Latest income tax cuts passed by Iowa Legislature, likely to become law

DES MOINES — Iowa lawmakers on Friday night passed a new round of state income tax cuts that would save Iowa’s taxpaying workers nearly $1 billion in the first two years — and thus limit future state revenue by the same, according to a nonpartisan analysis published Friday.

The proposed state income tax cuts were making their way through the lawmaking process Friday at the Iowa Capitol as legislators worked to conclude their work for the year. They passed the House 68-24, with some Democratic support.

The bill is headed to Gov. Kim Reynolds for her signature. In a statement released Friday, Reynolds said “It's time that state government stop over collecting from the hardworking men and women of Iowa.”

“Iowa families live within their means every day, and there’s no reason government can’t do the same,” Reynolds said in the statement. “Thanks to conservative budgeting and fiscal responsibility, Iowa is in a strong position to cut taxes and continue to invest in key priorities like housing, child care, broadband, and more.”

This is the third time since 2018 that statehouse Republicans have led the charge to lower state income tax rates. Previous state income tax cuts were passed in 2018 and 2022.

Those 2022 reductions — which were being phased in — would be accelerated under the latest proposal, which appears destined to become state law.

If that happens, there will be two tax rates next year and just one in 2026 — 3.9 percent.

The state’s nonpartisan Legislative Services Agency has projected those cuts, at full implementation in 2026, will reduce tax collections and state revenue by $1.9 billion annually.

The new proposal would speed up that process and lower the flat tax rate to 3.8 percent next year.

The Legislative Services Agency projected that acceleration would lower state revenue and provide state income tax savings by an additional $328 million in the 2025 state budget year, $605 million in fiscal 2026, and roughly $100 million annually over each of the next four years, for a total of more than $1.3 billion over the next six years.

The latest proposed reductions would be funded by the state’s general fund surplus, which is just under $2 billion, and the state’s Taxpayer Relief Fund, which is projected to have a balance of $3.7 billion at the close of the current state budget year.

The proposal, Senate File 2442, was approved Friday morning by a bipartisan, 31-7 vote in the Iowa Senate, with seven Democrats joining all Republicans in support. It was expected to be passed later Friday in the House, just a day after it was introduced.

Gov. Kim Reynolds is expected to sign the proposed tax cuts into law.

GOP ‘trifecta’

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During debate in the Senate, Iowa Sen. Dan Dawson, a Republican from Council Bluffs, recalled previous tax reductions kick-started by statehouse Republicans since they took full control of the state lawmaking process — earning majorities in both chambers of the Iowa Legislature and occupying the governor’s office — after the 2016 elections.

Dawson said those tax cuts have made Iowa’s overall tax climate among the best in the country.

“This Republican trifecta will have transformed the Iowa tax code from one of the least competitive in the United States to something that will be one of the most competitive. I will put our record of what we have done in eight years against any other state in the nation,” Dawson said.

“The Republican trifecta has listened to (Iowans). We want to return more of the money back to you, and we are absolutely re-engineering this tax code for one of the most competitive in the United States, letting the entire nation know that Iowa is open for business, families can move here, and we will protect the hard-earned dollars that you make.”

Tax credits next?

Statehouse Democrats have in previous argued that the tax cuts have benefited the wealthiest Iowans more and sooner. This latest proposal, some Democrats said during debate Friday, will benefit what they described as working class Iowans.

Sen. Nate Boulton, a Democrat from Des Moines, said during debate that he would like to see an examination of tax credits and exemptions to create a more fair tax system in Iowa, but also expressed his support for the proposed income tax rate reductions.

“(Democrats) see something clear in this tax proposal, and that is for the first time in dealing with tax policy we are actually seeing working class Iowans get a quicker step toward tax relief, and that is something that is important in this legislation,” Boulton said.

“Yes, there is work to do here to make our tax system fairer, and this bill does not deliver a fair tax system. But at the end of the day, it does make a difference to working Iowans to get some of this relief sooner than later.”

The legislation also tweaks last year’s property tax overhaul that limits revenue growth for cities and counties, and allows county supervisors to decide whether to keep or disband county compensation boards.

Comments: (515) 355-1300, erin.murphy@thegazette.com