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Iowa Gov. Kim Reynolds signs major tax cut package into law

Iowa Governor Kim Reynolds has signed a major tax cut package into law just hours before she’s set to give a nationally televised speech.
The Iowa Legislature passed a sweeping tax cut bill Thursday.

This article was originally published Feb. 24 and updated March 1.

Read also: Iowa governor signs law to phase in a 3.9% flat income tax

Iowa Gov. Kim Reynolds signed a major tax cut package into law Tuesday just hours before she is scheduled to deliver the Republican response to the State of the Union address.

“Today is a great day for the state of Iowa as we dramatically reform Iowa’s tax system for the better and make our state one of the most competitive in the nation,” Reynolds said.

The new law will phase in a flat 3.9 percent personal income tax by 2026. It will eliminate state taxes on retirement income starting next year, and enact new tax breaks for retired farmers and people retiring from employee-owned companies. The corporate tax rate will also be reduced over time, along with reductions in some corporate tax credits.

Reynolds signed the law at a local manufacturing facility surrounded by dozens of Republican state lawmakers cheering her on.

The Iowa Legislature passed the sweeping tax cut bill Thursday, sending it to the governor's desk for her signature.

"There's never been a better time in Iowa for bold, sustainable tax reform," Reynolds said in a statement. "This bill rewards work, takes care of our farmers, and supports our retirees, all while protecting key state priorities."

Senate Majority Leader Jack Whitver, R-Ankeny, said he’s excited and proud that House and Senate Republicans along with Reynolds reached a tax agreement.

“Senate Republicans are happy to deliver on the promise that we’ve made to voters for the last year—that when we have surpluses in Iowa, we are going to deliver tax cuts for every single Iowan,” he said.

Democratic leaders have criticized the tax plan as being largely beneficial to wealthy people and corporations at the potential cost of cuts to state services.

The Senate passed the bill 32-16, with Democratic Sens. Tony Bisignano and Kevin Kinney joining all 30 Republicans present in support of the bill. The House passed the bill 61-34, with Democratic Reps. Kenan Judge and Steve Hansen joining all 59 Republicans present in voting for the bill. All remaining Democrats voted against it.

Sen. Dan Dawson, R-Council Bluffs, said it’s the first time in Iowa history that the state will have a flat income tax.

“People call the current tax system progressive, but we actually look at it as regressive,” Dawson said. “The current system right now penalizes people who work harder. You know, we want to treat all Iowans fairly.”

Iowa currently has what is called a progressive income tax: higher tax rates applied to people who make more money. Under this plan, that will be phased out by 2026.

Republicans say on average, the income tax cuts will save Iowa families about $1,300 a year. The tax bill as a whole is projected to cost the state more than $1.8 billion in 2028.

They pointed to an Iowa Department of Revenue analysisthat shows people who make more than $1 million will save an average of $67,000 per year. Meanwhile, Iowa households that make $68,000 per year are projected to see an average annual savings of about $600.

“Put another way, it’ll take more than a century for average Iowans to get the same tax relief that the wealthiest Iowans will get in a single year,” said Senate Minority Leader Zach Wahls, D-Coralville. “Does that sound fair? Is this what Iowa values are about?”

Democratic senators proposed amendments that would expand the Child and Dependent Care Tax Credit and the Earned Income Tax Credit, keep current tax rates for Iowans with taxable income over $250,000, and limit retired farmer benefits to those who rent their land to beginning and young farmers.

Republican senators rejected all of those amendments.

Sen. Pam Jochum, D-Dubuque, said the amendments were an attempt to reward work. But she said the bill that passed rewards wealth instead.

“Sen. Dawson …said this was a great day, a July Fourth,” Jochum said. “For whom? For whom is this a great day? It’s a great day for the millionaires. But it isn’t for the child care workers. It isn’t for the school teacher. It isn’t for that truck driver. It is not.”

Speaker Pat Grassley, R-New Hartford, said House Republicans are following through on their commitment to cut taxes.

“This is something we were able to do—focusing on the individual income tax without raising taxes on Iowans and making sure that we can make Iowa more competitive,” he said.

Rep. Dave Jacoby, D-Coralville, said that the pandemic and the Russian invasion of Ukraine are causing economic uncertainty.

“I’m just a little nervous that we’re doing something that doesn’t help a majority of Iowans, and it’s an investment that we may not be able to make given the economic situation that we’re in today," he said.

How does the final GOP tax plan compare to the original proposals?

The final bill is similar to Reynolds’ tax plan that she unveiled in her Condition of the State address last month.

She proposed phasing in a 4 percent flat personal income tax by 2026. The House GOP took up that plan, while the Senate GOP called for a 3.6 percent flat tax by 2027.

They landed on a 3.9 percent flat personal income tax by 2026.

If state revenue doesn’t grow 3.5 percent per year, money will be taken from the Taxpayer Relief Fund to cover potential budget gaps.

Reynolds’ proposals to eliminate taxes on retirement income and give tax breaks to retired farmers and people who retire from employee-owned companies are in the final bill.

It also includes Reynolds’ plan to gradually cut the top corporate tax rates depending on how much corporate tax revenue the state brings in over $700 million each year. It also includes part of the Senate plan to reduce some refundable business tax credits, including the Research Activities Tax Credit.

The Senate GOP proposal to fill the Outdoor Recreation and Natural Resources Trust Fund is not in the final bill. Dawson said he will continue to advocate for that this session. Their plan to use the Taxpayer Relief Fund to trigger automatic tax cuts in the future is not in the final bill.

Updated: March 1, 2022 at 1:36 PM CST
This story was updated to reflect that the governor signed the tax bill.
Katarina Sostaric is IPR's State Government Reporter