Iowa Senate Republicans have advanced atax billthat would remove the revenue targets for individual income tax cuts to kick in and phase out the inheritance tax, but this week’s revenue update and the latest federal pandemic relief package could change that plan.
The Iowa Legislature passed sweeping tax cuts in 2018. Under current law, they can’t all take effect until state revenue grows a certain amount. The December revenue estimate points to that happening in 2024 or later.
Sen. Dan Dawson, R-Council Bluffs, said changing the law to make the tax cuts take effect in 2023 regardless of revenue growth will provide certainty for taxpayers and state budgeting.
“So it’s important to put our stake in the ground at some point in this discussion and say, ‘This is what the tax code’s going to be, no ifs ands or buts going forward,’” Dawson said at a subcommittee hearing last week.
Republican Gov. Kim Reynolds has also called on the legislature to make this change.
When the tax cuts kick in, the number of individual income tax brackets will decrease from nine to four, and the top tax rate will fall from 8.53 percent to 6.5 pecent. The top rate applies to individuals making more than $75,000 and married couples with an income over $150,000.
When these tax changes take effect, they are projected to cost the state $1.25 billion in the first four years, according to analysis by the nonpartisan Legislative Services Agency.
Federal deductibility, or the ability for Iowans to deduct income taxes paid to the federal government, is also eliminated, along with other Iowa-specific deductions.
Sen. Pam Jochum, D-Dubuque, said there is bipartisan support for eliminating federal deductibility. But she questioned the timing of all these tax changes.
“Is this the right time, considering that we are still trying to get our arms around the impact of this pandemic on our economy and on our budget?” Jochum asked.
She also asked if the Senate would take up a bipartisan bill passed by the House that would exempt federal pandemic unemployment benefits and other relief grants from state taxes. Dawson did not commit to passing that bill.
The state’s revenue forecasters are scheduled to meet Friday, and they could estimate enough growth to meet the targets in the current law and make removing the revenue “triggers” unnecessary. Then the tax cuts could take effect in 2023 without action from lawmakers.
The Senate tax bill would also phase out the state inheritance tax by 2024.
Speaker Pat Grassley, R-New Hartford, said House Republicans have been hesitant to change the law and remove the revenue triggers. And he said while there is some interest among House Republicans in phasing out the state inheritance tax, he has questions for the Senate about that.
“I think it comes with a $90 million to $100 million price tag, and if the triggers were to be eliminated at the same time, I think we’d have to be just very careful in the decisions that we’re making,” Grassley told reporters Thursday. “We’d like to work towards that, but theirs may be a little bit more aggressive than what we would be interested in at this point.”
Grassley also said lawmakers need more clarity on whether the latest federal pandemic relief package could block efforts to cut taxes this year.
