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Every state has some version of a rainy-day fund.  A small number of states have funds that address property tax issues. But only Iowa has created a state fund that collects excess tax revenue for the sole purpose of providing on-going tax relief to its citizens. In this edition of Freedom Watch, I will discuss Iowa’s Taxpayer Relief Fund, a vision born through compromise that is culminating in the ability to provide historic tax relief and revolutionize Iowa’s tax code.

The Taxpayer Relief Fund is an account in the State Treasury that holds unanticipated state revenue. In order for funds to be deposited in the Taxpayer Relief Fund, actual state revenue has to exceed what has been projected for state tax collections by the three-member Revenue Estimating Conference (REC). The difference between what is actually collected in tax revenue and what the REC has projected, is deposited into the account once the fiscal year’s books have been closed.

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When the Fund was created in 2011, the account was originally called the Taxpayer Trust Fund, and was the result of compromise between the Democrat-controlled Senate and the Republican-controlled House. Democrats wanted to spend more than Republicans were comfortable with, so a unique compromise came to fruition. Republicans in the House would agree to some higher spending than they really wanted, and Democrats in the Senate would agree to establish the Taxpayer Trust Fund for revenue in excess of forecasts. If the state collected more in taxes than what was expected, then at least a portion of the additional revenue would be returned to the taxpayers. This compromise prevented the gridlock of Washington DC, while also creating an innovative path for future tax relief.

In its initial creation, the maximum amount of money that could be deposited into the Fund in one year was limited to no more than $60 million. If there were funds deposited into the account, they would be returned to taxpayers through a special income tax credit on Iowans’ state income tax return in the next tax year.

The creation of this fund through compromise was a way for Republicans to fight for less government spending and more respect for the hard-working taxpayer. Once Republicans gained control of both the House and Senate, as part of the 2018 state tax reform law, the Fund’s name was changed to the Taxpayer Relief Fund. The limit on the amount of funds that could be deposited into the account was stripped from the law, as was the automatic return of the funds via the personal income tax credit. Instead, the vision was for the Fund to be dedicated to historic tax relief, which would be determined by the Legislature.

After the close of the Fiscal Year 2019 books, the Fund had a balance $74.1 million. In spite of all the financial troubles caused by the onset of the Coronavirus pandemic and the government response to it, the state’s actual revenues exceeded the REC forecast, and the Taxpayer Relief Fund balance rose to $90.4 million. Then came Fiscal Year 2021, when actual state revenue outpaced the REC forecast by almost one billion dollars. Thanks to Governor Reynold’s efforts to reopen Iowa as soon as possible, Iowa’s resurgent economy and hardworking citizens, and careful spending by the Legislature, the Taxpayer Relief Fund balance at the end of FY 2021 was an incredible $1.0537 billion, this as many other states fought huge deficits and borrowed money just to pay their bills. The balance of the Taxpayer Relief Fund is projected to grow even more in FY 2022, as once again actual state revenues are ahead of what the REC projected last spring.

The vision of the Taxpayer Relief Fund, born by the necessity of compromise, has now paved the way for the most revolutionary tax relief and reform in the history of the state. Big things are coming that should excite every Iowan that works hard for their families and their communities. Stay tuned.

In my next newsletter, I will discuss the specifics of the House’s aggressive tax proposal to return money to taxpayers and fundamentally change our tax structure.

Author: Steven Holt

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