Water quality funding in Iowa

Sales tax for water quality must protect low-income Iowans
Report offers ways to keep clean water priorities, funding equity together

July 2, 2019
Full report

IOWA CITY, Iowa (July 2, 2019) — Iowa could increase the state Earned Income Tax Credit and a longstanding renters’ benefit to make funding equity an equal priority with clean-water solutions if state lawmakers raise the sales tax to meet voters’ demand for a natural resources trust fund.

“Both are important priorities for the future of Iowa and, if we do it right, it could be a win-win for environmental quality and improved funding equity,” said David Osterberg, lead author of a new report for the nonpartisan Iowa Policy Project (IPP).

Regressive boxOsterberg and IPP researchers Peter Fisher and Natalie Veldhouse examined options to offset the regressive impacts of a sales-tax increase that would fund a clean-water and recreation trust fund authorized by voters in a 2010 statewide referendum.

When and if the sales tax is increased, three-eighths-cent is designated for the Natural Resources and Outdoor Recreation Trust Fund. Legislators have not acted, while environmental advocates continue to push for approval.

“This report addresses two elephants in the room. First, the sales-tax proposal itself is a funding solution that would be paid disproportionately by lower-income Iowans, compounding an already unfair tax system, so many have understood the increase would have to be offset to protect those least able to bear new costs,” Osterberg said.

“Second, it is highly unlikely a legislature would approve only a three-eighths-cent sales tax increase.”

The authors said history shows it is more likely that a full penny increase would be approved if legislators will take the political heat for any tax increase — and that raises an important question: How would the rest of the penny be used?

Sales tax by income distribution“In no case should that other five-eighths-cent be used to further imbalance Iowa’s tax system in favor of the wealthy. Part should be used to reverse the negative effects for lower-income Iowans and that is what we address in this report” Veldhouse said.

The report — available at www.iowapolicyproject.org — notes that the interest in the trust fund has grown with a continued lack of investment in water quality and growing attention to pollution by the state’s most prominent industry, agriculture.

“As we illustrate,” the report states, “not finding new sources to fund water quality or depending on sales taxes creates funding equity issues. Such policy also eases the tax load on polluters who are not required to deal with the problems they create.”

Two options examined by the researchers to restore tax equity are boosts to the Earned Income Tax Credit (EITC) and the Disabled and Senior Citizen Property Tax Credit and Rent Reimbursement Program (Rent Reimbursement).

“Using both strategies is important,” Fisher said, “because the EITC helps working families, whereas Rent Reimbursement addresses Iowans unable to work due to age or disability.”

Under those options:

• Raising the EITC from the current 15 percent of the federal credit to 20.5 percent would offset the full cost of the sales-tax increase to working people in the bottom 40 percent of income.
• Increasing the Disabled and Senior Citizens Property Tax Credit and increasing eligibility for the Rent Reimbursement Program to reflect inflation would contribute to an offset of the 1-cent increase for those not in the workforce.

The report also noted other equity-based options, including a removal of the exemption from the already existing sales tax for agricultural fertilizer. While a residential user of lawn fertilizer pays general Iowa sales tax, agricultural fertilizer — the principal source of water contamination — is exempt.

“Canceling the exemption and taxing such a large input would bring a substantial source of water quality funding: about $110 million annually,” Osterberg said.

“It’s hard to avoid, when considering tax equity, the idea of placing the cost of pollution on the chemicals that pollute Iowa waters.”

The Iowa Policy Project is a nonpartisan, nonprofit public policy research and analysis organization in Iowa City. Reports are at www.iowapolicyproject.org.

# # # # #