Iowa legislators must feel as though they meet themselves coming and going at the start of a legislative session. Without fail, a few pieces of stubborn legislation appear year after year. That will certainly be the case during this session, in which proposals on local option sales taxes and renewable chemical production tax credits are certain to be introduced.

Renewable chemical production tax credit

History: House Republicans passed the renewable chemical production tax credit last session for the conversion of byproducts from the manufacture of biofuels and animal feed into chemicals that could be used to produce high-value items, such as pharmaceuticals and plastics. The legislation died in a Senate committee. It has been introduced again this session, this time as Senate Study Bill 3001.

Issue: Supporters say a tax incentive is needed to persuade manufacturers to take advantage of this growing segment of the biochemicals industry. Detractors, we are reluctant to call them hard-core opponents at this point, point out that unlike many economic development tax incentives, this credit is fully refundable and should be revenue neutral. 

Who favors the bill: Proponents include the Iowa Economic Development Authority, the Professional Developers of Iowa, the Cultivation Corridor and the Iowa Biotechnology Association. 

Governor’s position: Gov. Terry Branstad said in his Condition of the State speech that a priority of his administration is to promote growth-sector strategies that fall under the category of biorenewables.

Democrat position: Iowa Senate Majority Leader Michael Gronstal wants proof that the tax credit is revenue neutral. Democrats could seek cuts in allocations for other tax incentives to pay for the renewable chemical production tax credit. IEDA Director Debi Durham says the credit will be revenue neutral. Gronstal said he will only trust numbers supplied by the Legislative Services Agency.

Republican position: Iowa House Speaker Linda Upmeyer said her members support the bill.

The pressure is on again this legislative session to adopt a tax credit that supporters say would put byproducts of Iowa production of biofuels and animal feed to good use and would encourage manufacturers of renewable chemicals to increase their output, create more jobs and place the state at the top of biomass heap. 

The Iowa Economic Development Authority has pressed for the legislation, and on Jan. 14, the Cultivation Corridor and the Iowa Biotechnology Association released a white paper concluding that the absence of a statewide economic development incentive program tailored to biobased chemicals is “a serious impediment to the state’s potential to emerge as a center of gravity for biorenewable chemical investment and job creation in the coming years.” 

IEDA Director Debi Durham also said that day that the tax credit has bipartisan support.

The credit does seem innocent enough. The state allocates $170 million for tax credits that encourage job creation and other economic development activities. What’s one more tax credit among many?

There is little question that the production of renewable chemicals is of high importance in a state that produces animal feed and fuel from corn, soybeans and other products. The byproducts of those processes are called biomass feedstocks, such as starch, glucose and cellulose, and some of them can be used to create chemicals of higher value, which in turn can be used to manufacture other value-added products, including plastics and pharmaceuticals. Iowa is among the top five states in the naton in terms of the available supply of biomass.

The U.S. Department of Energy has identified 30 biobased chemicals that hold the greatest market potential. The Iowa Economic Development Authority’s goal with the tax credit program would be to encourage companies to manufacture these types of “building block” chemicals that can be produced from biomass feedstocks.

As proposed last year, the credit would be paid at 5 cents per pound of production, topped at $1 million for startups and $500,000 for existing businesses. The cap on the program has been proposed at $10 million. In addition, the chemicals cannot be used for the production of ethanol, biodiesel or animal feed.

Again, how could the state go wrong on this deal?

Maybe it couldn’t, but there is a hitch, said Senate Majority Leader Michael Gronstal. Unlike the majority of tax credits, of which about 50 percent of the total allocation goes unclaimed for a variety of reasons, this one is a direct refund. It is estimated that taxpayers would claim upwards of 95 percent of the allocation.

That is a direct hit on the treasury. Gronstal would like for the credit to be revenue neutral. In other words, the state might have to cut dollars allocated for another tax credit to pay for the renewable chemical production tax credit.

The longtime state senator from Council Bluffs is still chafing from an administrative sleight of hand last year in which the Iowa Department of Revenue granted manufacturers a sales tax exemption on products that are consumed during production processes. By IDR estimates, the exemption would trim $35 million to $40 million a year in sales tax revenues and up to $6 million a  year in local option sales taxes. Other estimates are that the sales tax exemption could add up to $75 million or more each year in lost revenue.

Lawmakers had struggled for years with the issue and failed to come up with a legislative solution. The sales tax exemption has been a top issue for manufacturers and the Iowa Association of Business and Industry.

The revenue department said it took up the issue in an effort to clarify the tax code and eliminate confusion about the tax. The Legislature’s Administrative Rules Committee deadlocked on the issue along partisan lines, with Republicans supporting the change and Democrats opposing it.

Gronstal is not happy that the state tax code was altered by administrative rule rather than legislation. Couple that with the fact that Republicans would not overturn Gov. Terry Branstad’s veto of $56 million in one-time school funding that was approved last year by the Legislature, and you have a Senate leader who might draw a line in the sand over the renewable chemical production tax credit.

Other tax cuts from the past also are weighing on Gronstal’s mind, although he recently told Business Record reporters that he doesn’t like to dwell on the past. 

