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Iowa GOP lawmakers unveil proposal to gradually eliminate state income tax
‘Glide path’ calls for IPERS investing state surplus, with profits used to reduce taxes
Feb. 1, 2024 4:48 pm, Updated: Feb. 2, 2024 2:23 pm
DES MOINES — Iowa House and Senate Republicans rolled out a new proposal to provide a “glide path” to eliminating the state individual income tax.
Rep. Bobby Kaufmann, R-Wilton, and Sen. Dan Dawson, R-Council Bluffs, filed legislation Thursday that would put Iowa on a path to eliminate the individual income tax and protect the tax relief measures Republicans have passed.
Kaufmann and Dawson lead the tax-writing Ways and Means Committee in the House and Senate.
“We have heard time and time again from our colleagues in both the House and Senate, as well as Iowans across the state, that we want to get Iowa to a zero-income-tax rate, and we believe these proposals will responsibly get us to that point and set our state up for continued success and stability for years to come,” Kaufmann said.
Senate Study Bill 3141 would accelerate current income tax cuts lawmakers passed in 2022 that gradually reduces rates until tax year 2026 when most Iowa workers will pay a 3.9 percent state income tax.
The bill would lower the rates to 3.65 percent by tax year 2027.
It also would have Iowa Public Employees' Retirement System start managing the state’s more than $3.5 billion Taxpayer Relief Fund. Profits earned from investing that money would be used to ratchet down the state income tax rate over time.
Under the proposal, the new trust fund that would be created would receive an initial $2.6 billion transfer from the Taxpayer Relief Fund. It would have an oversight board and contract through IPERS to invest those dollars.
Once the trust becomes operable, 5 percent a year would be transferred to the new Income Tax Elimination Fund, used to help lower and eventually eliminate the income tax, while assisting with budget stabilization as rates are cut, the two lawmakers told reporters.
If the trust fund has sufficient dollars and sales tax growth hits a certain trigger, the income tax rates will be automatically reduced.
“We’re doing something that everyday Iowans do for their retirement, everyday businesses here in the state do,” Dawson told reporters. “We’re using the money, growing it for something bigger.”
Kaufmann said the proposal responsibly achieves Republicans’ long-term goal to eliminate the individual income tax and put Iowa on a stronger path to prosperity.
Dawson said the plan ensures state government can meet its spending obligations even as the state reduces income tax revenue.
“Ultimately, it’s a responsible glide path to zero,” Dawson said, “as opposed to some massive sales tax increase or eliminating a bunch of (tax) exemptions out there.”
Adding taxpayer protections to Iowa Constitution
Both lawmakers, though, described the proposal as a long-term plan meant to be a starting point for continued conversations.
“How quickly this bill happens, this is the beginning,” Kaufmann said. “ … And so this will happen as quickly as people are ready for it, and I think you’ll find out as this gets talked about … you’re going to find a high appetite for Iowans to want to do that.”
Kaufmann and Dawson also plan to advance a proposed constitutional amendment, Senate Joint Resolution 14, that would require a two-thirds vote — rather than a simple majority — in the Legislature to raise any state tax. Lawmakers considered but failed to advance the constitutional amendment last year, noting this year it’s become a priority of the two chairmen.
In the near term, Republican lawmakers say they’re focused this session on passing legislation accelerating the already approved income tax cuts.
They said they intend to file a bill this spring to do just that but are waiting on a March report on state tax revenue and may use some elements of the tax reduction plan Gov. Reynolds introduced three weeks ago.
Reynolds, in her annual Condition of the State address, called for accelerating state income tax cuts — landing at a 3.5 percent rate for most Iowa workers 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.
Republicans say the state can afford more tax reductions, with a $2.1 billion general fund budget surplus projected to grow to $3.1 billion in the next fiscal year, full emergency accounts and $3.7 billion in the Taxpayer Relief Fund.
‘Tax-cutting spree’
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.
“State policymakers nationwide have embarked on a tax-cutting spree over the past three years, using the cover of temporary budget surpluses stemming from robust federal aid in response to COVID-19 and the economic recovery that followed,” the report states.
“The tax cuts — most of which are both permanent and tilted toward wealthy households and corporations — will weaken state revenues by large and growing amounts over time, limiting these states’ ability to maintain support for schools and other vital public services or make new investments that can strengthen the economy and promote opportunity.”
Democrats propose lower costs, higher wages
House and Senate Democratic leaders said they are concerned that further income tax cuts would disproportionately benefit the wealthy while leaving hundreds of thousands of Iowans who pay no income taxes with no benefits.
House Democrats on Thursday, meanwhile, unveiled a legislative package to lower costs and raise wages for Iowans.
The package of bills would:
- Gradually raise Iowa’s minimum wage to $15 an hour by 2026.
- Clear the list of more than 20,000 Iowans with disabilities on the Home and Community-Based Services waiver waitlist to get services — like personal care, food preparation, home repairs and modifications — so they can stay in their homes. Doing so would cost $69 million, according to the nonpartisan Legislative Services Agency. It could be paid for with unspent federal COVID relief dollars, said Rep. Josh Turek, D-Council Bluffs, but also would require additional money to provide services since Iowa faces a shortage of direct care workers.
- Make a one-year pilot program — that allows child care workers to apply for state child care assistance for their own children — permanent and available statewide.
- Provide a subsidy for child care workers who need child care for their own kids so they can afford to stay on the job.
- Expand and extend Iowa’s tax-free holiday in August from two days to two weeks; add school and art supplies, instructional materials and musical instruments to the list of tax-free exemptions; and raise the cap on clothing items from $100 to $250 so Iowans can purchase work uniforms, work boots and other items.
House Minority Leader Jennifer Konfrst, D-Windsor Heights, said the bills will lower costs, raise wages and leave Iowans with more money in their pockets.
“What we’re proposing is what Iowans tell us they want,” Konfrst told reporters. “What Republicans are proposing is what special interests tell them that they want.”
Comments: (319) 398-8499; tom.barton@thegazette.com
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