Earlier this week we shared that the state panel that estimates how much tax revenue the state of Iowa will collect predicted a slight slowdown in the next budgeting year that starts July 1. In total, the State Revenue Estimating Conference predicted lawmakers will have about $20 million less to work with in next year’s budget. 

In his column last week, Business Record columnist Dave Elbert took a deep look at the state’s revenue growth through eight months of this fiscal year, and ultimately the impact it will have on last year’s efforts to reform Iowa’s tax code.

Elbert reported that net tax revenue grew at a rate of 7.8 percent for the six months that ended Dec. 31 — a period that made up the first half of the current fiscal year — but slowed to less than 3 percent by February. Iowa’s Legislative Services Agency said the slower growth was due to tax rates implemented on Jan. 1 in response to the 2017 federal tax cuts. 

But, as Elbert shares, there’s potentially another factor: a 2016 expansion of the corporate sales tax exemption. From his piece: 

“Taxes on internet sales were supposed to generate roughly $100 million in new revenue, which would have been enough to ensure 4 percent revenue growth for the first year. As of Feb. 28, though, sales tax receipts from all sources, including internet sales, had increased only $41.5 million, which is about what you would expect in a normal year without including internet sales. 

“A big chunk of the sales tax shortfall may be the result of a little-publicized tax law change approved in 2016. That change widely expanded a corporate sales tax exemption to include consumables used in manufacturing, such as saw blades, filters, jigs, coolants and lubricants, among other items.

“Officials predicted that the change would reduce sales tax revenue by about $50 million this year. The Iowa Revenue Department has not disclosed what the actual loss is, but there are indications it may be as much as twice that amount.”

And as Elbert points out, that presents a challenge for the state to enact part of the Iowa tax reform plan passed last year. In order to eliminate federal deductibility, Gov. Kim Reynolds agreed to delay the change until net state tax revenues increased at least 4 percent per year for four consecutive years.

Via Elbert: “The first year of that four-year period is now, and it was supposed to be a slam-dunk because of the additional income created by the new tax on internet sales.” 

You can read Elbert’s full column here.