In the 19th edition of Rich States, Poor States, the ALEC-Laffer State Economic Competitiveness Index, Iowa’s Economic Outlook has improved from being ranked 30th to now 25th in the nation.
The reason for Iowa’s improvement in the Index is the pro-growth tax reforms that Governor Reynolds and the legislature have implemented. Rising five points in the ranking may seem gradual, but it also tells another story that Iowa policymakers must consider.
Tax rates matter, and they have a significant impact on a state’s economy, but as Governor Reynolds has expressed, taxes are more than just numbers. “When I first took office in 2017, Iowa’s top income tax rate was 8.98%, among the nation’s highest. So was our 12% corporate tax rate. Those taxes weren’t just numbers on a page. They were eating into paychecks, increasing the cost of doing business, and quietly making life more expensive for Iowa families,” stated Governor Kim Reynolds in her 2026 Condition of the State Address.
Governor Reynolds has made tax reform a priority since 2017. Iowa has been a national leader in state-based tax reform, including serving as an early leader in the state “flat tax revolution.” “I’m proud to say, we’ve cut taxes more than any other state in the country,” noted Governor Reynolds. The significance of these tax reforms is reflected in Iowa’s strong fiscal foundation and increasingly competitive economic climate.
In 2025, Iowa’s 3.8% flat tax was fully phased in, representing nearly a 60% reduction in the income tax rate since 2017. The 7.1% corporate tax rate will also continue to be lowered until it reaches a flat 5.5%. Governor Reynolds and the legislature also enacted additional tax reforms, including eliminating the inheritance tax, broadening the sales tax base, and cutting the unemployment insurance tax in half.
Governor Reynolds has noted that even with the recent challenging economic times, Iowa’s economy is starting to benefit from the flat tax and other pro-growth reforms. “Today, the momentum is real. Despite a challenging global economy, we’ve attracted over $20 billion in new capital investment since 2024, creating new jobs and new opportunities,” stated Governor Reynolds.
Governor Reynolds is in her final term, and she has already been the most significant pro-taxpayer executive in Iowa’s history. The 3.8% flat tax is one of her top policy achievements. However, as Governor Reynolds has stated, “that’s more than just a number, a ranking, or a percentage. It means more room in the budget for groceries. For school supplies. For a tank of gas. It means saving more, instead of falling a little further behind.”
Nevertheless, rankings can serve a purpose to demonstrate Iowa’s progress and why Iowa cannot become complacent with tax policy. Other states are now beginning to surpass it because of the highly completive fiscal policy environment. For example, next year Ohio’s flat tax will be 2.75%, while other states continue to find pathways to further reduce rates or even place their income taxes on a path toward elimination.
Another factor holding back Iowa’s competitiveness is its high property tax burden. Governor Reynolds and the legislature have made property tax reform a priority, including passing a comprehensive package of reforms this year that are not yet reflected in the Rich States, Poor States rankings. In contrast, Utah has retained the top ranking in Rich States, Poor States for 19 years, a testament to its pro-growth tax policies. It also has one of the most taxpayer-friendly property tax systems in the nation.
Regardless of the type of tax, government spending ultimately drives taxation. One reason Iowa has been so successful in reforming its income tax system is that Governor Reynolds and the legislature have exercised spending restraint, making meaningful tax relief possible. Similarly, the property tax reform law passed during this legislative session will, for the first time, apply a 2% cap to limit both the growth of property taxes and local government spending. Spending gets to the heart of the issue because, without restrained spending, responsible tax policy is impossible.Rich States, Poor States demonstrates that Iowa is becoming more competitive because of its pro-growth tax reforms, but policymakers cannot afford to become complacent. The report also reinforces a fundamental truth: the foundation of any successful fiscal policy is conservative budgeting and disciplined spending.
Print a PDF