Iowa Gov. Kim Reynolds signed a nearly $1 billion tax cut into law Wednesday that will lower the state’s personal income tax to a flat rate of 3.8% in 2025.
The top income tax rate was 8.98% when Reynolds took office in 2017. The Republican trifecta started cutting income taxes in 2018, making deeper and deeper cuts without waiting for them to fully phase in. Reynolds said after all that, the state still had a large budget surplus and billions of dollars in the Taxpayer Relief Fund.
She said that made it clear she could propose going “further faster” this year.
“The bottom line is that every Iowa taxpayer will experience significantly lower tax rates starting next year,” Reynolds said.
The top income tax rate is currently 5.7% and would have phased down to a flat 3.9% in 2026 under the law Reynolds signed in 2022. This year, Reynolds proposed a 3.5% income tax rate to take effect in 2025, but Republican leaders landed on 3.8% last month.
Reynolds said the eyes of the nation have been on Iowa for its several rounds of tax cuts in recent years, so she thought it was “imperative” to continue cutting taxes this year. She said it sends a message to the country that “Iowa is open for business.”
“Simply put, we’ve comprehensively transformed our tax code, and dramatically increased our competitiveness within a few short years,” Reynolds said. “At the same time, conservative budgeting practices have kept us living within our means and allowed us to continue making historic investments in key priorities of Iowans.”
@iowapublicradio Iowa Gov. Kim Reynolds signed a nearly $1 billion tax cut into law Wednesday that will lower the state’s personal income tax to a flat rate of 3.8% in 2025. The top income tax rate was 8.98% when Reynolds took office in 2017. The Republican trifecta started cutting income taxes in 2018, making deeper and deeper cuts without waiting for them to fully phase in. Reynolds said after all that, the state still had a large budget surplus and billions of dollars in the Taxpayer Relief Fund. She said that made it clear she could propose going “further faster” this year. The top income tax rate is currently 5.7% and would have phased down to a flat 3.9% in 2026 under the law Reynolds signed in 2022. This year, Reynolds proposed a 3.5% income tax rate to take effect in 2025. Republican leaders agreed to reduce the rate to 3.8%, slightly more than Reynolds' proposal, last month. Read the full story at ipr.org/news #ipr #iowapublicradio #iowa #news #radio #npr #taxes ♬ original sound - Iowa Public Radio
Reynolds also said she is confident that the Legislature is not done cutting taxes. She has previously said she wants to eliminate the state income tax before the end of her term in early 2027.
Democratic leaders have criticized the income tax cuts, saying the richest Iowans will get tens of thousands of dollars in tax savings, while the approximately 500,000 Iowans who don’t make enough money to pay income taxes will not benefit. They have also accused Republicans of underfunding education and health care to save up for tax cuts.
The new law sets up a mechanism that allows 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.
Senate Minority Leader Pam Jochum, D-Dubuque, said she believes this is the wrong direction for the state of Iowa.
“This is one-time money that’s going to be used for ongoing expenses,” she said last month. “Sooner or later, it’s not going to work. It’s not good budgeting. It isn’t sustainable.”
Some Democrats voted for the bill, saying they support cutting taxes for everyone who pays income taxes, rather than just the top earners in the state.
According to the nonpartisan Legislative Services Agency, the additional income tax cuts will reduce state revenue by an estimated $328 million in the next fiscal year, and $605 million in fiscal year 2026. LSA also predicts that revenues will not fall below the amount that is budgeted for state services in the next few years, so the bill’s procedure for using money from the Taxpayer Relief Fund would not be triggered.
Rep. Bobby Kaufmann, R-Wilton, previously said he disagreed with that analysis, and that half the money to pay for the tax cuts would come from the budget surplus and half would come from the Taxpayer Relief Fund.
The new law makes changes to a property tax relief law that was passed last year by adjusting the limits on revenue growth generated from a city or county’s general levy. County supervisors will also be allowed to get rid of county compensation boards that decide how much county elected officials get paid.
At the bill signing event Wednesday, Reynolds also signed a law that will provide tax incentives for major economic development projects that invest at least $1 billion.
“We want those big investments, those capital investments in our state, and we need to be competitive for that, as well,” she said.
