Governor Kim Reynolds is growing Iowa’s economy by making tax laws more competitive and ensuring hardworking taxpayers keep more of their money. During her speech on the state of the state, the governor stated that not only do we “need to continue talking about tax cuts”, but we also called for the removal of “the unnecessary triggers introduced in 2018”.
As lawmakers worked to end this term, they passed a comprehensive bipartisan tax break package that is estimated to bring Iowans $ 1 billion in tax savings. This tax relief package is a victory for the taxpayer, but the tax reform is far from over.
A major reason for introducing tax breaks was the prudent budgeting that Governor Reynolds and Republican-led lawmakers followed. As a result of fiscal conservatism to keep spending levels down and lower tax rates, Iowa’s finance house was fine as the nation was hit by the recession sparked by COVID-19.
At the start of the legislature, Iowa’s budget was in surplus and reserves were full. This not only laid the foundation for economic recovery, but also paved the way for tax breaks.
At the beginning of the session, Senate Republicans pushed for tax breaks that would remove the 2018 revenue triggers and end the outdated inheritance tax. To reduce property taxes, Senate Republicans also proposed removing the county mental health property tax and phasing out backfilling. The backfill resulted from an earlier law to reform the property tax, which helped the city and district administrations to compensate for lost business tax revenues.
The comprehensive tax break met the tax break goals advocated by the governor and Senate Republicans. Some of the most important provisions include:
Eliminates 2018 Revenue Triggers: The 2018 Tax Reform Act envisaged two tough revenue triggers for the 2023 income tax rate cut. On the one hand, government revenues were supposed to exceed USD 8.3 billion, and on the other hand, revenues had to increase by at least 4% for the fiscal year. Eliminating both triggers removes an unnecessary barrier to rate reduction.
Eliminated Death Tax: Iowa is one of six states that still have inheritance tax. It will now expire over a period of five years.
District Mental Health Tax: This property tax will expire within two years and the general fund will take over mental health funding.
Backfill expiry: Property tax backfill will expire over a period of four to seven years depending on the city and county, giving you time to prepare for the backfill to be removed.
Paycheck Protection Program (PPP): Grants from the federal COVID-19 program are exempt from state taxation.
Bonus Amortization: The Iowa Tax Code will now be pegged to the Federal Tax Code for purchases of equipment and other investments.
The measure includes numerous other provisions, including several tax credits. The expansion of Iowa tax credits is a growing problem as it makes tax laws more complex and complicates future tax reform. Policy makers need to monitor tax credits more closely and eliminate those that are ineffective.
Although Iowa revenue is growing and it would appear that both revenue triggers would have been met, eliminating the revenue triggers will add more security to taxpayers. In 2023 the maximum rate will drop to 6.5% and the individual income tax brackets will be reduced from nine to four brackets with a lower rate of 4.4%. In addition to the interest rate cut in 2023, the federal deductibility will be eliminated.
“Lowering the highest income tax rate to 6.5% means Iowa families will keep more of the money they make. Lower income tax rates make this state more attractive to small businesses and people looking for new homes, ”said Jack Whitver, Senate majority leader. Senator Whitver also argued that “the phasing out of inheritance tax will end the unfair practice of taxing the dead and abolishing the mental health charge” in order to finally give Iowans real property tax relief.
While this tax break is a victory for the taxpayer, Iowa cannot afford to be complacent. Iowa’s individual and corporate tax rates are still high and further property tax reform is needed. The American Legislative Exchange Council (ALEC) recently published the 14th annual Rich States, Poor States: The ALEC-Laffer State Economic Competitiveness Index, and Iowa’s ranking for economic prospects fell from 27 in 2020 to 33 in 2021. One reason for the Iowa decline ranked other states are working to lower their tax rates. Iowa can’t afford to be complacent as it competes with 49 other states for both jobs and people. The latest census data show that states with no income tax or states with lower income tax rates are gaining in population.
Future tax reforms must depend on following a path of fiscal conservatism by keeping spending levels low. Iowa has shown that tax rates can be lowered while respecting government priorities. Other states like North Carolina, Indiana, and Utah have also proven that limited government policies work.
Governor Reynolds and the Republican-led legislature continue to fight for Iowa taxpayers. If policymakers continue to pursue fiscal conservatism, Iowa could become a growth leader in the Midwest.
John Hendrickson is the political director of the Tax Education Foundation in Iowa, a public policy think tank