Reynolds signs major tax cuts into law, promises more to come
Gov. Kim Reynolds signed a major piece of tax legislation at YSS in Ames. (Photo by Katie Akin / Iowa Capital Dispatch)
AMES, Ia. — Gov. Kim Reynolds signed a massive tax law Wednesday that will accelerate income tax cuts, phase out the inheritance tax and property tax backfill, and fund the state’s mental health system through a state appropriation.
“Iowa is already overcoming a lot of headwinds,” Reynolds said, touting the state’s post-pandemic recovery rate. “The policies in this bill will help translate our encouraging short-term trajectory into broad-based, long-term prosperity.”
Reynolds signed the bill at YSS, a youth shelter and addiction treatment program in Ames. The small conference room was filled with program participants and families, lobbyists, and a row of beaming Republican lawmakers lined up behind the governor.
The law will fund Iowa’s mental health system, including programs like YSS, through a state appropriation instead of local property taxes. House lawmakers and Democrats in both chambers were initially skeptical of the change. Some critics were concerned that future legislators may one day decide to cut mental health funding. Reynolds and other speakers on Wednesday emphasized that the state appropriations model would be “a steady and reliable funding source,” unlike the “burdensome” property tax model.
“This work is so important and the stakes are so high,” said YSS President Andrew Allen. “The need is so great, especially for our youth.”
Beyond funding the mental health system, the law represents several Republican priorities from the legislative session. It accelerates tax cuts passed in 2018, despite the fact that certain revenue triggers have not been met. Beginning in 2023, Iowa will have four tax brackets, rather than nine. A nonpartisan analysis by the Legislative Services Agency found that the change will represent $297.6 million reduction in state income tax liability in 2023. Future years will see more modest reductions.
The law also phases out the inheritance tax over four years. The property tax backfill, a 2013 state appropriation to sustain local governments after property taxes, will phase out over the course of four to seven years. Legislative Democrats criticized the removal of the backfill, which they said was meant to be a state funding commitment in perpetuity.
Reynolds responded Wednesday that the property tax backfill was never meant to last forever and that it was being phased out over several years, enough time for local governments to adjust.
“This is a time when the cities and the counties are receiving a lot of federal funds from the (American Rescue Plan), so they have an opportunity to utilize them as they’re phasing out the backfill,” she said.
Reynolds promised more tax cuts on the way in the upcoming legislative session. She plans to cut income taxes even further, pointing toward the need to stay competitive with other states that have eliminated state income taxes.
“We’re projected to end this fiscal year with a significant surplus and our cash reserves full … If we’re overcollecting, we should make sure that we get that money back to (taxpayers),” she said.
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