Economy

Governor Reynolds Proposes 4% Flat Income Tax

Governor Kim Reynolds, in her Condition of the State address this week, delivered a Reagan-esque take on the finer points of governing.  “Under these ceilings, next to this marble, among these columns and portraits, it’s tempting to believe that nothing good happens unless we legislate it, regulate it, or fund it.  But in the small towns, around kitchen tables, in the fields and back-offices, Iowans understand that we in this building don’t fund anything. They do.”

We like to think that statement, in addition to being 100 percent accurate, is a nod to the former President’s perspective when he said, “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Acknowledging that more government isn’t always the best solution, and in fact a smaller role for government is often better, the governor offered a number of pro-growth policy proposals on Tuesday evening.  Many of these policies would be perfectly at home in ITR Foundation’s recently-released Blueprint for Free-Market Solutions, including her comprehensive tax reform plan that calls for a 4 percent flat income tax by 2026.

Under the governor’s proposal the income tax cuts would “occur gradually over the next four years” so that the priorities of government are protected. The progressive income tax brackets would be replaced by a 4 percent flat tax.  Proposed changes to the personal income tax alone will save taxpayers $1.583 billion by 2026. Getting government out of the way and allowing taxpayers to keep more of their income will only lead to a more productive and prosperous economy.

The ongoing process of tax reform in Iowa began in 2018.  In response to President’ Trump’s Tax Cuts and Jobs Act, Iowa cut its top marginal rate from 8.98 percent to 8.53 percent.  In 2021, the governor and legislature locked in an additional cut to 6.5 percent.  And now, the governor has proposed a further reduction to 4.0 percent.  We don’t mean to bog down the discussion by throwing a bunch of tax rates around, so we will say it more directly: it’s a really big deal that a process that started just four years ago is now poised to complete a series of rate cuts that will have reduced Iowa’s income tax burden by more than half.

In her speech, Governor Reynolds covered more issues than just taxes.  For instance, she also discussed reforms that would address Iowa’s workforce issues, reduce occupational licensing burdens, and bring more transparency and choice to education.  Many of these policy ideas focus on expanding opportunity and putting decision making in the hands of Iowans. As the governor said, “We’re strong because we’ve been guided by the lights of common sense, fairness, and freedom. By the knowledge that bold action isn’t always government action. It’s Iowans making their own decisions for their own families and future.”

This year’s legislative session is scheduled to last into April, if not longer.  The reality is that not all of the good ideas that are presented in January will make it across the finish line to be signed into law.  And the bills that do may very well look drastically different by the time they’ve worked their way through the legislative process.  As legislation takes shape, ITR Foundation will continue to educate the public about what it takes to build a pro-growth tax code, a friendly business climate, and an education system that prepares responsible leaders and citizens for the workforce.

Conservative policies are working in Iowa. As we wrote in our Blueprint for Free-Market Solutions, our state is in a strong financial condition thanks to the hard work and ingenuity of Iowans. But pro-growth policies, including prudent budgeting and an improving tax climate, have been crucial, too. Much of what the governor discussed has been met with support by Republican leaders in the Iowa House and Senate.  We all have a lot of reasons to be optimistic about our state’s future.