Iowa Gov. Reynolds proposes accelerated tax cuts, $8.9B state budget

DES MOINES — Gradual reductions in the state’s income tax would be accelerated — landing at a 3.5 percent rate for most Iowa workers next year — under a legislative proposal unveiled Tuesday by Iowa Gov. Kim Reynolds.

The proposal falls short of Reynolds’ previously stated call to completely eliminate the state income tax by the end of her term, which ends in 2026.

Currently, as a result of multiple tax cut bills passed starting in 2018, state income tax brackets and rates are being reduced until most taxpayers would pay 3.9 percent by 2026. Reynolds’ proposal would expedite that transition.

Most working Iowans would pay a 3.65 percent state income tax on their 2024 wages — the legislation applies the rate retroactively — and then a 3.5 rate in 2025 under the Republican governor’s proposal.

The proposal would require approval by the Republican-majority Iowa Legislature; Iowa House and Senate Republicans may propose their own income tax reductions this legislative session, which began Monday.

The proposal would reduce Iowans’ state income taxes, and thus limit future state revenue growth, by a projected $3.8 billion over the first five years.

Republicans say the state can afford more tax reductions because of its finances: a $2.1 billion state general fund budget surplus projected to grow to $3.1 billion in the next fiscal year, full emergency accounts and another $3.7 billion in the state’s Taxpayer Relief Fund.

“Let me be absolutely clear: The surplus does not mean that we aren’t spending enough; it means we’re still taking too much of Iowans’ hard-earned money,” Reynolds said Tuesday night during her annual Condition of the State address to a joint session of the Iowa Legislature.

The governor’s tax cut proposal would mean a tax savings of 26.3 percent for an Iowa family with two children making $79,000 — roughly the median Iowa salaries for a welder and certified nursing assistant, according to the governor’s staff. A single mother of two making $47,000 would see a savings of 42 percent, Reynolds said during her address, according to the prepared remarks.

“So let’s not hesitate. Let’s stick to the approach we established in 2018 and allow Iowans to keep more of their money,” Reynolds said.

Democratic legislative leaders said they want to see tax legislation that would benefit more than just the state’s highest wage-earners. Reynolds’ office said her proposal would do exactly that.

“We’ve heard this before. And we have yet to see this play out,” said Iowa Senate Minority Leader Pam Jochum, a Democrat from Dubuque, after Reynolds’ address. “I mean, we have heard the trickle-down theory given to us too many times, and we have yet to see the drip hit those who most need it.”

Experts with Common Good Iowa, a liberal-leaning tax and policy analysis firm, have criticized the recent reductions in state income taxes. The group labeled statehouse Republicans’ 2022 round of tax cuts, “a recipe for disaster,” a prediction that Reynolds quoted and disputed in her address.

Common Good Iowa did not back off its criticism of the previous or proposed state income tax reductions.

“While Gov. Reynolds is backing off her promise to push for elimination of the income tax, her plan for deeper cuts than those already scheduled are a mistake,” Common Good Iowa Executive Director Anne Discher said in a statement. “Common Good Iowa was right two years ago and still has math on its side. A tax-cut agenda benefiting primarily the wealthy and gutting future revenues for critical services remains a recipe for disaster, as we stated in January 2022.”

Republican legislative leaders said they were glad to hear Reynolds’ proposal to further reduce state income taxes, even if it did not yet include a path to eliminating the tax.

“I’ve said for years, the goal is to get to zero in the state of Iowa. Whether we get there in Year 1 or Year 10, we don’t know. But taking another step forward is certainly progress that we appreciate,” said Senate Majority Leader Jack Whitver, a Republican from Grimes. “We want to go as low as we can. We want to do it responsibly, though. That’s where it’s just a math problem.”

Governor’s budget proposal

Reynolds’ state budget proposal recommends spending $8.9 billion in the state general fund budget year that begins July 1. That would be a 4.7 percent increase of the $8.5 billion allocated in the current state budget year.

The governor’s budget proposal includes a 2.5 percent increase for general K-12 public school funding. The budget would increase overall public education spending by 5.55 percent, including proposed increases to teacher salaries and other education funding measures, according to the governor’s staff.

Under the governor’s proposal, even with the proposed acceleration of state income tax cuts, state revenue is projected to continue increasing in future state budget years.

The proposal also requires use of the Taxpayer Relief Fund in the 2026 state budget year.

According to the governor’s staff, 56 percent of her proposed budget — more than $5 billion — would go to public education, including 44 percent to preschool through 12th grade; 27 percent would go to health and human services; and 9.5 percent would go to the justice and judicial systems.

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