Governor Kim Reynolds signed a major realignment of Iowa’s tax system into law on Tuesday, achieving one of his main legislative priorities in time for a national discourse presenting itself to a conservative audience.
Over the next few years, the law will lower Iowa’s top tax rate until all Iowans pay a flat tax of 3.9% beginning in 2026. road, the measure will eliminate the state’s progressive income tax system, in which wealthier Iowans pay higher rates. than low-income Iowans and places Iowa among 10 other states with some form of flat-rate income tax.
“Even after major tax cuts and historic investments last year, we were still collecting too much in Iowa,” she said. “There has never been a better time in Iowa for bold and enduring tax reform. And that is exactly what today’s bill represents.”
Democrats criticize the plan because wealthier Iowans receive the biggest share of the benefits, while Republicans say the law will attract new residents and make the state more competitive.
“A flat tax is not fair, and Kim Reynolds is doubling down on an outdated tax policy that has failed in other states — and will fail in Iowa,” Iowa Democratic Party Chairman Ross Wilburn said in a statement. a statement. “We need a tax plan that not only funds our communities fairly, but also puts money in the pockets of all Iowans, not just the wealthy few.”
Democrats also warned that the state surplus was being artificially inflated due to a huge one-time influx of federal money in the wake of the COVID-19 pandemic.
This year’s tax cut, which Reynolds signed into law Tuesday at LBS, a Des Moines bookbinding and packaging company, preceded his expected primetime national address, response to President Joe Biden’s State of the Union address on behalf of the Republican Party.
Reynolds alluded to the theme of that speech, saying the tax cuts contrasted with federal policies and sent a message “that Iowa is open for business.”
“It also strengthens Iowa’s economy at a time when bad DC policy is generating real headwinds, whether it’s runaway inflation or lingering supply chain issues,” a- she said of the law. “These growth-oriented tax cuts will help us weather the storm and come out stronger on the other side.”
The law also makes retirement income like 401(k)s, IRAs, and pensions tax-exempt, provides tax breaks to farmers who retire, and lowers the state’s corporate tax rate while by reducing the size of certain corporate tax credits.
The law lowers Iowa’s personal income tax rates. What else does it change?
The total plan would reduce Iowa state revenue by more than $236 million in the first year, an amount that would rise to nearly $1.9 billion in the sixth year, according to a financial analysis by the Nonpartisan Legislative Services Agency released Thursday.
Most of the revenue loss would come from the reduction in the personal income tax rate and the retirement income exemption, which combined would reduce Iowa’s revenue by $1.7 billion. dollars once fully implemented.
Personal income tax is a significant portion of Iowa’s revenue. In the fiscal year that ended June 30, state personal income taxes totaled $4.25 billion, just under half of the $8.8 billion net revenue from the general fund of the State.
Republicans said they believe Iowa’s projected growth will be enough to sustain the cuts, but Democrats said they fear the loss of revenue will make it harder for the state to fund essential services. in the future.
Deidre DeJear, a Democrat running for governor against Reynolds, called the tax cuts myopic. Because the plan cuts rates first for the highest income brackets, she said many Iowans won’t get a tax cut for several years.
“This tax plan that she is signing, the people of Iowa will only reap the benefits four years from now,” she said. “The average Iowan will get $50 more a month four years from now.”
Senate Majority Leader Jack Whitver, R-Ankeny, said parts of the bill — like making retirement income tax-exempt — will go into effect next year.
“Iowans can expect a tax cut right now and then even more over the next four years,” he said.
Reynolds says lower corporate tax rate will make Iowa more competitive
The law will lower the corporate tax rate to a flat rate of 5.5% over time, assuming the state collects at least $700 million in corporate tax revenue. The rate cut is expected to reduce state revenue by more than $229 million in the fiscal year beginning in 2028, according to the legislative agency’s analysis.
“We are maximizing opportunities for workers by making Iowa more attractive to investment and world-class employers,” Reynolds said.
In his statement, Wilburn said Reynolds’ plan “rewarded his corporate donors, not hard-working Iowans.”
Corporations also won’t be able to receive as much money from the state in the form of refundable tax credits — essentially checks that Iowa cuts corporations each year.
The law will take several tax credits that are now fully refundable and reduce refundability by 25% over five years. This means businesses not subject to tax will receive smaller checks from the government when claiming these tax credits.
For the tax credit for state research activities, which paid nearly $44 million in refunds last year, much to large companies such as Deere & Co. — refundability will be reduced by 50%.
Changing this tax credit alone is expected to boost state revenue by nearly $45 million in fiscal year 2028, according to the agency’s analysis.