Insurance firms warn against bill

Iowa insurance companies expressed stern opposition to state lawmakers' proposal for a one-time, short-term increase of a state tax on health insurance companies to generate $123 million in new state revenue to help cover the state's $1 billion budget shortfall.

"We oppose this bill because we constantly hear up here that insurance is really expensive, the rates keep going up. And it is exactly because of bills like this that put these costs back on our members," Brandon Geib, of Wellmark Blue Cross and Blue Shield, said during the public input section of a legislative hearing at the Iowa Capitol.

The proposed legislation, Senate Study Bill 3182, would increase the state tax on health insurance companies from 0.925% to 3.5% for the first nine months of 2026. After that, the tax rate would be 0.95%.

That would boost state revenues by $123.6 million in the next budget year, according to projections from the Iowa Department of Health and Human Services, and because of its retroactive provision, by $38.3 million in the current budget year.

Geib said the provision would increase taxes on Wellmark by more than $50 million.

"I want you all to be aware of the tax increase on us for this that we're paying for," Geib said. "I want you to just be aware that this is probably the single largest tax increase on an individual Iowa-based company maybe in legislative history."

Matt McKinney, representing the Federation of Iowa Insurers — a trade organization representing health and life insurance companies in the state — said during the hearing that the proposal amounts to a 238% increase on health care companies. He said that does not align with legislators' goals to address Iowans' cost of living.

"It's a significant problem," McKinney said. "A 238% increase on health insurance is not a step in the right direction."

Sen. Mark Costello, a Republican from Imogene, said one of the reasons the bill was proposed was to help make up for additional state revenue lost when federal Republicans last year allowed tax deductions for qualified tips and overtime. Because Iowa automatically conforms with the federal tax code, the newly allowed deductions are contributing to state revenues falling even shorter than anticipated, Costello said.

Costello and Sen. Tim Kraayenbrink, a Republican from Fort Dodge, signed off on advancing the bill, making it eligible for consideration by the Iowa Senate budget committee. Costello said he is open to discussing how the bill might be amended to help soften the financial impact on health insurance companies.

Sen. Molly Donahue, a Democrat from Cedar Rapids, declined to support advancing the bill.

State budget backstory

Iowa is operating in a budget deficit, created in large part by a series of reductions in state income tax levels over recent years. The state's general fund budget spending level, $9.4 billion in the current state budget year, is higher than state revenue for the same year — roughly $8.2 billion.

Republican lawmakers anticipated state revenue would dip below spending levels when, starting in 2019, they enacted a series of tax cuts that reduced the taxes Iowa workers pay on their income — from nine rates as high as nearly 9%, to a single rate of 3.8%. Expecting a state revenue drop, Republicans planned to use unspent state tax revenue, stockpiled over multiple years in multiple accounts, to cover any budget shortfalls.

Republicans have maintained throughout that eventually state revenues will rebound and surpass spending levels, eliminating the need for surplus funds to cover shortfalls.

The state is projected to collect roughly $8.5 billion in the 20262027 budget year, so lawmakers will have to reduce general fund spending by nearly $1 billion or again use the surplus funds to cover the shortfall.

To cover the budget shortfall, Republicans have been using two funding sources: the state general fund budget surplus and a Taxpayer Relief Fund, which remain stocked even after two years of withdrawals. On Dec. 12, the state's nonpartisan Legislative Services Agency projected in the 2026-2027 state budget year the state general fund surplus will be $546 million and the Taxpayer Relief Fund will contain $2.9 billion.

The balances in those surplus funding sources, however, are declining. In March of 2024, the agency's projections for the 2025 state budget year were a $3 billion general fund budget surplus plus $3.7 billion in the Taxpayer Relief Fund. In other words, the combined surplus in those two accounts in less than two years has dropped from $6.7 billion to $3.5 billion.

What else the bill does

The proposed legislation also changes the way the Taxpayer Relief Fund is used to cover the state budget shortfall for the next two years.

Currently, the Taxpayer Relief Fund is used to cover half of any difference between state revenue and spending. The bill would use the Taxpayer Relief Fund to cover the entire shortfall for the current state budget year, which ends June 30, and 75% of any shortfall projected for the next budget year, which begins July 1.

The bill also includes a supplemental $70.3 million appropriation from the state general fund to the Iowa Department of Health and Human Services for Iowa Medicaid.