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Iowa Legislature passes bill to cut income tax to 3.8% flat rate

Sen. Dan Dawson and Rep. Bobby Kaufmann managed the passage of the property tax relief bill Tuesday.
Katarina Sostaric
Sen. Dan Dawson (left) and Rep. Bobby Kaufmann managed the passage of the tax bill.

The Iowa Legislature passed a bill Friday that would cut Iowa’s personal income tax to a single rate of 3.8% in 2025, sending it to Gov. Kim Reynolds’ desk for her signature.

Reynolds said in a statement the top income tax rate was nearly 9% when she took office in 2017. She said even after several rounds of tax cuts, the state has a large budget surplus and billions of dollars in the Taxpayer Relief Fund.

Reynolds said this bill means every Iowan who pays income tax will keep more of what they earn.

“Iowa families live within their means every day, and there’s no reason government can’t do the same,” Reynolds said. “Thanks to conservative budgeting and fiscal responsibility, Iowa is in a strong position to cut taxes and continue to invest in key priorities like housing, child care, broadband and more.”

The top income tax rate is currently 5.7% and would phase down to a flat 3.9% in 2026 under current law. At the beginning of the legislative session, Reynolds proposed a 3.5% income tax rate to take effect in 2025, but Republican leaders landed on 3.8% earlier this week.

House Minority Leader Jennifer Konfrst, D-Windsor Heights, said the tax cuts won’t benefit the 500,000 Iowans who don’t pay income taxes. And Democrats have said it’s not a true flat tax when deductions and credits are still available.

“This overwhelmingly benefits the rich,” she said. “Those who are at the top bracket get five figures of benefit. Those at the bottom, $5. It’s not fair. It’s not a flat tax. And too many Iowans are left behind.”

Konfrst said the Republican majority has been able to cut taxes because they’re underfunding key services like education.

The bill would allow the state to use the budget surplus and the Taxpayer Relief Fund to make up for the loss of revenue from the proposed tax cuts.

Rep. Bobby Kaufmann, R-Wilton, said the tax cuts are sustainable.

“This is another historic tax rate reduction—over a billion dollars saved,” he said. “I would argue for an opportunity for all Iowans to take advantage of this piece of legislation, putting Iowa again at the forefront of leading on conservative tax rates.”

According to the nonpartisan Legislative Services Agency, the additional income tax cuts would reduce state revenue by $328 million in the next fiscal year, and $605 million in fiscal year 2026. LSA also predicted that revenues would not fall below the budget in the next few years, so the bill’s procedure for using money from the Taxpayer Relief Fund would not be triggered.

Kaufmann said he disagreed with that analysis, and that half the money would come from the surplus and half would come from the Taxpayer Relief Fund.

House Democrats proposed an amendment to cut the sales tax by one cent instead of cutting income taxes.

Rep. Sami Scheetz, D-Cedar Rapids, said that would cost less than the income tax cuts while helping working families in Iowa.

“This will be a tax cut for 100% of Iowans, and as so many people in the state know, the sales tax is the most regressive form of taxation,” he said. “It hits the people in the state who need help the most the hardest.”

Republicans ruled the amendment not germane to the bill.

The bill would also make changes to a property tax relief law that was passed last year, by adjusting the limits on revenue growth from a city or county’s general levy. It would also allow county supervisors to get rid of county compensation boards that decide how much county elected officials get paid.

The bill passed the House 68-24, with 10 Democrats joining all Republicans in support of the bill. It passed the Senate 39-7, with seven Democrats joining all Republicans in voting yes.

Proposed constitutional amendment would require flat income tax rate

Republicans in the Iowa House approved a proposed constitutional amendment Friday night that would require Iowa’s personal income tax to be a flat rate in an effort to make it difficult for future lawmakers to change their tax policies.

The Senate approved the language earlier this month.

Sen. Jason Schultz, R-Schleswig, said he believes Iowans want to keep a flat income tax rate in place forever.

“They’d like to move ahead, they’d like to better themselves, they’d like to keep their wages,” he said. “And the simple fact is that a graduated income tax is simply adding more hurdles as you better yourself.”

Democrats say it wouldn’t be fair because tax exemptions would still largely benefit wealthier taxpayers. They also say the state might have to raise sales and property taxes to make up for lost revenue.

Sen. Cindy Winckler, D-Davenport, said income taxes are just one aspect of funding government.

“I think that taking only one component of a taxing system and placing it in the constitution, holding it higher than the other areas, places an undue burden on the other areas of taxation,” she said.

The Legislature would have to pass the proposal again in 2025 or 2026 before it could go on the ballot for voters to decide.

Republicans have also approved language to amend the Iowa Constitution to require a two-thirds vote by lawmakers—instead of a simple majority—to raise income taxes. They would also have to pass that again in 2025 or 2026 to get it on the ballot.

Katarina Sostaric is IPR's State Government Reporter