Iowa income tax rates head lower and faster under new law

DES MOINES — Iowans will pay a flat 3.8 percent on their state income next year under a law Gov. Kim Reynolds signed Wednesday as she lauded the “transformation” of Iowa’s tax code that Republicans have ushered in over the last six years.

The law, Senate File 2442, builds on a tax overhaul that Reynolds signed in 2022, which set Iowa’s tax rate on a path to a flat 3.9 percent by 2026. The latest change sets a lower tax rate — and brings it sooner than first planned.

Republicans continually have pushed state income taxes lower since they gained control of all the state's legislative levers starting in 2017, pointing to annual budget surpluses as evidence Iowans are paying too much.

“Simply put, we’ve comprehensively transformed our tax code and dramatically increased our competitiveness within a few short years,” Reynolds said as she signed the bill in her office at the Iowa Capitol. “At the same time, conservative budgeting practices have kept us living within our means and allowed us to continue making historic investments in key priorities of Iowans.”

Iowa’s top income tax rate this year is 5.7 percent.

Reynolds: Iowa taxpayers will experience significantly lower tax rates next year:

The new law makes a number of other changes to Iowa’s tax code, including tweaking property tax rules, following up on a law Republicans passed last year. It also allows county supervisors to eliminate county compensation boards, which recommend the salaries of elected officials in the county. If supervisors eliminate their county’s compensation board, they would be tasked with setting those amounts without a recommendation from the panel.

The law is expected to cut stat income taxes by an extra $1 billion over three years. It would also reduce state revenue, by about $100 million each year from 2028 to 2030, according to an analysis from the nonpartisan Legislative Services Agency.

If tax receipts come in below what the Legislature spends in any year over the next five years, the new law states that half of the difference would come from the state’s Taxpayer Relief Fund, which is estimated to reach about $3.66 billion by the end of this fiscal year.

The tax law was passed in the last hours of the legislative session this year after Republicans in the House and Senate spent much of the session crafting an agreement.

Several Democrats in the House and Senate voted for the bill, but Democratic leaders opposed it. They argued the overwhelming majority of the benefits would go to the richest Iowans, and said they were concerned about long-term impacts of waning revenues on government services, like education.

House Minority Leader Jennifer Konfrst of Windsor Heights said during the session that the changes give no benefit to about 500,000 Iowans who do not pay income taxes.

“They’re not giving the money back to all Iowans. They’re giving the money back to the wealthiest Iowans, middle-class Iowans, and leaving 500,000 Iowans in the dust,” she said. “So our argument will be, continually, this overwhelmingly benefits the rich. Those who are at the top bracket get five figures of benefit. Those at the bottom, five dollars.”

Reynolds signs ‘megasites’ bill

Another bill Reynolds signed Wednesday will create tax incentives designed to attract major businesses to designated sites in Iowa.

The new law, Senate File 574, creates tax breaks for “megasites,” which will be business developments that occupy at least 250 acres and have at least $1 billion in investments. Up to two qualifying projects could be approved under the bill.

Businesses that qualify for the sites would be eligible for an investment tax credit, a refund on sales tax for construction services and a withholding tax credit. They also will be eligible for local tax breaks.

To qualify, a business must meet the following criteria:

The program will cost the state about $97 million in the first year if all eligible projects are approved, and it will cost about $18 million in subsequent years, according to the Legislative Services Agency.

Reynolds talks about creating tax incentives for billion-dollar business investments:

A similar bill was proposed last year, but it did not pass. Reynolds told reporters Wednesday that state officials have been using the prospects of the tax credits to attract businesses to the state.

“We have used it as a competitive tool for us to land significant economic development projects in the state of Iowa,” she said.