Iowa would be the first state in the nation to eliminate its income tax.
In 2022, Iowa led what has been called a state-level “flat-tax revolution.” 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 or 2022 and in 2023 nearly a dozen states continued the trend. Now, Iowa has the opportunity to build on its previous good work in this area by being the first state in the nation to eliminate its income tax.
Governor Kim Reynolds along with legislative leaders have shared Iowa’s successful record of advancing pro-family and pro-growth economic policies. This included the universal-school-choice law passed early in 2023 and the 2022 tax-reform law. The 2022 tax-reform measure is the most significant tax cut in state history and arguably the nation. The measure replaces the nine-bracket progressive income tax with a top rate of 8.53 percent, and gradually reduces rates until a flat 3.9 percent rate is established in 2026. The corporate-tax rate is also being lowered following a revenue trigger, until it reaches a flat 5.5 percent.
Governor Reynolds and her colleagues have said on multiple occasions that Iowa is far from finished with tax reform, and her goal is to eliminate the income tax altogether. This is a goal that is shared by many in the legislature, including Iowa senate majority leader Jack Whitver, who has been instrumental in helping Governor Reynolds enact pro-growth tax reform. Both understand that Iowa cannot be complacent, especially as other states continue to lower their rates. States are in competition with each other for both jobs and people, and increasing worker mobility has made low-tax states more attractive.
Senator Dan Dawson, who chairs the Ways & Means Committee, has introduced legislation (SF552) 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 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 $3.5 billion balance and that is expected to increase in Fiscal Year 2024.
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.
While this policy might seem like a dream in some states, Iowa is in the perfect situation to enact the first of its kind elimination of the income tax. During the last election, Governor Reynolds won her re-election campaign with 58 percent of the vote while Republicans expanded their majority in the Iowa House of Representatives and the Iowa Senate gained a supermajority. Adding to that, a poll in March 2023 asked whether Iowans favor “gradually reducing the state’s individual income tax rate until it is eliminated.” Iowa adults overwhelmingly supported the policy with 56 percent supportive and only 33 percent opposed and 11 percent unsure. Nearly three-fourths of Republicans, 72 percent, favor eliminating the income tax, while 56 percent of Independents say they are in favor of the policy.
For decades, Iowa had some of the highest income taxes in the nation, however, the tides have turned. Taxpayers have spoken and they want to keep more of their hard-earned money and Iowa is answering by once again trying to lead the nation in pro-growth economic policies.
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