Iowans would pay a 3.9% income tax under a massive tax bill passed by the Iowa Senate on Thursday, in what GOP leaders have called a “largest tax cut in Iowa history”.
“The current system currently penalizes people who work harder,” said Senator Dan Dawson, chairman of the Senate Ways and Means Committee. “We want to treat Iowans fairly.”
House file 2317 is the result of negotiations between Republicans in the House and Senate, as well as in the governor’s office. It would create a single tax rate for all Iowans, reduce the corporate tax rate, eliminate taxes on retirement income, and reduce certain corporate tax exemptions.
The nonpartisan Legislative Services Agency (LSA) estimates that the bill would result in a $1.9 billion a year reduction in tax revenue going to the state’s general fund. This would mean a $1.7 billion income tax cut for Iowans and a $230 million reduction in the corporate tax rate when the changes are fully implemented in fiscal year 2028. .
The Senate moved the bill Thursday afternoon, 32-16, sending it to the House for consideration. All Republicans and two Democrats voted for: Sen. Tony Bisignano, D-Des Moines, and Sen. Kevin Kinney, D-Oxford.
The House is expected to debate the bill on Thursday evening.
This is a developing story. Check back for updates.
What would the tax bill be used for?
The final bill is similar to what Gov. Kim Reynolds proposed when the legislative session began in January.
The most significant change is an income tax cut: Iowans, regardless of income, would pay the same rate of 3.9%.
“For the first time, our state is charting a new course forward… We are treating the work of all Iowans fairly and equitably by passing a flat tax,” said Dawson, R-Council Bluffs.
The package includes a corporate tax cut, gradually reducing the rate from 9.8% to 5.5%. Corporate taxes would only decrease when the state exceeds $700 million in corporate tax revenue.
“That ensures he keeps the state at $700 million in revenue, so you’re not going to see drastic drops in revenue,” House Speaker Pat Grassley said. “You maintain this level.”
The bill also reduces certain large corporation tax credits by 5% per year over a five-year period. The research and activities tax credit will be further reduced. This would result in additional funds for the state, as Iowa will have to pay fewer tax credits over time: the LSA estimates that the state will collect an additional $49.7 million by fiscal year 2028, when the changes will be fully implemented.
The bill eliminates tax on retirement income and introduces an additional exemption for retired farmers beginning with the 2023 tax year.
Democrats say tax cuts unfairly benefit wealthy Iowans
Most Democrats opposed the tax cut program, arguing that the flat tax rate and corporate cuts would unfairly prioritize higher-earning Iowans.
Senator Zach Wahls presented data on the median household income in Iowa – earners who earn $68,000. He said those people would see their state taxes reduced by about $563 under the plan.
Meanwhile, Iowans earning more than $1 million a year would see a much bigger reduction.
“Their average tax cut, under this plan, would be $67,000,” Wahls said. “So $1,286 a week, more than double what your average household receives in an entire year.”
Dawson rattled off his own numbers during a floor debate, pointing out that Iowa families would save several hundred dollars a year under the plan.
“The question before this body is simple: Will this tax proposal help average Iowan?” he said. “The answer is unequivocally yes.”
Democrats have proposed several amendments to increase the earned income tax credit and the dependent child care tax credit, and to introduce more exemptions for beginning farmers. Sen. Jackie Smith, D-Sioux City, pushed Iowa to keep a higher tax rate for people earning more than $250,000.
“Let’s give struggling families a tax cut and always protect education, protect public safety, protect public health care systems,” Smith said.
All Democratic amendments failed in the Senate.
Rep. Dave Jacoby, a senior member of the House Ways and Means Committee, said he was surprised Republicans were putting the bills to a vote on Thursday, hours after Russia launched military action in Ukraine. He expressed concern that the conflict in Ukraine could complicate the expected growth rate for Iowa’s economy.
“The invasion in Ukraine – we don’t know what the economy will look like,” said Jacoby, D-Coralville. “And we’re investing heavily in growing at 3.5% a year…I’m not sure that’s going to happen with all that’s going on right now.”
Senate Majority Leader Jack Whitver told reporters he was “very confident” about the state’s finances, pointing to a record surplus and a comprehensive taxpayer relief fund.
“This tax plan will work for Iowa in the long run,” said Whitver, R-Ankeny.
What was lost in the negotiations?
Several parts of the House and Senate tax plans got lost in the negotiations.
The original Senate proposal transformed the local option sales tax into a statewide sales tax, funding the long-empty Iowa Water & Land Legacy (IWILL) fund. Reynolds was hesitant about the plan during a Feb. 18 episode of Iowa Press.
“With inflation at its highest level in 40 years, we have to be very careful about raising taxes at the moment,” she said, although she acknowledged that the passage of a tax local to a statewide tax could be “an overall tax cut”.
Senate Republicans also wanted a bigger income tax cut, proposing a flat rate of 3.6% with a mechanism to keep the rate down until Iowa runs out of tax. ‘income tax.
The compromise bill does not include the IWILL change or a plan to work toward 0% income tax. Dawson said eliminating the income tax was always “game over.”
“The goal is correct. The path is clear,” Dawson said. “And it starts here today, with this bill.”
House leaders didn’t want to tackle corporate tax cuts or mess up Iowa’s complex system of exemptions. The Senate proposed changes to both: a 7.8% corporate tax rate and the elimination of $141 million in corporate tax credits.
The bill passed Thursday does not cut corporate tax credits as severely. It would, however, further reduce the corporate tax rate to a final rate of 5.5%.
Read more: How Do Iowa Republican Tax Plans Compare?
Tax cut comes days before Reynolds delivers national speech
Reynolds is expected to sign the tax bill after it passes the House. This would be the second major tax cut of his tenure: it signed a bill in 2021 which phased out inheritance taxes, changed the way the state funds mental health, and accelerated income tax cuts.
Reynolds will be in the national spotlight on Tuesday when she delivers the Republican response to President Joe Biden’s State of the Union address. Reynolds said Wednesday she plans to pitch Iowa as “an alternative” to Biden’s policies.
Democrats accused Republicans of rushing the tax bill to give Reynolds a victory before the address.
“The first question I ask myself is, why the hell are we doing this so quickly? Well, I think we all know why,” said Jacoby, D-Coralville. Governor include this in his response to the condition of the United States.”
Republican leaders said tax cuts were a high priority for the session, regardless of national attention. Grassley, R-New Hartford, said it would be “great” if Reynolds cited tax cuts in the speech, but he said plans are moving quickly through the process.
“I think it’s because we felt strongly, we wanted to put something in place,” Grassley said. “We knew it would work and it was one of our priorities.”
