Reports that the Iowa Legislature eliminated the retirement income tax so that there would be enough people around to call the Bingo numbers have proven to be false. Okay, while that thought may have never actually crossed anyone’s mind, our elected officials were certainly thinking about how to keep retirees in our state when they eliminated Iowa’s tax on retirement income this month.
Kiplinger currently ranks Iowa in the top ten states for worst tax climates for retirees, but even they admit that will change in 2023 when retirees will no longer have to pay a state income tax here. Acknowledging there were major financial incentives to flee Iowa’s tax code, this most recent measure caps steady progress that has been made to deliver tax relief to retirees. Last year, Iowa started the process to eliminate the inheritance tax. In 2014, taxes on military retirement benefits were eliminated and that same year also saw the completion of a seven year phase-out of the income tax on social security benefits. Prior to those changes, Iowa had already been exempting the first $12,000 of income for a retired couple.
This year’s major tax reform bill, which also will gradually reduce the individual tax rate to a flat 3.9% and the corporate tax rate to a flat 5.5%, is a major victory for Iowa’s retirees. “Beginning in tax year 2023, the tax liability for nearly 295,000 Iowa taxpayers will be eliminated under the retirement provision of this new tax law,” stated Governor Reynolds.
Iowa will now join 12 other states that currently do not tax retirement income, as illustrated in the chart below. These include nine states that don’t tax individual income of any kind, as well as Illinois, Mississippi, and Pennsylvania that have also decided not to tax income from 401(k) plans, IRAs, or pensions.
Retired farmers will also have their tax liabilities reduced under the new law. “For farmers, age 55 or older who have farmed at least 10 years and are retired, this bill allows an option to eliminate the tax on cash rent or crop share agreements for all years the income is earned,” noted Governor Reynolds. There are additional provisions in the bill that attempt to exempt retirement income for certain business owners, too.
Retirees are the foundation of many communities across Iowa. They provide countless hours of volunteer service and contribute greatly to the culture of Iowa. Eliminating income taxes on retirees may not prevent some from escaping the cold winters, but an improved tax climate should encourage them to stick around the rest of the year.
Even with all of this good news, some Iowans may be asking why can’t ALL of the provisions be implemented RIGHT NOW? Some retirees may be asking why they have to wait until next year, too. These are understandable questions, but an important point to consider is that Governor Reynolds and the legislature are providing tax relief responsibly.
Iowa law requires that its budget is balanced. This means that any tax reform must fit with spending plans. Governor Reynolds and the Republican-led legislature have mapped out a plan that couples a steady reduction in tax rates with prudent levels of spending growth. It is precisely this fiscal conservatism that created not only a strong economy, but also a stable financial foundation for the state.
So, what’s next? Governor Reynolds and the legislature have made historic progress on cutting income taxes, but to make Iowa’s tax climate even more completive, property taxes must be examined. The Kiplinger retirement ranking docks Iowa for a high property tax burden, calculating our median property rate as the 11th-highest in the nation. That means we will need to address local government spending and public-school financing. For too long, local officials have gotten away with escalating property taxes and it is time for that growth to be reined in.
The 2020 census demonstrated that states with low- or no-income taxes are growing their populations and their economies. Improving Iowa’s tax climate will help attract and keep more people in Iowa. Our neighbors, as well as the nation at large, are paying attention to the pro-growth tax reforms taking hold here.