Iowa GOP leaders pass 3.9% flat income tax rate

DES MOINES — Most Iowa workers would pay a 3.9 percent state income tax — a large reduction for the state’s highest wage earners and a modest decrease for low-income workers — under a new $1.9 billion tax cut proposal that is likely to become law soon.

The new tax plan, introduced and approved Thursday at the Iowa Capitol, is the result of negotiations between Republican leaders in the Iowa House and Senate and Republican Gov. Kim Reynolds.

The Senate and House approved the legislation Thursday, giving Reynolds time to sign it into law just before she is scheduled to appear on national television next week to deliver the Republican Party’s response to President Joe Biden’s State of the Union address.

Under the plan:

• State income taxes would be gradually reduced over multiple years to a 3.9 percent rate on the vast majority of workers. Iowa now has nine income brackets, with rates from 8.53 percent on the highest wage-earners and 4.14 percent on lower-income workers. The median Iowa household pays 6.25 percent.

• State taxes on retirement income would be eliminated, including for retired farmers.

• The corporate tax rate would be reduced gradually. Each year the state collects $700 million in business tax revenue, the rate will be reduced until it reaches 5.5 percent.

• Some corporate tax breaks and incentives would be reduced gradually, including the most expensive: the research and activities credit.

At full implementation in five years, the new proposal will result in tax savings — and thus a reduction in state revenues — of $1.9 billion, according to the state’s nonpartisan fiscal estimating agency.

Iowa’s current budget is just over $8 billion.

“There’s never been a better time in Iowa for bold, sustainable tax reform,” Reynolds said in a statement issued just after the bill passed. “This bill rewards work, takes care of our farmers, and supports our retirees, all while protecting key state priorities. Iowans will reinvest these dollars in our economy, communities will prosper, and families will rest a little easier. Once again, we’re putting our faith in Iowans, and they won’t let us down.”

‘Competitive’ or ‘not fair’

“Senate Republicans are happy to deliver on the promise that we’ve made to voters for the last year, that when we have surpluses in Iowa, we are going to deliver tax cuts for every single Iowan,” said Jack Whitver, the Republican Senate Majority Leader from Ankeny. “We’re really excited and proud that (Thursday) we were able to reach agreement with the governor and the House to deliver on that promise.”

Democrats argued the plan overwhelmingly benefits wealthier Iowans.

They pointed to an analysis by the Department of Management, the state budget office, which shows the median Iowa household will see an average reduction of $593 on their state income taxes, while the wealthiest Iowans — those earning $1 million or more — will see a $67,000 reduction.

“They’re more focused on the ultrarich that fund their campaigns,” Sen. Zach Wahls, the Democratic Senate Minority Leader from Coralville, said of Republicans’ proposal. “It’s not fair. It’s out of touch. And it’s completely disconnected form the lives of everyday Iowans.”

Senate Democrats countered by proposing an expansion of the tax credit for low-income workers and the child care and early childhood tax credits, and lowering rates for all Iowans making less than $250,000 while maintaining current rates for those making more.

Budget impact

Statehouse Republicans and Democrats disagree on the tax cuts’ impact on future state budgets.

House Speaker Pat Grassley, R-New Hartford, said their tax projections, which assumed annual revenue growth of roughly 3 percent, will be sufficient to cover the revenue reductions and should not require the state to trim its budget.

The proposal would use the roughly $1 billion in the state’s taxpayer relief fund to cover any budget shortfalls that occur as a result of the income tax reductions.

“We were able to continue to do this in a way that our projections and our runs continued to work to make sure that we could continue to fund state government but also provide the significant tax relief,” Grassley said.

Rep. Dave Jacoby, the top Democrat on the House tax policy committee, took a more cautious view.

“I hope the economy does (grow 3 to 4 percent annually). But COVID, (federal pandemic relief funding), Ukraine … I don’t know what I would predict,” Jacoby said.

“If it were me, I would be doing this bill after the March (state revenue estimating panel meeting) because that may give us a better picture, a more accurate picture of where we’re going.”

No outdoor fund

The bill does not, as was proposed by Senate Republicans, shift sales taxes in order to begin funding the state’s long-starved outdoor and natural resources trust fund.

“It really wasn’t on our radar,” Grassley said. “The (House Republican) caucus just was not in a position where they had the support to do that.”

Sen. Dan Dawson, a Republican from Council Bluffs who chairs the Senate’s tax policy committee, said he plans to continue the debate on sales taxes and the outdoors trust fund as the session continues.

The Senate passed the tax cuts bill Thursday afternoon on a 32-16 vote, with Democratic Sens. Tony Bisignano, of Des Moines, and Kevin Kinney, of Oxford, joining Republicans in support of the measure.

The House passed the bill Thursday evening on a 61-34 vote, with Democratic Reps. Kenan Judge, of Waukee, and Steven Hansen, of Sioux City, joining Republicans in support.

Comments: (515) 355-1300, erin.murphy@thegazette.com