Session Preview: Income Taxes

Policymakers could seize the opportunity to place Iowa’s income tax on a path toward elimination.

Iowa is in a strong position to enact even further income tax reforms in 2024, and it must. As more states cut income tax rates, Iowa cannot become complacent. The competition among the states for businesses, jobs, and people is fierce. This is especially true as more people can work remotely, and a mass exodus is occurring from high tax states.

In 2022, Iowa led what has been called a state-level “flat-tax revolution.” Iowa’s 2022 tax-reform was the most significant tax cut in state history and arguably the nation. When fully implemented by 2026, the measure will have replaced the nine-bracket progressive income tax and its top rate of 8.53 percent with a flat 3.9 percent rate. Similarly, the corporate income tax rate is shrinking in accord with a revenue trigger until it reaches a flat 5.5 percent.

Having paired three rounds of income tax cuts with conservative budgeting, Iowa is in a position not only to accelerate its tax rate reductions, but also to achieve an even lower flat tax rate. The first goal should be a 2.4 percent (or lower!) flat tax, which would be the lowest in the nation, surpassing Arizona’s 2.5 percent rate. Even better, policymakers could seize the opportunity to place Iowa’s income tax on a path toward elimination.

Reinforcing the possibility of this move is Iowa’s Taxpayer Relief Fund, which the state created for the purpose of delivering income tax relief. That fund is estimated to grow to $3.6 billion in 2024. Leveraging this fund as a mechanism to further reduce or eliminate the income tax would certainly fulfill its tax relief mission. From an economic point of view, income taxes are the most harmful of all taxes because they punish growth, productivity, and increased earnings.

When Iowa closed Fiscal Year 2023 with a $1.83 billion surplus, Governor Kim Reynolds stated her desire to continue cutting taxes in 2024, “Some see a surplus as government not spending enough, but I view it as an over collection from the hard-working men and women of Iowa… I look forward to cutting taxes again next legislative session and returning this surplus back to where it belongs – the people of Iowa.”

Senator Dan Dawson, who chairs the Ways & Means Committee, has already introduced legislation (SF552) that could serve as the framework to continue Iowa’s tax reform progress. During the 2023 legislative session, Senator Dawson proposed speeding up already-planned cuts, and then continuing them on until a flat 2.5 percent rate is reached in 2028. Once the 2.5 percent flat rate is implemented, then the individual income tax would placed on a path of continuous cuts until it is eliminated altogether.

Whether Iowa leaders utilize existing plans to deliver additional income tax cuts or a completely new proposal is introduced, 2024 should shape up to be another historic year for the taxpayer.

 Print a PDF