Expiration of TCJA Could Bring Higher Tax Bills, Slower Growth to Iowa

Tax increases, unchecked federal government spending, and rising national debt levels pose a significant economic threat to Iowa.

The Tax Cuts and Jobs Act (TCJA) was the signature economic policy achievement of President Donald Trump. The TCJA benefited most taxpayers, but unless renewed or made permanent, the tax cuts are set to expire starting at the end of 2025. If Congress allows the TCJA to expire, it will not only result in tax increases for the majority of individuals and businesses in Iowa, but it will also have broader economic implications for the state. While it is difficult to quantify the exact impact the expiration of the TCJA will have on Iowa’s revenue, it will undoubtedly create economic challenges.

The future of the TCJA is politically uncertain. The outcome of the 2024 election, and which political party controls the White House and Congress—or if divided government continues—will determine the fate of the TCJA. The act has significantly influenced state fiscal policies. When income tax rates were lowered at the federal level, several states, including Iowa, passed substantial income tax reforms that conformed to the federal tax code.

The TCJA’s tax rate reductions and base-broadening measures not only benefited the economy and taxpayers but also led to states generating more revenue from increased economic activity. If the TCJA is allowed to expire, the reverse may occur: as tax rates increase, the economy could slow, negatively impacting state revenue.

Key provisions of the TCJA set to expire in 2025 include the lowered individual income tax rates, the increased standard deduction, and the $10,000 cap on state and local tax deductions (SALT), which would revert to its pre-2017 form.

The TCJA not only reduced individual income tax burdens, but also introduced reforms that benefited businesses. Many small businesses in Iowa were able to offer bonuses, hire additional workers, and expand. One significant business-friendly provision was the reduction of the corporate tax rate. Another impactful measure was full expensing, also known as bonus depreciation, which was available under the TCJA for tax years 2017-2022 for both IRC Section 179 (smaller purchases) and 168(k) (larger purchases). Beginning in 2023, there is a gradual phase-out of the maximum amount that can be expensed in the year of purchase. Instead, the remainder must be depreciated over several years, depending on the type of capital purchase:

This phase-out will have a significant financial impact on businesses. Instead of fully expensing a capital purchase in the year it’s made, businesses will have to depreciate the expense over time. This change reduces businesses' ability to make timely investments when cash is available and can increase financing costs. The ability to immediately expense capital purchases has allowed businesses to reinvest in their operations, benefiting employees, consumers, and the economy. The loss of this provision will affect businesses of all sizes.

Additionally, the expiration of Section 199A (Qualified Business Income, QBI), also known as the 20 percent small business deduction, will have a negative impact. Section 199A lowers the effective tax rate for small and medium-sized businesses structured as sole proprietorships or pass-through entities (PTEs). This provision has empowered businesses to grow, increase wages and benefits, and improve facilities and equipment. The expiration of this deduction could slow economic activity and business growth.

Iowa conforms to IRC Sections 179, 168(k), and 199A, meaning an increase in the starting point for federal taxable income for businesses, which would likely result in higher tax bills. As a result, businesses will retain less of their earnings and be forced to send more to the government instead of reinvesting in the economy.

There is, however, some good news. The corporate income tax rate reduction under the TCJA—from 35 percent to 21 percent—is permanent. It would require an act of Congress to change these rates or revert them to pre-TCJA levels. This may become a possibility if Vice President Kamala Harris and Minnesota Governor Tim Walz win the 2024 presidential election, and Democrats gain a majority in the U.S. House and Senate.

Iowa’s fiscal foundation remains stable due to prudent budgeting and pro-growth tax reforms implemented by Governor Kim Reynolds and the legislature. Iowa has consistently operated with budget surpluses, which are projected to continue in future fiscal years. Additionally, Iowa’s reserve accounts are at their statutory maximums, and the Taxpayer Relief Fund holds a $3.7 billion balance.

However, the economic impact of the TCJA’s expiration will affect Iowa. A tax increase on individuals and businesses will likely have a negative economic effect. Just as the TCJA spurred economic growth, a tax increase could lead to slower growth. Iowa’s economy is intertwined with the national economy, and the expiration of the TCJA could contribute to a national recession.

Iowa’s economy is already experiencing challenges due to high inflation and a slowdown in agriculture and lower commodity prices. If businesses face higher taxes, they may hire fewer employees, reduce investments, or even cut back on operations. Iowa policymakers should prepare for the potential expiration of the TCJA by being cautious with spending and preparing for a possible national recession. While economic forecasting is difficult, a fiscal storm may be on the horizon. Renewing the TCJA or making it permanent would provide greater economic certainty, but this will depend on the results of the 2024 election.

What is clear is that the ingredients for a fiscal calamity are coming together. The expiration of the TCJA, combined with increased government spending, will likely result in tax hikes and higher inflation. Tax increases, unchecked federal government spending, and rising national debt levels pose a significant economic threat to Iowa.

Iowa emerged from the COVID-19 pandemic as one of the most financially secure states, thanks to the conservative budgeting of Governor Reynolds and the legislature. While the pandemic was an unpredictable "black swan" event, the expiration of the TCJA and some future fiscal policies are foreseeable, giving Iowa policymakers time to prepare.

 Print a PDF