The Iowa legislature is poised to deliver the benefits of conservative budgeting and pro-growth policies to taxpayers in our state.
Heading into the legislative session Governor Kim Reynolds and legislative leaders stated that not only would further income tax reform be a priority, but an opportunity existed to accelerate planned income tax rate reductions. Under current law the income tax rate is scheduled to be lowered until it reaches a flat 3.9 percent in 2026.[i] As a result of conservative budgeting and prior pro-growth tax reforms, Iowa’s fiscal foundation is strong and lawmakers are able to enact further income tax rate reductions.
Iowa Senate and House Republicans have now jointly released an income tax reform plan that not only continues to lower income tax rates, but will also place Iowa’s personal income tax on a path toward complete elimination. Under the leadership of both Ways & Means chairs, Senator Dan Dawson and Representative Bobby Kauffman, the Iowa legislature is poised to deliver the benefits of conservative budgeting and pro-growth policies to taxpayers in our state.
Under the new proposal, 2024’s top rate would remain at 5.7 percent, but then fall to a flat 3.65 percent by 2027. The lowest income tax bracket in 2024 would also be reduced from 4.4 percent to 3.9 percent. Starting in 2026, Iowa would have a flat income tax rate of 3.75 percent.
In addition, to accelerating rate reductions, the proposed legislation creates a new mechanism that utilizes the accumulation of budget surpluses to slowly eliminate the income tax. This innovative idea would transfer dollars from the Taxpayer Relief Fund into a new Trust Fund that will be managed by (but separate from) the Iowa Public Employees Retirement System (IPERS). As that Trust Fund grows, dollars from the Fund would be used to replace general fund revenue that is being slowly ratcheted down by decreasing income tax rates. As a safety measure to ensure budget stability, future rate reductions would only occur in fiscal years when several fiscal benchmarks are met.
One key policy piece of this proposal that should not be overlooked is how the Taxpayer Relief Fund would be used. From time to time, discussions have taken place inside the Capitol that considered diverting those dollars to other uses. Fortunately, this plan importantly honors the original intent of that Fund by ensuring its use for income tax relief.
Governor Kim Reynolds and the legislature have a demonstrated history of enacting pro-growth tax reforms. Iowa once had some of the highest income tax rates in the nation. But as a result of conservative budgeting, pro-growth tax reforms have been and can continue to be enacted.
“Since 2017, we have been budgeting conservatively and responsibly, passing a number of historic tax relief bills, all while filling our reserves and the Taxpayer Relief Fund. All these decisions brought us to where we are today, a one-time opportunity to implement generational reforms to benefit Iowa families today and benefit the future of our state,” stated Representative Kauffman.
“The proposals filed today offer us a once-in-a-lifetime opportunity to completely eliminate the individual income tax in Iowa, put Iowa on an even stronger path to prosperity, and protect the tax cuts we’ve passed over the last several years, bringing more predictability to both Iowa families and small businesses here in our state,” stated Senator Dawson.
For the last few years Iowa’s budget has been in surplus, ending fiscal year 2023 with a $1.83 billion surplus, which was $86.3 million higher than originally estimated. The fiscal year 2024 surplus is projected to be $2.1 billion, rising to an estimated $3 billion in the fiscal year 2025.
Iowa’s reserve accounts are filled to their statutory maximums and are projected to continue at this level in fiscal years 2024 ($961.9 million) and 2025 ($963.7 million). The 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 to $3.66 billion in fiscal year 2024 and $3.847 billion in fiscal year 2025.
The large budget surpluses and the growth in the Taxpayer Relief Fund demonstrate that Iowa is still collecting too much from taxpayers.
The Senate and House tax reform plan also provides an avenue for further lowering of the corporate tax rate. Under current law the corporate tax rate is scheduled to be lowered to a flat 5.5 percent as specific revenue triggers are met. The Senate and House are now proposing to lower the rate further until it reaches a flat 4.9 percent.
Governor Reynolds, during the Condition of the State address, outlined her own income tax reform plan that would accelerate tax cuts and drive rates down further. The governor’s plan 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.
With a flat 3.5 or 3.65 percent rate, Iowa would have the fifth lowest income tax in the nation among the states that levy an income tax. Only Arizona would have a lower flat tax at 2.5 percent. North Dakota, while not having a flat tax, has a top rate of 2.9 percent.
Governor Reynolds and leaders in the legislature understand that Iowa cannot become complacent. The last few years have seen tremendous competition with numerous states reducing their income tax rates. Recently, legislators in Ohio and Governor Doug Bergum of North Dakota have called for eliminating their income taxes.
As a result of our strong fiscal foundation, Iowa is in a unique and historic position to not only create a lower flat tax but also prudently eliminate the income tax. “We truly may never have an opportunity like this again, and we are eager to start the legislative process on these bills and talk to Iowans about the incredible chance we have here to move our state forward,” stated Senator Dawson.
Taxpayers across the state should be encouraged by the proposals offered by Governor Reynolds and the House and Senate. Both are pro-growth, allowing taxpayers to keep more of their hard-earned income, making the Iowa more attractive to businesses and families. Going forward a debate will be had over both proposals, but one thing is crucial: Governor Reynolds and the legislature should continue the patterns of past sessions by mixing more tax cuts with conservative budgeting.
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