The Path Remains Clear for More Tax Reform

“There is no reason to think the state cannot continue down the path of leaving more money in Iowans’ pockets.” -Iowa Department of Management Director Kraig Paulsen

The Revenue Estimating Conference (REC), which has the arduous task of estimating Iowa’s tax revenue, recently met to provide an updated revenue forecast. The REC slightly lowered their revenue estimate for the current fiscal year (FY 2024) to $9.63 billion while increasing the FY 2025 estimate they made in December to $9.7 billion. The legislature is bound by law to use the lower of the December and March estimates in crafting the FY 2025 General Fund budget. This means that legislators will need to build a budget using the December estimate of $9.6 billion.

Governor Kim Reynolds responded to the REC forecast by noting the resiliency of Iowa’s economy. “Even with the significant national economic challenges created by so-called ‘Bidenomics,’ Iowa’s economy remains strong and steady,” stated Reynolds.

Kraig Paulsen, who serves as Director of the Department of Management and chair of the REC, attributed Iowa’s strong financial position to the conservative fiscal principles the state has been adhering to. “Thanks to this fiscal restraint, we think there is no reason to think the state cannot continue down the path of leaving more money in Iowans’ pockets,” stated Director Paulsen.  Going forward, policymakers should feel confident in crafting another conservative budget while enacting further income tax rate reductions.

For the past several years Iowa’s budget has been in surplus, which has swelled the Taxpayer Relief Fund to have a balance of $3.7 billion. Budget surpluses continue to be expected for both FY 2024 ($1.9 billion) and FY 2025 ($2.9 billion). This includes Iowa’s reserve accounts (Cash Reserve Fund and Economic Emergency Fund) to be full both in FY 2024 ($961 billion) and FY 2025 ($963 billion). “Our agenda has resulted in a strong Iowa economy, a balanced budget, almost $4 billion in the taxpayer relief fund, and a surplus this year of roughly $1 billion,” stated Iowa Senate Majority Leader Jack Whitver.

Policymakers can build upon this foundation by enacting a FY 2025 budget that is both prudent and restrained, while enacting further income tax cuts. With the legislative session’s second funnel now in the rearview mirror, more attention will be applied to the state’s budget and tax policy.

Both Governor Reynolds and the Republican-led legislature have made further income tax reform a priority, authoring reform proposals that would accelerate existing tax rate reductions in order to reach a lower flat tax. Currently, Iowa’s 3.9 percent flat tax will be achieved in 2026.

The income tax reforms proposed by Governor Reynolds would fully implement a 3.65 percent flat tax this year. The rate would further be lowered to a flat 3.5 percent in 2025. These cuts would amount to a $3.8 billion savings for taxpayers over the next five years.

The Senate and House have released their own joint tax reform proposal to accelerate rate reductions, while also creating a mechanism to slowly and steadily eliminate the income tax over time. Under the Senate-House plan income tax rates would be gradually reduced until a 3.65 percent flat rate is reached in 2027. Further, the Taxpayer Relief Fund would be used to create a new trust fund that would specifically be utilized to gradually eliminate the income tax using budget surpluses that would flow into the Taxpayer Relief Fund.

Both tax reform plans have merit, and both will likely be revised as negotiations continue. Policymakers have a historic opportunity as a result of the budget surpluses and the Taxpayer Relief Fund. Iowa is still collecting too much from taxpayers and it is time to return these dollars back to the taxpayers through rate reductions. The long-term goal should be a low flat tax of 2.5 percent and creating a path to complete income tax elimination. Going forward, the crucial elements will be restraining the growth of spending and avoiding the calls of preferential treatment for special interests.

“Now is the time to continue to implement these policies and Senate Republicans look forward to building on our success this year with the House and Governor Reynolds to enhance the truly great condition of our state,” stated Leader Whitver. By enacting a conservative budget, continuing Iowa’s historic income tax reforms, and advancing the constitutional protections for taxpayers, Iowa will be the gold standard for fiscal conservatism.

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