Iowa Republicans advancing competing tax reform proposals

DES MOINES — Iowa Senate Republicans advanced Gov. Kim Reynolds’ legislation that would accelerate previously planned state income tax reductions. But the top Senate Republican on tax policy said legislators, in the coming weeks, also will advance their own proposal, which includes an eventual elimination of the state income tax.

Republicans on a Senate subcommittee Monday advanced Senate Study Bill 3038, the governor’s proposed tax bill that would speed up state individual income tax cuts passed two years ago, provide a property tax cut for commercial child care centers, and lower taxes that businesses pay to fund benefits for unemployed workers.

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Sen Dan Dawson, R-Council Bluffs, the Republican who leads the Senate Ways and Means Committee, told reporters those components will be considered as separate bills in the coming weeks, along with his own bill — Senate Study Bill 3141 — to gradually eliminate the state individual income tax.

Reynolds’ bill would accelerate income tax cuts passed in 2022 that started to take effect this year. As is, the law would gradually reduce personal income taxes to a flat 3.9 percent in 2026.

The governor this year proposed lowering the state income tax retroactively to 3.65 percent this year and 3.5 percent next year.

The proposal would reduce Iowans’ state income taxes, and thus limit future state revenue growth, by $3.8 billion over the first five years.

“Despite the tax cuts already delivered, Iowa ended the year with a $1.83 billion surplus, $902 million in reserve funds and $2.7 billion in the Taxpayer Relief Fund,” Molly Severn, the governor’s legislative liaison, said during the subcommittee meeting. “The state is over collecting from Iowans and they deserve to keep more of their hard earned money.”

House and Senate Democratic leaders have said further income tax cuts would disproportionately benefit the wealthy, while leaving hundreds of thousands of Iowans who pay no income taxes with little to no benefits.

Reynolds’ office estimates a family of four with an income of about $79,000 would see a tax savings of more than 25 percent under her proposal. A single mother of two making about $47,500 would see an average tax savings of more than 42 percent.

GOP plan would use money from state’s Taxpayer Relief Fund

The tax cuts would be paid for using one-time money in the Taxpayer Relief Fund. Dawson and Rep. Bobby Kaufmann, R-Wilton, have proposed investing that money and using the profits to ratchet down the state income tax rate over time, putting Iowa on a path to eliminate the individual income tax.

If the trust fund has sufficient dollars and sales tax growth hits a certain trigger, the income tax rates will be automatically reduced.

Dawson emphasized the importance of responsible management of the Taxpayer Relief Fund and the need for fiscal notes and a larger public dialogue to ensure responsible decision-making on how best to use the state’s budget surplus.

"We're talking about one-time money and when it's gone, it's gone," Dawson said.

While calling the governor's bill a "bold plan," he said Senate Republicans will start to advance their own legislation in the next couple of weeks.

"And I really do think it's important that we do get fiscal notes for both these pieces of legislation and have a larger public dialogue," Dawson said.

Dawson added: “We owe it to Iowa, since we’ve accumulated those moneys in the Taxpayers Relief Fund, to really kind of think through responsibly what a long-term plan is.”

Officials representing Iowa business and taxpayer advocacy groups applauded the governor’s bill.

“It's important to note that all of this is based on a firm foundation of fiscal discipline, and the work that you all have done to make sure that the tax reform packages in the past and the ones that are considered this year are always going to be sustainable and forward-looking,” said Chris Hagenow, president of Iowans for Tax Relief. “We think this is going to make Iowa much more competitive and allow Iowans to keep more of their hard earned dollars, and make Iowa a much better place to live, work and raise a family.”

Democrats: Plan would shift tax burden to lower-income Iowans

The governor’s bill also calls for lowering taxes that businesses pay to fund benefits for unemployed workers. Under her proposal, Iowa would cut the taxable wage base in half and reduce unemployment taxes by about 40 percent.

Reynolds’ office estimates that will save Iowa employers more than $800 million over five years.

“Helping companies of all sizes prosper, especially small businesses,” Severn said, “and making Iowa more competitive.”

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Senate Minority Leader Pam Jochum, D-Dubuque, who served on the subcommittee, said Reynolds’ plan would unfairly shift the tax burden to lower-income individuals and families while providing significant tax cuts to the wealthy.

Jochum and representatives for Common Good Iowa and Iowa Federation of Labor, AFL-CIO emphasized the need to invest in quality of life issues to attract new workers to the state. They also worried that Iowa’s unemployment trust fund will face challenges in the long term if faced with a downturn in the economy and business tax rates aren’t increased to keep the trust fund alive.

Jochum said business leaders in Iowa are asking for investment in quality of life issues to attract new workers, while child care workers are struggling with low wages and difficulty filling positions.

Anne Discher, executive director of Common Good Iowa, a liberal advocacy organization, said lawmakers’ proposals would “blow a huge hole in the budget.”

“Under the 2022 tax changes that are being implemented, we already face enormous revenue threats in education, health care and other services that help Iowans succeed,” Discher told lawmakers Monday. “And of course, this bill will make things worse and worse faster, and will cost about $1.7 billion this year.”

Iowa lost $57 million in tax revenue in 2022-23 and will lose close to $5 billion over the next five years — about 7.8 percent of the state’s general fund, according to a report by the Center on Budget and Policy Priorities, a progressive think tank that analyzes the impact of federal and state government budget policies.

Jochum asserted cutting the income tax won’t generate enough economic activity to make up for revenue losses and force the state to rely more heavily on regressive sales taxes or property taxes to bring in significant revenue.

“So I would hope that we're going to slow this down and really spend a lot of time dissecting it and really understanding the long-term impact this is going to have on our state in the years to come,” Jochum said.

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