Once ranked as one of the worst states (44th) for its tax climate, Iowa is becoming more competitive (20th) and will only improve as future reforms are implemented.
The Tax Foundation has released its new State Tax Competitiveness Index, which replaces the previous State Business Tax Climate Index. This updated Index considers not only the business tax environment but also overall tax competitiveness. Iowa’s ranking has improved significantly, thanks to pro-growth tax reforms enacted by Governor Kim Reynolds and the state legislature. Between 2020 and 2025, Iowa’s position has risen from 44th to 20th. Once ranked among the worst states for tax climate, Iowa is now becoming increasingly competitive—and future reforms are expected to enhance this progress.
Overall Ranking: 20th
Corporate Tax: 23rd
Individual Tax: 19th
Sales Tax: 11th
Property Tax: 32nd
Unemployment Insurance Tax: 33rd
The Tax Foundation attributes Iowa’s substantial improvement to key measures, such as lowering income tax rates, eliminating federal deductibility, repealing the alternative minimum tax, and phasing out the inheritance tax. Since 2018, Governor Reynolds has prioritized making Iowa’s tax code more competitive and providing relief to taxpayers.
Iowa has set a benchmark in income tax reform. The state once had some of the nation’s highest income tax rates, with the top individual rate near 9% and the corporate rate at 12%, the highest in the country. Starting in 2025, Iowa’s tax code will be comprised of a single flat rate of 3.8%. The corporate tax rate, currently 7.1%, will continue to be gradually reduced until it reaches a flat rate of 5.5%.
Based on these rankings and the forthcoming 3.8% flat income tax rate, along with the targeted 5.5% corporate tax rate and the complete repeal of the inheritance tax, the Tax Foundation estimates that Iowa’s ranking will improve further, potentially reaching 15th.
Despite the gains in income tax competitiveness, Iowa’s rankings reveal that there is still work to do. Iowa ranks high in property taxes and unemployment insurance taxes. The Tax Foundation highlights Iowa’s relatively high property tax burden as a concern:
“While Iowa’s combined state and average local sales tax rate is slightly below average, the state’s property tax burden is somewhat high, and unlike many of its regional competitors, Iowa not only taxes tangible personal property (machinery and equipment) but does so without a de minimis exemption for small businesses. The state also has split roll property taxes, with higher ratios applied to businesses and renters than to homeowners.”
Addressing property tax reform is crucial for Iowa’s economic competitiveness, just as reducing income tax rates and regulatory burdens have been.
In the 2025 State Tax Competitiveness Index, Iowa’s regional standing has also improved. South Dakota, a state with no income tax, continues to lead the region, ranking second in the Index.
South Dakota: 2nd
Missouri: 13th
Wisconsin: 19th
Iowa: 20th
Nebraska: 24th
Illinois: 37th
Minnesota: 44th
Iowa is not alone in taking large strides on tax policy.; Arkansas and Indiana (now ranked 10th) are also examples of states advancing their tax competitiveness. This underscores the importance for Iowa to continue reform efforts as other states work to reduce tax rates.
Governor Reynolds has stated that, even with the 3.8% flat tax, income tax reform is far from finished; she has expressed interest in ultimately eliminating the income tax altogether. She is also committed to property tax reform, recognizing that the core of effective tax reform is controlling government spending. High taxes are often driven by high government spending, and Governor Reynolds has shown that through careful budgeting and spending restraint, it is possible to reduce income tax rates responsibly. The same approach could be applied to property tax relief efforts.
The 2025 State Tax Competitiveness Index is good news for Iowa, showing that recent tax reforms are making the state more competitive. However, it also serves as a reminder that more work remains to ensure Iowa’s tax system continues to improve, delivering even greater tax relief for its residents.
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