Iowa’s Individual Income Tax Could be on the Road to Elimination

Senator Dawson introduced a bill (SSB1126) that calls to speed up the individual income tax reductions and reduce the overall rate to 2.5 percent by 2028 while eventually eliminating the income tax altogether.

The Iowa Senate kicked off February with a bang by introducing a measure to lower both individual and corporate tax rates, before placing the individual income tax on a path to elimination. Senator Dan Dawson, who chairs the Ways & Means Committee, has introduced a serious measure that would continue Iowa’s historic tax reform progress. Senator Dawson’s bill calls for the individual income tax to be lowered to a flat 4 percent in 2025 and then falling to 3.9 percent in 2026. By 2027 the rate would fall to 2.95 percent and by 2028 the rate would be lowered to 2.5 percent.

Once the 2.5 percent flat rate is implemented, then the individual income tax would be set to phase down until it is completely eliminated. Senator Dawson’s plan does this by utilizing the Taxpayer Relief Fund, which he proposes to rename the Individual Income Tax Elimination Fund. The Taxpayer Relief Fund was originally intended for the purpose of providing Iowans with income tax relief. Currently, the Taxpayer Relief Fund has close to a $3 billion balance and that is expected to increase in Fiscal Year 2024.

With so many taxpayer dollars sitting in the Taxpayer Relief Fund, there are temptations for policymakers to spend that money. This even includes using the Fund to “buy down property taxes” or to provide backfills to local governments. Senator Dawson is making sure that the Taxpayer Relief Fund will only be used to provide income tax relief.

Senator Dawson also proposes to revise the calculation used for corporate tax rate reduction. Under the 2022 law, excessive corporate tax collections are used for reducing that tax rate; this is why the rate fell to 8.4 percent this year. Senator Dawson is now proposing to speed-up future reductions, with the goal of phasing-down the rate to a flat 4.75 percent instead of the current target of 5.5 percent.

Governor Reynolds and legislative leaders have stated that Iowa cannot be complacent when it comes to tax policy. The last few years have been historic for state-based tax reform, with the Tax Foundation reporting that 43 states passed some form of tax reform in 2021 and 2022. While Iowa led the way in 2022 by passing the most comprehensive tax cuts in the nation in what has been referred to as the state “flat tax revolution,” other states are already considering new tax policies in 2023.

North Dakota is considering a tax reform proposal that would create the lowest flat income tax in the nation at 1.5 percent, passing Arizona’s rate of 2.5 percent. Our neighboring states are pushing ahead with reform ideas, as well.  Wisconsin is considering a measure that could take them to a flat income tax rate of 3.25 percent, while Nebraska is attempting to match Iowa with a 3.9 percent flat rate.

In Arkansas, Governor Sarah Huckabee Sanders is pushing to put the income tax on a path to elimination, while North Carolina, which for years has been the gold standard for state tax reform, is looking at further income tax reforms too. Despite having additional tax cuts scheduled through 2026, North Carolina leaders are considering further rate reductions with the goal of matching Arizona’s flat rate of 2.5 percent. North Carolina’s corporate income tax is already on a pathway to elimination, and it will be fully repealed by 20230.

Senator Dawson has offered a responsible, pro-growth tax proposal that would help Iowa maintain its competitive position, while allowing taxpayers to keep more of their hard-earned income. It will be interesting to see how his legislation advances this year.

 Print a PDF