Two tax plans for Iowans show big contrast

Senate bill cuts taxes far deeper than governor's proposal

(File photo) The dome of the Iowa State Capitol building from the rotunda in Des Moines on Tuesday, Jan. 10, 2017. Suspended across the dome is the emblem of the Grand Army of the Republic (G.A.R.). The emblem, painted on canvas and suspended on wire, was placed there as a reminder of Iowa’s efforts to preserve the Union during the Civil War. (Stephen Mally/The Gazette)
(File photo) The dome of the Iowa State Capitol building from the rotunda in Des Moines on Tuesday, Jan. 10, 2017. Suspended across the dome is the emblem of the Grand Army of the Republic (G.A.R.). The emblem, painted on canvas and suspended on wire, was placed there as a reminder of Iowa’s efforts to preserve the Union during the Civil War. (Stephen Mally/The Gazette)

DES MOINES — Proposed changes to Iowa’s income tax laws have the potential to be dramatic, impacting every Iowan who pays taxes.

Similarly, the changes could impact every function of state government — from education to public safety to health care — because of what could be a reshaped budget.

Republican state lawmakers, who hold agenda-making majorities in the Iowa House and Iowa Senate and occupy the governor’s office, are working on plans to overhaul the tax code.

Comparing the proposals

Current Iowa Law, Tax Year 2019
OverBut not overTax rates
Gov. Kim Reynolds plan, Tax Year 2019*
OverBut not overTax rates

*The Governor's plan would roll out over several years, read more here

Iowa Senate Republicans plan, Tax year 2019
OverBut not overTax rates
$0 $6,000 5.00%
$6,000 $15,000 5.25%
$15,000 $30,000 5.50%
$30,000 $75,000 6.00%
$75,000 6.60%


Two plans have emerged. Both reduce state income tax rates for Iowa workers. One also cuts taxes paid by Iowa businesses. But within the plans are other significant differences.

The Senate GOP’s plan, for example, goes much deeper with the tax cuts, providing more tax relief for Iowans and businesses but also taking much more money out of the state budget.

A proposal by Gov. Kim Reynolds also reduces rates, but has less of an impact on the budget and includes triggers that could slow it in a lackluster state economy.

Eventually the two plans will have to be merged into one.

The Senate introduced its plan and approved it within a week.


The House began work last week on a tax rewrite, choosing to work off Reynolds’s proposal made in February.


Both plans would reduce the amount of taxes paid by Iowa workers.

Under the Senate plan, the number of income brackets would shrink from nine to five, with the top bracket paying 6.3 percent, down from almost 9 percent.

The governor’s plan also reduces rates but does not change the income bracket structure.

So what does that mean for taxpayers? The state budget office came to these conclusions in analyzing the proposals:

Under the governor’s plan, by full implementation in 2023, Iowans making between $40,000 and $60,000 annually would pay roughly $200 less in taxes each year, a reduction of about 12 percent.

Under the Senate plan, Iowans in that range would pay roughly $600 less, a reduction of about 25 percent.

On the higher end of the income scale, Iowans who make between $100,000 and $125,000 would pay $365 less under the governor’s plan and $872 less under the Senate plan.

In short, the Senate plan calls for bigger state income tax cuts — meaning Iowa taxpayers would pay less under both plans, but even less under the Senate plan than the governor’s.

But that comes at a cost to a state already cutting spending and dipping into savings to deal with slower-than-expected tax receipts — even before any tax cuts are approved.


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Perhaps the biggest difference between the two plans impacts taxes paid by Iowa businesses.

Reynolds’ plan does not include a reduction of the state’s corporate tax rate; the governor said the state budget cannot withstand the additional loss in revenue, and that further study of the state’s myriad tax incentive programs needs to be done first.

Republican senators don’t think they need to wait. Their plan makes significant reductions to business taxes, lowering the top rate from 12 to 7 percent and reducing the tax brackets from four two, at 7 and 5.5 percent.

The changes would have a significant impact, reducing businesses’ state tax burden by more than half, according to budget officials.

Businesses that make between a quarter-million and $1 million would receive the most significant savings from the Senate plan: an average reduction of more than $95,000, according to the projections.

Businesses that make more than $1 million would see a more modest reduction: just more than $5,000.

“This bill creates dramatic economic development and it says that we’re open for business,” said Randy Feenstra, a Republican senator from Hull who oversaw the Senate plan. “We want to be a business-friendly state. We want to be bold. We want to grow.”


But under both plans, cuts mean less money coming into the state budget. Unlike the federal budget, where Congress increased deficit spending to pay for much of its U.S. tax code overhaul, the state budget must balance.


So that means state tax cuts will necessitate more spending cuts, although the state expects a windfall from the federal tax cuts to help.

The size of that reduction is vastly different in the two plans.

Reynolds’ plan anticipates state revenue will be reduced by $1 billion over the next six years.

The Senate plan would match that in one year when phased in. Over the next six years, state revenues would be reduced by more than $4 billion.

Iowa’s entire state general fund budget this year was just more than $7 billion.

Republicans hope the revenue losses are not as significant as projected; they say economic growth as a result of the cuts could create some new revenue growth.

“Yes, this is bold,” Feenstra said. “Senators, we must be bold if we want to drive Iowa’s economy by creating higher wages, more jobs and more opportunities.”

The governor’s plan would trim state revenue by just more than $88 million in the state budget year that starts July 1 of this year, and gradually increase to a nearly $300 million reduction in the state budget year that begins July 1, 2022.

The Senate plan would cut state revenue by more than $200 million in the next state budget year, and increase annually to the point where it would reduce state revenue by more than $1 billion annually in the state budget years that start July 1 of 2021 and 2022.

Opponents of the plan, most prominently Democratic lawmakers, fear such significant reductions would wreak havoc and devastate the functions funded by state government.


“This is, in my opinion, the height of fiscal irresponsibility. Reducing the state of Iowa’s revenue by $1 billion will have a catastrophic consequence to public education, public safety, and managed health care,” said Matt McCoy, a Democratic senator from Des Moines. “We are taking a drastic, dark and disastrous path.”


Before any of the proposals become law, one plan must emerge from the Legislature and be signed by the governor.

Since it appears likely the plans will have differences — some of them significant — Republican leaders from the Senate, House and governor’s office eventually will have to work together to construct one compromise.

That final legislation could contain elements from both plans.

“We’re not going to preclude any topic at this point, I don’t think,” said Iowa House Speaker Linda Upmeyer, a Republican from Clear Lake. “The Senate sent a bill that they have an interest in doing and the governor has a bill. And we’re going to see what we can do to come up with something that’s just good for Iowans.”



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