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DES MOINES — Iowa would join several other states in making retirement income — including pensions, annuities and employer plans among others — exempt from state income taxes starting right way under a proposal made Monday by Iowa House Republicans.
State Rep. Gary Mohr, a Republican from Bettendorf — himself a retiree — said the proposal aims to keep more retirees in Iowa instead of seeing them moving to other states that do not tax retirement income.
“When you retire, your kids are all grown, you really have nothing keeping you here if you want to save money. And I think that’s why a lot of people change their state of residence,” Mohr told reporters Monday. “That’s what I’m trying to stop.”
As of March 2021, nine states do not tax any retirement income because they do not have any state income tax for anyone, according to AARP. Three more states do not tax income from either retirement plans or pensions, and two tax income from retirement plans but not pensions.
Iowa has a state income tax on most retirement income, with some exclusions.
House Republicans’ proposal, House File 2026, is similar to a plank within Republican Gov. Kim Reynolds’ tax plan. Reynolds also proposed eliminating the state tax on retirement income.
The state’s nonpartisan fiscal analysis agency has not yet reported on the bill’s financial impact. But according to a preliminary analysis by the state budget office, provided by House Republican staff, the bill would reduce state general fund revenue by $186.6 million in 2023 and gradually increase to a reduction of $396.5 million in 2028.
“Iowa can afford that right now. And that’s why I decided for me, this was a priority,” Mohr said.
Mohr said information from Iowa Public Employees' Retirement System — the largest public employee retirement program in the state — shows that more than $282 million in retirement benefits from that program are paid to retired Iowa workers who now live in other states. Of the nine states to which at least $10 million in IPERS benefits were paid, four do not tax retirement income.
Rep. Jennifer Konfrst, D-Windsor Heights and leader of the minority House Democrats, said she supports the proposal in theory but wants to see how it fits with Republicans’ overall tax proposals and what impact they will have on the state budget.
“I’m all for keeping Iowans in the state,” Konfrst said. “We need to look at this holistically, see what does the big picture look like and make sure this is sustainable, that we can afford these changes.”
In addition to making her proposal to eliminate retirement income, Reynolds has also pitched a plan for Iowans who do pay state income taxes to within four years pay a flat rate of 4 percent. Currently, as a result of tax reform passed by the Iowa Legislature and signed by Reynolds in 2018, the number of tax brackets will be reduced to four, ranging between 4.4 percent and 6.5 percent.
In the Iowa Senate, several Republicans also are formulating a “moon shot” proposal they say would eventually eliminate the state’s personal income tax all together.
The House GOP proposal to exempt retirement income has not yet scheduled for its first legislative hearing.
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