Iowa’s income tax would drop to 3.5 percent next year under the governor’s proposal.
In her Condition of the State address, Governor Kim Reynolds outlined a pro-growth policy agenda, including a new round of income tax cuts. Gov. Reynolds stated, “ the condition of our state is truly strong.” The reason for this is the fiscally conservative policies Iowa’s elected officials have been following. Iowa Senate Majority Leader Jack Whitver summed up the policy goals of the 2024 legislative session when he stated that the plan is to “cut taxes, control spending, reform government, and let Iowans be great.” This is the formula that is making Iowa strong.
Due to fiscal conservatism, Iowa ended fiscal year 2023 with a $1.83 billion surplus and our state’s reserve accounts are filled at their statutory maximums (over $900 million). Repeated surpluses have also fueled an enormous growth in the Taxpayer Relief Fund. The Taxpayer Relief Fund has a current balance of $2.73 billion and this is projected to increase.
This means that Iowa is still collecting too much from taxpayers. “Let me be absolutely clear: the surplus does not mean that we aren’t spending enough; it means we’re still taking too much of Iowans’ hard-earned money,” stated Gov. Reynolds.
As a result, Gov. Reynolds is proposing to accelerate existing income tax rate reductions and even lower the future flat tax. As of now, Iowa is in the process of phasing in a 3.9 percent flat tax by 2026. This year Iowa’s top individual income tax rate will be lowered from 6 percent to 5.7 percent.
The plan the governor unveiled on Tuesday night would fully implement a 3.65 percent flat tax this year. The rate would further be lowered to a flat 3.5 percent in 2025. These cuts would amount to a $3.8 billion savings for taxpayers over the next five years.
This pro-growth tax plan would benefit all taxpayers in Iowa, as the governor demonstrated with two examples. “The average family of four with an income of about $78,000 will see a tax savings of over 25 percent. A single mother of two making $47,000 would see an even greater savings of more than 42 percent,” stated Gov. Reynolds.
It is almost certain that the Senate and House will offer their own income tax reform plans this year. For instance, Sen. Whitver has stated that the goal of Senate Republicans is to not only get the rate as low as possible, but eventually eliminate the income tax altogether. Speaker of the House Pat Grassley stated that “this session, we’ll look at speeding up our previously passed tax cuts as quickly as we can.”
Critics of tax plans like those put forth by Gov. Reynolds fail to admit that the tax and spend model does not work. Our neighbors to the north in Minnesota, after increasing spending by 38 percent, burning through an enormous budget surplus, and even raising taxes, are now confronted with a budget deficit. “Overspending leads to higher taxes, broken promises, and fewer opportunities,” stated Sen. Whitver.
Further, Sen. Whitver argues correctly that the danger is not Iowa becoming another Kansas, but rather Minnesota. “So much rhetoric has been spilled in this building accusing Republicans of turning Iowa into the next Kansas. I think the much bigger and much more real danger for states is becoming the next Minnesota,” stated Sen. Whitver.
Iowa once had one of the heaviest tax burdens in the nation, but our state has now become the gold standard for state fiscal policy. Pro-growth tax reform, right sizing government, and conservative budgeting are the pillars of a successful economic policy. As other states continue to lower their tax rates, Iowa cannot become complacent. Additional income tax cuts would be another step in the right direction.
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