116 3rd St SE
Cedar Rapids, Iowa 52401
DES MOINES — Iowa workers will see a gradual reduction in the state income tax on their paychecks over the next five years, thanks to legislation signed into law Tuesday by Gov. Kim Reynolds.
The tax cuts will be phased in over five years, at which point they will provide tax relief — and thus also reduce state revenue — by $1.9 billion. Iowa’s current state budget is roughly $8 billion.
It is the third significant tax cuts legislation signed in the five years that Reynolds has been governor.
“We’re sending a very clear message to the rest of the country that Iowa is open for business, all the while still protecting state priorities like education and public safety” the Republican governor said Tuesday during a public bill-signing event for House File 2317 at LBS, a publishing and packaging company in Des Moines.
Right now, most Iowa workers pay between 4.14 percent and 8.53 percent state tax on their income.
Under the new law, the first round of state income tax reductions will begin in tax year 2023. Each year, the rates and the number of income brackets will be reduced until tax year 2026, when all Iowa workers will pay a 3.9 percent state tax on their income.
The new law also eliminates the state tax on retirement income, also starting in tax year 2023.
And it contains a mechanism that will lower the state’s tax on business income.
Currently, the state taxes business revenue from $100,000 to $250,000 at 9 percent, and all income beyond that at 9.8 percent.
Under the new law, for every year that the state collects more than $700 million in business tax revenue, the rate will be lowered until it reaches 5.5 percent. That threshold has been crossed only once, according to the state’s nonpartisan fiscal analysis agency. But the state budget department projects it will continue to be surpassed annually.
“There’s never been a better time in Iowa for bold, sustainable tax reform, and that’s exactly what today’s bill represents,” said Reynolds, who was scheduled later Tuesday to deliver the Republican Party’s response to President Joe Biden’s State of the Union address.
Dozens of Republican state lawmakers attended the bill signing ceremony, which was held just a few miles from the Iowa Capitol. The tax cuts passed the Iowa Legislature with mostly Republican support, with just four Democrats joining all Republicans in voting for the bill.
Democrats expressed concerns about the impact the $1.9 billion reduction in future revenue could have on the state budget, and criticized the new law for favoring higher-income workers. While the highest wage earners will see their tax rate slashed in half, lower-income workers will see only a modest rate reduction.
“This is a tax bill that is going to overwhelmingly benefit the ultra-rich and big corporations,“ Zach Wahls, the Democratic Senate minority leader from Coralville, said Tuesday during a news conference.
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