Iowa lawmakers pass massive tax cut

Iowans would pay a 3.9% income tax under a massive tax bill passed Thursday by the Iowa Legislature, part of what GOP leaders called the “largest tax cut in Iowa history.”

“This transformative legislation is the greatest act of social justice that we have done here in the six years that I have been here,” said Rep. Jon Jacobsen, R-Council Bluffs, who delayed a trip to his daughter’s wedding to vote on the bill.

House File 2317 is the result of negotiations among Republicans in the House and Senate, as well as the governor’s office. It would create a single income tax bracket for all Iowans, lower the corporate tax rate, eliminate taxes on retirement income and reduce some corporate tax exemptions.

The nonpartisan Legislative Services Agency (LSA) estimates the bill would result in a reduction of $1.9 billion per year in tax revenues going to the state’s general fund. It would mean a $1.7 billion income tax cut for Iowans and a $230 million reduction in the corporate tax rate when changes are fully implemented in fiscal year 2028.

The Senate passed the bill Thursday afternoon, 32-16, sending it to the House for consideration. Every Republican voted in favor along with two Democrats: Sen. Tony Bisignano, D-Des Moines, and Sen. Kevin Kinney, D-Oxford.

The House voted 61-34 to pass the bill Thursday evening. Two Democrats voted in favor: Rep. Steven Hansen, D-Sioux City, and Rep. Kenan Judge, D-Waukee.

Gov. Kim Reynolds is expected to sign the bill into law.

“Iowans will reinvest these dollars in our economy, communities will prosper, and families will rest a little easier,” Reynolds said in a statement after the vote. “Once again, we’re putting our faith in Iowans, and they won’t let us down.”

What would the tax bill do?

The final bill is similar to what 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 3.9% rate. 

“The current system right now penalizes people who work harder,” said Sen. Dan Dawson, chair of the Senate Ways and Means Committee. “We want to treat Iowans fairly.”

Under current law, Iowa would have four tax brackets in 2023, with the lowest earners paying 4.4%. The bill still divides Iowa into four tax brackets for 2023, the first step in a gradual process to a flat rate in 2026.

Final plan cuts corporate tax rate, some credits

The package includes a corporate tax cut, cutting the top rate gradually from 9.8% to 5.5%. Corporate taxes would decrease only when the state exceeds $700 million in corporate tax revenue.

“It makes sure it maintains the state at $700 million worth of revenue, so you’re not going to see any drastic dips when it comes to revenue,” House Speaker Pat Grassley said. “You maintain that level.”

The bill also reduces some large corporate tax credits by 5% each year over the course of five years. The Research and Activities Tax Credit will be reduced even further. That would result in additional state money, as Iowa will have to pay out fewer tax credits over time: The LSA estimates the state would collect an additional $49.7 million by fiscal year 2028, when the changes are fully implemented.

The bill eliminates the retirement income tax and introduces an additional exemption to retired farmers beginning in tax year 2023.

Democrats say tax cuts unfairly advantage wealthy Iowans

Most Democrats were opposed to the tax cut package, arguing the flat income tax rate and corporate cuts would unfairly prioritize the highest-earning Iowans.

Sen. Zach Wahls presented data on the median household income in Iowa – earners who make $68,000. He said those individuals would see their state taxes reduced by about $563 under the plan.

Meanwhile, Iowans who earn more than $1 million annually would see a much higher reduction.

“Their average tax cut, under this plan, would be $67,000,” Wahls, D-Coralville, said. “So $1,286 per week, which is more than twice as much per week as your average household gets in an entire year.”

Dawson, R-Council Bluffs, rattled off his own numbers on floor debate, emphasizing that families across Iowa would save several hundred dollars a year under the plan.

“The question before this body is simple: Will this tax proposal help the average Iowan?” he said. “The answer is unequivocally yes.”

Senate Democrats proposed several amendments to increase the earned income tax credit and child dependent care tax credit, and to introduce more exemptions for beginner farmers. Sen. Jackie Smith, D-Sioux City, led a push for Iowa to retain a higher tax rate for people making over $250,000.

“Let’s give a tax cut to families who are struggling and still protect education, protect public safety, protect public health systems,” Smith said.

All Democratic amendments failed on the Senate floor.

Rep. Dave Jacoby, ranking member of the House Ways and Means Committee, said he was surprised Republicans brought the tax bills to a vote Thursday, hours after Russia took military action into Ukraine. He raised concerns the conflict in Ukraine could complicate the projected growth rate for Iowa’s economy.

“The invasion in Ukraine – we don’t know what the economy is going to look like,” Jacoby, D-Coralville, said. “And we’re putting a lot of investment in a 3.5% growth per year… I’m not sure that’s going to happen with everything going on right now.”

Senate Majority Leader Jack Whitver told reporters he was “very confident” about the state’s finances, pointing toward a record-high surplus and a full Taxpayer Relief Fund.

“This tax plan will work for Iowa long-term,” Whitver, R-Ankeny, said.

What was lost in negotiations?

Several parts of the House and Senate tax plans got lost in negotiations.

The Senate’s initial proposal turned 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 on a Feb. 18 episode of Iowa Press.

“With inflation at a 40-year high, we have to be really careful about raising taxes right now,” she said, though she acknowledged the shift from a local to statewide tax may be “an overall tax reduction.”

Senate Republicans also wanted a deeper cut on income taxes, proposing a flat 3.6% rate with a mechanism to keep ratcheting the rate down until Iowa had no income tax at all.

The compromise bill does not include the IWILL change or a plan to work toward a 0% income tax. Dawson said eliminating the income tax was still the “end game.”

“The goal is right. The pathway is clear,” Dawson said. “And it begins here today, with this bill.”

House leadership didn’t want to address corporate tax cuts or mess with Iowa’s complex system of exemptions. The Senate proposed changes to both: a 7.8% corporate tax rate and the removal of $141 million worth of corporate tax credits.

The bill passed Thursday does not cut corporate tax credits as severely. It would lower the corporate tax rate further, however, to a final rate of 5.5%

Read more: How do Iowa’s Republican tax plans compare?

Tax cut comes days before Reynolds delivers national speech

Reynolds is expected to sign the tax bill into into law after it passes the House. It would be the third major tax cut of her tenure: She signed a tax cut in 2018, then signed a bill in 2021 to phase out the inheritance tax, change the way the state funds mental health and accelerate the 2018 cuts.

Reynolds will be in the national spotlight Tuesday when she delivers the Republican response to President Joe Biden’s State of the Union address. Reynolds said Wednesday she plans to highlight Iowa as “an alternative” to Biden’s policies.

Democrats accused Republicans of fast-tracking the tax bill to give Reynolds a win ahead of the address.

“The first question I have is, why the hell are we doing it so quickly? Well, I think we all know why,” Jacoby said. “Because it’s a time thing for the governor to have this in her Condition of the United States response.”

Republican leaders said tax cuts were a high priority for the session, regardless of the national attention. Grassley, R-New Hartford, said it would be “great” if Reynolds cited tax cuts in the speech, but he said the plans were moving quickly through the process regardless.

“I think it’s because we felt strongly, we wanted to get something in place,” Grassley said. “We knew it would work and it was one of our priorities.”