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Kim Reynolds wants to eliminate income taxes in Iowa. Let’s see the math
If Gov. Kim Reynolds gets her way, and she usually does, Iowa’s personal income taxes will be eliminated by the final year of her current term in 2026.
This is a significant development, to say the least. But if you’re hoping to hear the plan, you’re out of luck, at least for now.
That’s because the governor didn’t make this announcement in Iowa, where she might have faced questions from Statehouse reporters seeking details. Instead, Reynolds dropped her bombshell in Washington, D.C. at a forum sponsored by the CATO Institute, sitting in front of a banner proclaiming “Limited Government” and “Free Markets.”
“I think Iowans know better what to do with their money than government,” Reynolds said, according to The Gazette’s Tom Barton, who watched a livestream of the forum. “When you let Iowans decide what they’re going to do with their money, we see communities flourish, we see the state flourish, we see revenue grow, so it works.”
But income tax revenue won’t grow if the tax rate is zero. During the current fiscal year, the state is projected to collect nearly $5.6 billion in personal income taxes, or nearly half of all general fund revenues. The general fund is the heart of the state budget, paying for line items including funding for public schools, state universities, human services, mental health and a long list of services.
We’re already on track to cut Iowa’s income tax rate to a flat 3.9 percent by 2026, resulting in a tax reduction of $2 billion annually. Eliminating income taxes entirely would leave a bigger budget hole. Neither Reynolds nor legislative Republicans have explained how they’d fill it.
They talk instead about budget surpluses, claiming they’re proof of Iowa’s fiscal responsibility. As I’ve explained previously, Republican budgeting policy has involved spending far less than what’s allowed by Iowa law, socking away big surpluses and dumping large deposits into the Taxpayer Relief Fund. The relief fund is supposed to cover the cost of tax cuts.
In her budget plan for Fiscal Year 2024, Reynolds socks away a projected $2 billion budget surplus and deposits more than $600 million into the Taxpayer Relief Fund, raising its balance to $3.4 billion.
Impressive, to be sure. But if revenues drop, which they are bound to do no matter how much Republicans claim tax cuts will spur growth, there’s going to be less money to sock away, especially if you eliminate half of general fund revenues. Then what?
Some have pointed to the governor’s government reorganization plan. But, according to the Des Moines Register, that plan will save $215 million over the next four years. So not enough to cover lost income tax revenue. Meanwhile, the governor and Republicans created state-funded private school tuition accounts that will cost nearly $1 billion over the next four years.
Maybe they’ll raise the sales tax. But it would take a big increase to make up for lost income taxes. The state is projected to collect $3.9 billion in sales taxes this fiscal year. A system that relies on sales taxes would be bad news for low and middle-income Iowans. But it would be a boon for the wealthy.
Spending cuts would be bad news for Iowans who need state services or want adequately funded schools, a mental health care system that provides needed care and resources for other priorities. The governor clearly cares more about making a splash on a national stage and helping her friends and donors.
Regardless of the details, that’s always the plan.
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