Kim Reynolds signs 3.9% flat tax into law in conservative realignment of Iowa's tax system - Des Moines Register
Gov. Kim Reynolds has signed into law a major realignment of Iowa's tax system, achieving one of her top legislative priorities in time for a national speech introducing herself to a conservative audience.
Over the next few years, the law will lower Iowa's top income tax rate until all Iowans pay a 3.9% flat tax starting in 2026. Along the way, it will eliminate the state's progressive income tax system, where wealthier Iowans pay higher rates than lower-income Iowans, and place Iowa among 10 other states with some form of flat income tax.
Democrats have criticized the plan because the wealthiest Iowans receive the greatest share of benefits, while Republicans say the law will attract new residents and make the state more competitive.
It's the third major tax cut Reynolds, a Republican, has signed into law as governor, following previous reductions in 2018 and 2021.
This year's tax cut, which Reynolds signed into law Tuesday at LBS, a bookbinding and packaging company in Des Moines, comes the same day she is set to deliver the Republican response to President Joe Biden's State of the Union address.
The law also makes retirement income like 401(k)s, IRAs and pensions tax free and cuts the state's corporate tax rate while reducing the size of some corporate tax credits.
It will cost the state about $1.9 billion in revenue when fully phased in, according to an estimate from the nonpartisan Legislative Services Agency.
More:What the high-profile job of delivering the State of the Union response could mean for Kim Reynolds
What will the Iowa tax cut do and what does the law change?
The total plan would reduce Iowa’s state revenues by more than $236 million in the first year, an amount that would increase to nearly $1.9 billion by the sixth year, according to the financial analysis the Legislative Services Agency released Thursday.
The largest portion would be from the reduction in the individual income tax rate and the exemption for retirement income, which combined would reduce Iowa’s revenue by $1.7 billion when fully phased in.
The individual income tax accounts for a significant portion of Iowa’s revenue. During the fiscal year that ended June 30, the individual income tax totaled $4.25 billion, just under half of the state’s overall $8.8 billion in net general fund revenue.
Republicans have said they believe Iowa’s projected growth will be enough to sustain the cuts, but Democrats say they're concerned the loss of revenue will make it harder for the state to fund essential services in the future.
More:Iowa lawmakers have struck a deal on tax cuts. Here's what's in it.
The law will drop the corporate tax rate to a 5.5% flat rate over time assuming the state takes in at least $700 million in tax revenue from corporations. Lowering the rate is projected to reduce state revenues by more than $229 million in fiscal year 2028, according to the LSA analysis.
Corporations also won’t be able to receive as much money back from the state in the form of refundable tax credits — essentially a check that Iowa cuts to corporations each year.
The bill will take several fully refundable tax credits and lower refundability by 25% over five years. That means companies with no tax liability will get smaller checks from the government when they claim those tax credits.
For the state’s Research Activities Tax Credit — which paid out nearly $44 million in refunds last year, much of it to large companies such as Deere & Co. — the refundability will be lowered by 50%, cutting the size of the payments in half. The change to that tax credit alone is expected to increase state revenues by nearly $45 million in fiscal year 2028, according to the LSA analysis.
Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at [email protected] or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.
source: https://www.desmoinesregister.com/story/news/politics/2022/03/01/iowa-flat-tax-cut-bill-signed-law-governor-kim-reynolds/6977036001/
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