Gov. Kim Reynolds and Republicans in the Iowa House and Senate identified tax reform as a priority before the start of the 2018 session. With expectations high for the first significant income tax reform in 20 years, the discussion on tax policy dominated the session. The Governor and lawmakers agreed to a bill on the session’s final day and the tax reform they passed is a good start in providing tax relief for Iowa’s families and businesses.
The tax reform compromise that was reached will lower rates and reduce the tax burden on Iowans as well as take steps toward simplifying our complex tax code. Individual rates will be reduced in 2019, including a cut of the highest rate from 8.98 percent to 8.53 percent. If enough revenue growth is realized by the state in future years, tax rates will be reduced further, with the top individual rate reduced again to 6.5 percent.
Many Iowa business organizations have praised the tax reform legislation as being pro-business and pro-jobs. Iowa’s highest in the nation corporate tax rate of 12 percent will be lowered to 9.8 percent. The legislation provides additional tax relief for Iowa businesses and farmers that is phased-in over time by increasing Section 179 expensing and the Qualified Business Income (QBI) deductions. Iowa’s sales and use tax will be modernized by taxing many digital sales, making the competition fairer between online retailers and traditional brick and mortar businesses.
Once all of the reforms are phased in and, most importantly, if state revenue grows enough to trigger additional cuts, a total of $2 billion less will be taken from Iowans over the next six years. That’s why tax year 2023 will be crucial for income taxes. The plan requires the state to collect $8.3 billion in 2022, up from the $7.1 billion Iowa is expected to collect in 2018, before the second round of rate cuts occurs. This means that Iowa will need to grow the state budget by at least 4 percent a year for four years in a row. For perspective, the state has realized 4 percent revenue growth in less than half of the past 22 years. If the 4 percent trigger is not met then the implementation of lower income tax rates will be delayed.
While this plan is a good start, there is always more that could be done. One part of the reform that could be improved is our high tax rates are only reduced slightly initially and then potentially not again until five years down the road. More significant rate cuts in a shorter amount of time would have an even larger benefit in terms of economic growth. With the passage of the federal Tax Cuts and Jobs Act and the positive economic impact those tax cuts are having on the economy, the Iowa Legislature has a unique opportunity to further build upon the boost resulting from federal tax reform.
This tax reform plan is a step in the right direction and will help many families and businesses in Iowa, but it should be viewed as a starting point. The Iowa Legislature needs to continue their work to lower both the individual and corporate income tax rates into the future. A 9.8 percent corporate rate is better than 12 percent, but it still is high compared to our neighboring states. The same is true of our future top individual rate of 6.5 percent.
Lowering rates and controlling the growth of state spending must be perennial priorities for the legislature. This is the best path for economic growth and opportunity for all Iowans.