Big, Beautiful Bill heads off tax increases for Iowans

After months of debate, President Donald Trump signed his “Big, Beautiful, Bill” into law on Independence Day. If Congress had failed to act, for taxpayers it would have resulted in the 2017 Tax Cuts and Jobs Act (TCJA) expiring, which would have resulted in massive tax increase that would be detrimental to the economy.

At the core of the bill is renewal of the TCJA income tax cuts and making those permanent along with the expanded standard deduction. Further, the measure will benefit businesses by making permanent full expensing and the 20% small business deduction.

The “Big, Beautiful, Bill” will have a direct impact on Iowa. Iowa’s tax code mirrors the federal tax code through “rolling conformity.” This means that, in most cases, Iowa automatically updates its tax laws when federal changes occur to definitions of income and eligibility for credits.

Perhaps the most important benefit for Iowa taxpayers is making the TCJA permanent. The TCJA’s lower federal income tax rates, expanded standard deduction, and other reforms let Iowans and small businesses keep more of their income. That fueled job growth, investment, and economic expansion.

The TCJA also laid the groundwork for Iowa’s own tax reform. Prior to 2018, Iowa had some of the worst income tax rates in the nation.

As a result, Gov. Kim Reynolds and lawmakers enacted pro-growth reforms: replacing the progressive income tax with a flat 3.8% rate starting this year, phasing down corporate rates to 5.5%, modernizing the sales tax, and eliminating taxes on retirement income and inheritances. From 2018 to 2025, Iowa’s individual income tax rate was reduced by almost 60%.

If the TCJA was allowed to expire, not only would federal tax rates rise and offset some gains from Iowa’s own tax reforms, but key provisions like the child tax credit would suffer. A family with three children could see a $3,000 tax hike. Iowa taxpayers on average avoided at least a$2,063 per taxpayer tax increase.

Meanwhile, small businesses would lose a 20% deduction and experience higher rates, discouraging hiring, expansion, and investment. Higher tax rates don’t necessarily bring in more revenue; in fact, they can shrink the tax base. Businesses pull back from hiring, and workers with less take-home pay spend and invest less.

If the “Big, Beautiful, Bill,” did not pass Iowa’s economy would suffer, and so would its revenue. The national fallout from a tax increase also will apply pressure to Iowa’s economy, shrinking the market for goods and services produced here.

The 2017 TCJA spurred growth and allowed Iowa to pursue conservative budgeting that weathered the pandemic and inflation. State revenues remained strong. Letting those reforms unwind would jeopardize that progress.

Other measures in the “Big, Beautiful, Bill” include the “no tax on tips,” “no tax on overtime,” deductions for auto loan interest, and “no tax on Social Security income.” All of these provisions will impact Iowa because of “rolling conformity,” and also will impact state revenue.

These measures are popular, and they were part of President Trump’s campaign, but they are not necessarily the best tax policy. Tax policies that favor a specific taxpayer over another should be avoided. The best policy is to lower tax rates for all taxpayers and not have “carveouts,” which benefit some while shifting the burden to other taxpayers.

For Iowa, the goal should be to continue lowering the state’s flat tax rate.

Iowa taxpayers should also concerned about compromise reached over SALT (state and local tax) deduction cap, a Halloween disguise that lets high-tax states like New York and California mask their steep tax burdens, shifting the cost to federal taxpayers.

SALT rewards high tax states, while punishing states that have cut income tax rates. Iowa would see just 0.3% of the tax relief from an expanded SALT cap, while New York and California would claim over 51%.

There are other cautions about the “Big, Beautiful, Bill.” Perhaps the most controversial aspects of the legislation centered on its impact on Medicaid and food assistance (SNAP). Iowa’s Medicaid program for the poor and disabled continues to increase and for the Fiscal Year 2026 budget will consume close to $2 billion.

A federal pullback of Medicaid and SNAP funds could pose serious challenges to the state’s balance sheet.

With passage of the “Big, Beautiful, Bill,” Iowa taxpayers avoided a massive tax increase, but even with the positives of the measure there are still reasons for caution. Federal spending, along with the national debt, will both continue to increase and Iowa policymakers must begin to prepare for contingencies of potential cuts to federal funds.

Pete Sepp is president of National Taxpayers Union. John Hendrickson is policy director of Iowans for Tax Relief.