DES MOINES — State revenue experts now project Iowans will see their individual federal income taxes decrease by nearly $1.8 billion in the 2018 tax year.
But the federal changes could mean Iowans will pay an extra $373 million over three years in higher state income taxes due to Iowa’s federal deductibility law.
New estimates released Friday say 1,440,403 Iowa taxpayers will pay $1.775 billion less in federal income taxes this year.
That estimate — from Iowa Department of Revenue Director Courtney Kay-Decker and analyst Amy Harris — is up from the preliminary estimate in January of $1.538 billion.
The revised estimates say the average federal tax cut will be:
l $202 for the 435,222 Iowans earning $20,000 or less a year.
l $655 for the 324,828 Iowans earning $20,001 to $40,000.
l $1.128 for the 353,199 Iowans earning $40,001 to $80,000.
l $3,288 for the 327,234 Iowans making more than $80,000.
Because Iowa is one of three states that allows its taxpayers to fully deduct their federal taxes on their state income tax returns, revenue experts calculated the state will collect an extra $33 million in state income taxes this current budget year that ends June 30.
That increase will be $148 million in fiscal 2019 and $192 million in fiscal 2020 when the federal changes are fully implemented.
The rule of thumb is this in states with federal deductibility: When federal income taxes go down, Iowans have less to subtract from their state income tax obligation, so state income taxes will increase.
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The revised estimates are good news for Gov. Kim Reynolds and state lawmakers who are grappling with a projected $34.5 million state budget shortfall for the current fiscal year that ends June 30.
Lawmakers and the governor also are aiming to simplify Iowa’s complicated income tax system this legislative session, as well as reduce income tax rates and possibly eliminate federal deductibility.
David Roederer, the governor’s budget director who also leads the state Department of Management and the Revenue Estimating Conference, said the new estimates were “definitely a positive message, but we also need to be very cautious.”
Roederer said the numbers are in line with what the governor projected in the state budget she laid out for lawmakers in January and hopefully would give budget-makers “a little more leeway” with a bigger ending balance in case this fiscal year’s revenue growth estimates shift.
“I think it should give us all some confidence that the numbers aren’t going to drop from what the governor’s budget was looking at in January,” Roederer told reporters after the Revenue Estimating Conference meeting. “That’s the positive side.”
Reynolds is expected to unveil her tax reform/relief plan soon, and the projected higher state tax collections resulting from the federal tax cut will factor into what she proposes, Roederer said.
“The governor’s goal is that since Iowa state taxes would be going up because of federal taxes going down that she wanted to make sure that Iowans got that money back as well,” he told reporters. “So that’s a key number as to how much we believe is going to be coming in so that you would know how much that you could be reducing.”
Reynolds echoed Roederer’s assessment, saying in a statement that the “historic federal tax reform” is putting “real money in the pockets of real Iowans. Now, we need to do the same here and pass tax reform at the state level.”
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Kay-Decker said some of the growth in state revenue — irrespective of the federal income tax cuts — appears “attributable to actual growth in income,” which she takes as a positive economic sign.
“I think the economic signals out there are generally good, so hopefully that would mean that incomes are going to continue to increase,” she said.