projections for fiscal year 2024 show the fund increasing to $3.5 billion.
The Taxpayer Relief Fund owes its growth to Iowa’s strong economy, conservative budgeting, and a tax structure that still collects too much money from taxpayers even after multiple rounds of phased-in tax cuts. Unfortunately, such large balances create temptation for additional government spending. This “siren song” for policymakers grows in volume as loud voices demand new or increased spending. Whether for education, mental health, childcare, local government aid, or even property tax relief, numerous special interests see a pot of money as justification for more support from the state’s General Fund.
For example, during their last session, some legislators offered an amendment to a bill that would have used the Taxpayer Relief Fund to backfill payments to cities and counties. Another bill proposed to create local government supplement payments. Policymakers also considered using the Taxpayer Relief Fund to “buy down” the school property tax fund levy. Public schools are often the largest drivers of property tax bills, so (the argument goes) transferring a portion of the school property tax levy to the General Fund would provide direct property tax relief.
The unintended consequences of such policies can be subtle, so policymakers should remember the original intent of the Taxpayer Relief Fund was income tax relief, not additional state government spending or subsidizing relief from another tax. Shifting certain local property tax levies to the state General Fund would add to ongoing obligations for spending areas that already consume a large part of the state budget.
History shows that this sort of tax “relief” too easily becomes a path to tax increases. Iowa’s income and sales taxes were each first levied in 1934 to provide property tax relief. Instead of sustained property tax relief, all three taxes relentlessly increased over time. If a legislative goal is to enact real property tax relief, the solution must be found in the problem’s cause — namely, local government spending. “Buying down” property taxes with the Taxpayer Relief Fund would only distract from the harder work of limiting local government spending and budgets.
Finally, policymakers may be tempted to deplete the Taxpayer Relief Fund by sending out rebate checks to taxpayers. This may be a popular option in the eyes of some, but it is only temporary tax relief. In fact, it may be more appropriate to think of a rebate merely as a one-time payment rather than tax relief. Returning the dollars in the Taxpayer Relief Fund could be accomplished through rebates, but taxpayers and the state economy would be better served with substantial permanent rate reductions.
During the most-recent legislative session, Senator Dan Dawson, chair of Ways & Means, introduced a resolution that would establish two fundamental constitutional protections for taxpayers. The first would require a two-thirds majority of both legislative chambers to approve an income tax increase. The second would specifically deal with the Taxpayer Relief Fund. Senator Dawson correctly understands the temptation to use the fund for other purposes than income tax relief, and his constitutional amendment would restrict it to that purpose.
Senator Dawson also introduced a measure to accelerate the rate reductions implemented through Iowa’s 2022 tax reform. His proposal would lower the individual income tax to a flat 4 percent in 2025 and 3.9 percent in 2026. By 2027, the rate would fall to 2.95 percent, and by 2028, it would reach 2.5 percent. Finally, the individual income tax would phase down until completely eliminated, utilizing the money in the Taxpayer Relief Fund, which would be renamed as the Individual Income Tax Elimination Fund. Senator Dawson’s proposal not only establishes a framework for future income tax reform, but it also properly uses the Taxpayer Relief Fund for income tax relief.
Whether in support of Dawson’s proposal or other options, policymakers should ensure the Taxpayer Relief Fund is used for income tax relief by considering policy suggestions like these:
- Accelerate planned tax rate reductions using the Taxpayer Relief Fund as a supplement to the state’s ongoing revenue (with a relatively short timeline, this use is less appealing).
- Expand planned tax rate reductions using the Taxpayer Relief Fund as a supplement to the state’s ongoing revenue.
- Maintain the Taxpayer Relief Fund until all planned rate cuts are fully implemented and then utilize the Taxpayer Relief Fund as a revenue supplement to methodically eliminate the income tax.
Each of these three policy suggestions would not only honor the original intent of the Taxpayer Relief Fund, but also ensure taxpayers are the ones who benefit, and not special interests who profit from government spending. Too often the voice of the taxpayer is ignored or drowned out by those louder special interests that have ability to hire lobbyists to advocate on their behalf. Protecting the Taxpayer Relief Fund in the Constitution would ensure that the interests of taxpayers — and their money — are secure.