“We still haven’t paid for the commercial property tax cut (that was adopted in 2013), yet we can’t afford $56 million in one-time money for education,” he said. “We’re willing to give up $40 to $75 million a year in perpetuity (on the sales tax). We find that pretty outrageous.”

House Speaker Linda Upmeyer said her members remain keen on the renewable chemical production tax credit.

“We support that because we believe it is an emerging industry that is going to create jobs and add more value for products coming out of the state,” she said. “I’m sure we’ll take another shot at this. We’ll give the Senate a chance to take another look at this and see if we can address any concerns they might have to move this forward.”

Upmeyer might not be willing to horse-trade for cuts in other state economic development incentives. 

The Legislature has set up a process for the Iowa Department of Revenue to review the performance of all state tax credits. If that analysis determines that a credit is not delivering value, then the Legislature should decide whether to keep it on the books, she said.

Local option sales tax

History: In the early 1980s, the Iowa Legislature allowed cities to add 1 cent on the dollar to the state sales tax and to keep those revenues to pay for public works, public safety and other local needs. Voters had to approve the tax, and they could repeal it. The law requires cities that share borders to conduct a regionwide vote on the issue. Only two areas of the state were affected by that provision, Greater Des Moines and the Cedar Rapids metropolitan area. Several attempts have been made to allow city-by-city votes. For example, a Des Moines local option sales tax would have to be approved by city residents, not voters in West Des Moines, Altoona and other cities with abutting borders. Last session, a study bill was introduced to make the local option sales tax city-specific, but it required that 50 percent of the revenues should be used for property tax relief.

Issue: This is an issue that affects all cities in Greater Des Moines that share borders and the Cedar Rapids metropolitan area. The passage in 2013 of legislation that has resulted in a drop in property tax revenues collected from owners of commercial properties is putting a strain on some local budgets. As a result, the local option sales tax has become a key issue for city officials. 

Who favors the bill: This legislation has been a top priority for Des Moines and West Des Moines, although leaders from those cities are split on the study bill. West Des Moines supports using some local option sales tax revenues for property tax relief; Des Moines officials have said they should be allowed to decide how they will use the revenues. The Iowa League of Cities also supports allowing city-specific votes, sans the property tax relief requirement.

Governor’s position: Gov. Terry Branstad has not taken a position on this issue.

Republican position: Iowa House Speaker Linda Upmeyer said she is sympathetic to the concerns of Greater Des Moines communities. But she believes the issue could require more time to simmer. She points outs that there is support and opposition among Republicans and Democrats.

Democrat position: Iowa Senate Majority Leader Mike Gronstal said he is “open” to changing the law.

Nearly 30 years ago, the Legislature gave communities the opportunity to add one percentage point to the state sales tax rate. Rather than sending revenues from that extra levy to the state, cities could keep the proceeds at home to pay for street repairs, public safety and other items that generally are funded with property tax revenues. Residents had to approve the tax, called a local option sales tax.

And, by the way, cities with touching borders had to seek an areawide vote to approve the tax. That is a caveat that pretty much makes a public referendum in Greater Des Moines unworkable, local leaders say. For the past three years, Greater Des Moines city officials have sought legislation that would eliminate the requirement of a regional vote. Cedar Rapids is the only other city in the state affected by the requirement.

As the law stands now, West Des Moines would have to conduct a four-county vote — its borders are in Dallas, Madison, Polk and Warren counties — to adopt a local option sales tax.

This is a key issue for revenue-strapped cities such as Des Moines, where City Manager Scott Sanders has said a local option sales tax would have a big impact on finances, representing the largest potential source of revenue outside of property taxes.

It became even more important after the Legislature adopted property tax reform in 2013 that is expected to reduce property tax revenues.

West Des Moines Mayor Steve Gaer said more than 24 million shoppers, most of them bound for Jordan Creek Town Center, drive city streets every year, putting a “strain” on the Public Works and Public Safety departments that could be lightened by the use of revenues from a local option sales tax.

Last year, Rep. Tom Sands, a Wapello Republican who chairs the House Ways and Means Committee, introduced a study bill that would have eliminated the need for a vote. However, it carried the condition that 50 percent of the additional sales tax revenue had to be used for local property tax relief.

Sands said he was testing the waters and didn’t expect the bill to gain much traction. He was right.

Sands’ proposal got a mixed reaction in Greater Des Moines. West Des Moines’ Gaer supported the proposal then, and he likes it now.

The city could reduce its tax rate to $11 per $1,000 of valuation from $12, an 8 percent reduction, and use the other 50 percent for additional parks, bike trails, street repairs and public safety, he said.

The 50 percent split didn’t go over well with the city of Des Moines, and the Iowa League of Cities weighed in on the issue, saying that decisions on how to use the extra revenue should be left to communities. Again, voters would be asked to approve the local option sales tax, and they could repeal it.

House Speaker Linda Upmeyer said discussions about new taxes take awhile for lawmakers, and citizens, to digest. 

“We’ll have the discussion again this year; it’s hard to predict how it will end,” she said.

She does expect the idea of property tax relief as proposed by Sands to be part of the debate.

Senate Majority Leader Michael Gronstal said there is bipartisan support and bipartisan opposition for the local option sales tax.

“Some people might perceive it as a vote in favor of increasing taxes. Some Republicans and Democrats get nervous about doing that,” he said.