Iowa Legislature Sends 3.9% Flat Income Tax To Governor’s Office

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The Iowa Legislature passed a sweeping tax cut bill Thursday, sending it to the governor’s office for his signature.

It would phase in a fixed personal income tax of 3.9% by 2026, eliminate taxes on retirement income and reduce the corporate tax rate while reducing certain refundable corporate tax credits over time.

The bill includes tax breaks for retired farmers as well as retirees of employee-owned businesses.

It’s Gov. Kim Reynolds’ top legislative priority, and it’s nearing completion just days before she’s due to deliver the Republican response to President Joe Biden’s State of the Union address.

“There has never been a better time in Iowa for bold and enduring tax reform,” Reynolds said in a statement. “This bill rewards hard work, cares for our farmers and supports our retirees, while protecting the state’s top priorities.”

Senate Majority Leader Jack Whitver, R-Ankeny, said he was pleased and proud that House and Senate Republicans and Reynolds reached a tax deal.

“Senate Republicans are pleased to deliver on the promise we made to voters last year that when we have surpluses in Iowa, we will deliver tax cuts for every Iowan,” he said. he declares.

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

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

Sen. Dan Dawson, R-Council Bluffs, said this is the first time in Iowa history the state will have a flat income tax.

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

Iowa currently has what is called progressive income tax: higher tax rates applied to people who earn more money. As part of this plan, this will be phased out by 2026.

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

They pointed to an analysis by the Iowa Department of Revenue that shows people who earn more than $1 million will save an average of $67,000 a year. Meanwhile, Iowa households earning $68,000 a year are expected to see average annual savings of about $600.

“In other words, it will 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 seem fair to you? Is that what Iowa values ​​are? »

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

Republican senators rejected all of these amendments.

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

“Sen. Dawson … and it was a beautiful day, a 4th of July,” Jochum said. “For whom? For whom is this a big day? It’s a big day for millionaires. But it’s not for educators. It’s not for the schoolmaster. It’s not for that truck driver. It’s not.”

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

“That’s something we’ve been able to do — focus on personal income tax without raising Iowans’ taxes and making sure we can make Iowa more competitive,” he said.

Rep. Dave Jacoby, D-Coralville, said the pandemic and Russia’s invasion of Ukraine are causing economic uncertainty.

“I’m just a little nervous that we’re doing something that doesn’t help the majority of Iowans, and that’s an investment that we may not be able to make given the economic situation we’re in. we find 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 statehood address last month.

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

They landed on a fixed income tax of 3.9% by 2026.

If state revenues do not increase by 3.5% per year, money will be taken from the Taxpayer Relief Fund to cover any budget shortfalls.

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

It also includes Reynolds’ plan to gradually reduce top corporate tax rates based on the amount of corporate tax revenue the state brings in at more than $700 million each year. It also includes part of the Senate’s plan to reduce certain refundable business tax credits, including the tax credit for research activities.

The Senate GOP’s proposal to fill the Outdoor Recreation and Natural Resources Trust Fund is not included 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.


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