Fifty-five of the 60 Republicans in the Iowa House of Representatives have signed onto a bill that would immediately eliminate the state tax on pensions and other retirement income.
Lead bill sponsor Rep. Gary Mohr, R-Bettendorf, said he thinks the tax break will keep retired Iowans from leaving the state.
“Frankly, I’d like to stop that out-migration as quickly as possible,” Mohr told reporters Monday. “The governor’s plan calls for starting this in 2023. Mine makes it retroactive to January 1, 2022. Either one’s fine with me. It’s just important to me that we get this bill enacted.”
He said he sees this is a big issue for his district, which borders Illinois, a state that doesn’t tax pensions.
Mohr said it’s fine if retirees want to go to a warmer place for two or three months, but he doesn’t want them to spend most of the year there and change their state of residence to avoid paying taxes.
“They not only take their investments with them, they take their expenditure with them,” Mohr said. “But they lose some interest in Iowa. They used to be major contributors to not-for-profits in town. They were involved in community organizations. Well, now they’re gone six months in a year. They’re not as active in Iowa as they used to be. And they lose interest in the state. That’s a non-economic loss. But I think it’s a huge loss in the state of Iowa.”
Mohr provided a map from the annual IPERS report showing where benefits from the state’s biggest public pension plan are getting paid out. In Fiscal Year 2021, the states that got the most money outside of Iowa were Florida, Nebraska, Arizona, Illinois, Missouri and Minnesota. Of those states, Florida and Illinois don’t tax retirement income.
Iowa currently allows some retirement income to be exempt from state income taxes.
Mohr said a preliminary estimate from the Department of Revenue shows his plan would cost the state $187 million in the first year, and the cost would increase over time to $397 million five years from now. He said the state can afford that.
Last week, Gov. Kim Reynolds was asked about the House GOP proposal that would apply to all retirement income received in 2022.
“Oh yeah, we’ll look at all of that,” Reynolds said. “Sothis is a foundation to start. We spent all interim working on it. We ran the scenarios. We’ve been very conservative in our projections. And so this is a great place to start. I’m excited to work with the legislature.”
Mohr’s bill does not include specific tax breaks for retired farmers that Reynolds has proposed.
“I wasn’t sure how to do that,” Mohr said. “I’m looking at something that would affect most Iowans. I’m not opposed to it by any means—I was a farm kid—but I don’t know exactly how that’s going to work.”
Democratic leaders have said property tax relief would be a better way to help retired Iowans, but they have not directly opposed the plan to get rid of retirement income taxes.
“When I talk with folks in my district who are on a fixed income, their number one concern is property taxes, not income taxes,” said Senate Minority Leader Zach Wahls, D-Coralville. “And I think that’s where the focus should be, not on the income stuff. I do think we can continue to have conversations about it.”
Wahls said he’s expecting property taxes to increase more in the coming years as a result of a Republican-backed law that passed last year phasing out the “backfill” payments to local governments that began as a way to make up for commercial property tax cuts made a few years ago.
