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Iowa Republicans advance plan to cut income tax to 3.8% flat rate in 2025

senators listen to speakers at a subcommitee hearing at the iowa capitol
Katarina Sostaric
Sen. Dan Dawson and Senate Minority Leader Pam Jochum heard from stakeholders at a subcommittee hearing on a new GOP tax cut plan Thursday.

Iowa’s personal income tax would drop to a single rate of 3.8% in 2025 under a deal reached by Republican leaders, who estimate their plan would cut taxes by an additional $1 billion.

Sen. Dan Dawson, R-Council Bluffs, said the bill would help fix the “overcollection” of tax dollars while still leaving open the possibility of trying to eliminate the income tax in the future.

“We are accelerating the promised tax cuts, taking it lower, and returning an extra billion dollars to Iowans they would not have had otherwise,” he said.

The current top income tax rate is 5.7%, and it is set to phase to a flat 3.9% in 2026 under a law passed two years ago. The new bill speeds up and deepens those planned cuts, but not as much as Gov. Kim Reynolds proposed at the start of the legislative session.

In a statement, Reynolds said this will benefit every Iowan who pays income tax.

“This was a key piece of the tax reform bill I proposed this year, and this common-sense compromise will allow hard-working Iowans to keep more of what they earn in every paycheck,” Reynolds said. “Government should only collect what it needs to serve its people and allow them to keep the rest.”

Rep. Dave Jacoby, D-Coralville, opposed the income tax cut, saying it largely benefits the richest Iowans.

“Democrats believe it’s time that we give the working class, the middle class, the tax breaks they need,” he said. “This continues to give the top 1% of richest Iowans the largest tax breaks.”

Under the bill that advanced Thursday, the state would use the budget surplus and the Taxpayer Relief Fund, where nearly $4 billion of past budget surpluses have been deposited, to make up for the loss of revenue from the proposed tax cuts.

Rep. Bobby Kaufmann, R-Wilton, said Republicans are committed to making sure their tax cuts are sustainable.

“We’re showing here in Iowa that we’re fiscally responsible,” he said. “We’re understanding concerns and mistakes made in other states. We’re still able to actualize growth, fund our priorities and still have healthy balances and the ending balance and the TRF.”

Senate Minority Leader Pam Jochum, D-Dubuque, said she is concerned about the state’s ability to fund key services if there’s an economic downturn.

“I’m just looking long-term at the fiscal health of the state and making sure we can maintain our education system, because to me, public safety and educating our children are probably two of the most important things we can do in state government,” she said.

A nonpartisan analysis of the bill’s financial impact was not yet available Thursday evening.

During a Senate subcommittee hearing Thursday morning, Common Good Iowa Deputy Director Mike Owen said the state shouldn’t use one-time money for ongoing purposes. He said lawmakers should instead target tax breaks to people who really need help getting by.

“This bill compounds a patently unfair tax system that we have,” Owen said. “It further takes us away from a tax system based on ability to pay. That principle is fundamental to good tax policy to sustain services.”

Brad Hartkopf said the Iowa Association of Business and Industry supports the bill.

“We appreciate all the progress that has been made over the last several years in making our tax climate more competitive for both individuals and businesses,” he said. “We believe this bill takes us another step going in that direction.”

The bill would require the state to stop using the Taxpayer Relief Fund to cover this round of tax cuts in 2029. According to House Republicans, the Taxpayer Relief Fund would shrink to an estimated $2.66 billion by 2029, and start growing again in 2030.

Earlier this session, Dawson and Kaufmann proposed investing the Taxpayer Relief Fund and using earnings to ratchet down the income tax over time until it reaches zero. They said the new plan would leave enough money in the fund to consider that in the future.

Republicans in the House and Senate are also working to amend the Iowa Constitution to require the income tax to be a flat rate, and to make it more difficult to raise personal and corporate income taxes in the future. Those proposals would have to get passed again in 2025 or 2026 before going on the ballot for voters to decide.

Property tax changes

The bill that advanced Thursday would also make changes to a property tax relief law passed last year by adjusting when and how much a city or county may have to reduce their revenue by lowering their general levy.

Kaufmann and Dawson said they heard from rural counties that saw their tax base grow just over 3% that it wasn’t sustainable to have their revenue knocked down by two percentage points under the current law.

The bill would also let county supervisors get rid of their county compensation boards that decide how much county-level elected officials get paid.

Kaufmann said the boards are essentially “a group of friends getting together and recommending raises for each other.”

“And so you’ve got an autopilot Ponzi scheme of property tax growth that the local supervisors that are elected to do their job have no control over,” he said.

Lucas Beenken with the Iowa State Association of Counties said the group has opposed getting rid of county compensation boards, but he said he thinks county supervisors would be in favor of this proposal.

“Because it does give that local control in deciding, if they like it they can keep it, if they would like to take on those responsibilities themselves, they can do that as well,” he said.

The bill would also remove the requirement for Lee County in far southeast Iowa to operate two courthouses.

Katarina Sostaric is IPR's State Government Reporter