Overview / Major Events
The House and Senate this week took the final step in implementing the agreement that resolves a number of key tax concerns regarding coupling with federal tax changes (signed by the Governor this week) along with setting the amount of new money for our K-12 schools in FY17 (beginning July 1, 2016).

WHAT GOT DONE?

• Governor Branstad officially signed HF 2433 this week, legislation to couple the Iowa tax code with federal changes on Section 179 expensing for the 2015 tax year, only. The bill also rolls back Department of Revenue rules on taxation of consumable supplies in the manufacturing process and replaces them with a less comprehensive set of rules.
• A House and Senate conference committee on school aid agreed to a basic increase in supplemental state aid to our K-12 schools at a rate of 2.25%. SF 174 passed the Senate on a 44-6 vote and the House on a 55-41 vote. The bill now goes to Governor Branstad and he is expected to sign it into law. This now allows local school districts to make decisions on local school budgets.
  

WHAT IS NEXT?
With the “must-do” tax policy and education spending issues resolved for this session, the General Assembly will now turn to work on the remainder of the state budget (including the first necessary step of setting joint House and Senate budget targets for each budget area). See below for a primer on the budget process moving forward.

Overview / Major Events
The House and Senate both took major steps forward in implementing the agreement reached last week that resolves a number of key tax concerns regarding coupling with federal tax changes along with setting the amount of new money for our K-12 schools in FY17 (beginning July 1, 2016).

     WHAT GOT DONE?

• Legislation passed both the House and Senate (by large bipartisan majorities) to match federal changes on Section 179 expensing for the 2015 tax year, only. (HF 2433: passed House 79-18 and Senate 50-0). The bill will now go to Governor Branstad and his signature is expected.
• Legislation passed both the House and Senate to rescind the recently adopted rules by the Iowa Department of Revenue regarding the taxation of consumable supplied. The bill both rescinded those rules and then replaced them with a scaled-back version of consumable supply taxation. The bill will now go to Governor Branstad and his signature is expected.
  

     STILL TO DO:

• Yet to be done is the agreement between House and Senate leaders to set state supplemental aid for K-12 schools in Iowa. The widely reported figure of 2.5% growth has yet to be approved in either Chamber and it is not known what the impact of the new revenue estimate (see below) will have on the ability to finalize and pass this piece of the agreement.

Overview / Major Events
House and Senate leaders late this week reached tentative agreement on a deal that would resolve disagreements over federal tax coupling and supplemental state aid for K-12 schools. These two issues have been sticking points between the House and Senate and the tentative deal could speed the way toward an early- to mid-April adjournment date.

However, as legislators were reminded last summer, any deal between the House and Senate also needs the blessing of the Governor. It is not clear at this point whether or not the Governor is satisfied with agreement. Regardless, the House and Senate are moving rapidly to get the elements of the agreement to Governor Branstad’s desk ASAP.

What’s in the Deal?

1. House and Senate agree to couple the state income tax code to match federal changes on Section 179 expensing for the 2015 calendar year, only. The fiscal estimate for this change is a $95 million hit to the state treasury, which would be reflected in a smaller ending balance (prior to this change, the ending balance for FY16 was estimated at $172 million). Governor Branstad did not include coupling in his budget, but has since indicated he could support it under certain circumstances.
2. House and Senate agree to rescind the rules put forth by the Iowa Department of Revenue last summer that define those consumable supplies in the manufacturing process that are tax exempt. However, they also agree to adopt House language from last year on consumable supply exemptions – which is less broad than the Departmental rules. The bottom line for some manufacturers is this will raise $13.5 million in new revenue for the current fiscal year, thus mitigating some of the revenue loss from the Section 179 coupling (meaning the hit to the ending balance will be closer to $80 million). Governor Branstad supported the Department of Revenue when the new rule was announced and it is unclear his position on rolling it back.
   
3. House and Senate agree on an increase in supplemental state aid to K-12 schools at a level around 2.5% (this still may be under some additional negotiation). The House had proposed 2.0%, the Senate 4.0%, and the Governor 2.45%. This figure is extremely close to the Governor’s original budget request and it is difficult to imagine he would object to this compromise (that could change if it included one-time spending).

Overview / Major Events
Only one week remains until the second legislative funnel takes place and significantly reduces the number of policy bills still in play for the remainder of the 2016 legislative session. This week was dominated by extensive floor debate in both Chambers as legislators raced to get bills passed in time to be considered by committees in the opposite house by the March 11 deadline.

Next week expect a combination of committee meetings and floor work to round out the list of eligible bills. That said, the most significant policy decisions yet to be made are not even on the radar screen this week as negotiations on issues such as school aid, tax coupling, and water quality are continuing in private.

State Revenue Stagnant in February and Below Estimates for the Year
The Department of Management released the February state revenue numbers and the report shows revenue growth has recently stagnated—with year-to-date numbers now falling a full percentage point behind estimates.

General fund receipts for February 2016 grew only 0.7% over the same period last year. And, year-to-date receipts have grown by 2.7% while the Revenue Estimating Conference had pegged estimated growth at 3.7%. (And while one percentage point might not sound like much, each point is equal to more than $70 million.)