Iowa House approves 4 percent flat income tax
The Iowa House passed a bill Wednesday that would phase in a flat personal income tax of 4 percent and eliminate taxes on retirement income. It would also give tax breaks to retired farmers and people who retire from employee-owned companies.
The vote was 61 to 37, with three Democrats joining all Republicans present in support of the bill.
House Majority Leader Matt Windschitl, R-Missouri Valley, said it’s an historic moment. He said the state’s budget surplus isn’t for lawmakers to spend.
“This is Iowans’ money,” he said. “They deserve to have it back. We don’t need to be spending it on growing government.”
Several Democrats criticized the bill, saying the big reduction in state revenue resulting from the tax cuts could jeopardize state services in the future. And they said the bulk of the tax savings will go to the wealthiest Iowans.
“It’s kind of a reverse Robin Hood,” said Rep. Dave Jacoby, D-Coralville. “Rob from the poor, give even more to the rich.”
Jacoby also said it’s not truly a flat tax, because there are still a lot of tax credits and exemptions.
According to the governor’s office, a 4 percent flat income tax rate would save Iowa families an average of $1,300. Democrats said the plan would save Iowans in the lowest tax bracket less than $20 a year.
The whole tax plan is estimated to reduce state revenue by more than $1.6 billion in fiscal year 2028, after all parts of the plan are phased in, according to a nonpartisan analysis. The current fiscal year’s state budget was set at $8.1 billion.
“Some of us think that all of this surplus shows that we aren’t using taxpayer dollars to raise all the boats,” said Rep. Marti Anderson, D-Des Moines. “To help feed, educate, take care of the elderly, take care of people with disabilities, increase our mental health investment, make sure that our nursing homes are inspected, make sure that law enforcement has the resources that they need to do their jobs.”
Democrats proposed several amendments that were rejected by Republicans.
One would have thrown out all parts of the bill except for the elimination of taxes on retirement income and pensions. Another would have preserved the 4 percent flat tax but would enact that immediately for the three lowest income brackets, while phasing the cuts in over time for the top rate.
A third amendment would only implement the 4 percent flat tax for people making less than $1 million.
Democrats also proposed adding provisions to double the Earned Income Tax Credit for low-income Iowans, and to further expand the Child and Dependent Care Tax Credit. They also proposed increasing tax credits for volunteer firefighters, from $250 to $1,000.
Bill manager Rep. Lee Hein, R-Monticello, said he thinks a 4 percent flat tax is fair.
“A doctor who has spent a large amount of his time and money getting his education, only to have his high producing years taxed at a higher rate…does that sound fair to you? Doesn’t to me,” Hein said.
House Speaker Pat Grassley, R-New Hartford, said projections show the state will have enough money going forward to pay for the House GOP tax plan.
It’s not clear what Republicans’ final tax plan will look like because leaders still have to negotiate.
“A lot of those discussions usually happen toward the end of session,” Grassley said. “But the fact that we were here, we had the resources to pass this cut, and we had consensus from the [House GOP] caucus, we wanted to get this moving today.”
The bill passed Wednesday represents most of Republican Gov. Kim Reynolds’ tax plan. The House GOP bill excludes her proposal for corporate income tax cuts. The House plan would also use part of the Taxpayer Relief Fund to offset the cost of the tax cuts, while Reynolds’ plan would reserve those funds in case the economy doesn’t grow as expected.
Senate Republicans also have a different proposal for a 3.6 percent flat income tax as well as sales tax changes that would result in funding the Natural Resources and Outdoor Recreation Trust Fund.
Republican lawmakers also passed income tax cuts into law last year. Those are supposed to start taking effect in 2023. The cuts will be deeper if the legislature ultimately approves one of these tax plans.