DES MOINES, Iowa – The Iowa Legislature approved a bill on Thursday that would phase in a 3.9 percent flat individual income tax by January 1, 2026.
The bill will eventually move Iowa from having the nation’s 8th highest individual income tax rate to the fourth-lowest.
After debating over an hour, the Iowa Senate amended and passed HF 2317 by a 32 to 16 vote. State Senators Tony Bisignano, D-Des Moines, and Kevin Kinney, D-Oxford, joined Senate Republicans voting for the bill. State Senators Brad Zaun, R-Urbandale, and Dan Zumbach, R-Ryan, were absent from the vote.
The bill, if enacted, provides relief to retired farmers by providing them an exclusion on taxes for lease income and capital gains income. In addition, the bill reduces the number of tax brackets and lowers the top rates effective January 1, 2023, through December 31, 2025. It also eliminates the individual income tax on retirement income. The legislation will also eventually phase in a corporate flat tax of 5.5 percent if corporate income tax revenue exceeds $700,000. Finally, the bill also phases in reducing the amount the state provides from several refundable tax credits.
“Today’s a great day. We got the Second Amendment folks down here in the rotunda, and we’re going to cut some taxes today. To borrow a phrase, some big government types out there believe every day is April 15. For Senate Republicans, we believe every day is July 4, and today is certainly July 4. So let’s get down to business,” State Senator Dan Dawson, R-Council Bluffs, the bill’s manager, said during his opening remarks during the Iowa Senate’s floor debate on the bill.
He later stated that the bill is meant to be a stepping stone to eliminating the state’s income tax.
Senate Democrats offered four amendments to the Senate amendment being debated. Two amendments lost 30 to 18, and two were ruled not germane.
Senate Democrats argued the bill did not help lower-income Iowans.
“Workers are the backbone, they’re the backbone of the economy, and too long those workers have been left out. And they’ve been left out by too many supply-side economic tax plans that we have witnessed and experienced and lived through for the past 40 years,” State Senator Pam Jochum, D-Dubuque, said. “Whether you like it or not this tax plan, the governor’s tax plan is going to shift the tax burden to those who can least afford it.”
She later said the bill “rewards wealth over work,” adding that Thursday was “a great day for millionaires.”
Iowa Senate Minority Leader Zach Wahls, D-Coralville, echoed those remarks.
“Iowans need a fair tax code. We supported tax cuts last session that provided significant savings for working families while maintaining a fair tax code. Democrats believe that we need to reward and incentivize work, not wealth. But the Republican plan overwhelmingly rewards wealth, not work,” he said, arguing Democrat amendments provided more tax relief to working families.
During his closing comments, Dawson said the bill provided lawmakers an opportunity.
“This bill before us today, the opportunity before us today, is a moment in our state’s history. Ever since Iowa enacted the income tax in 1934, 88 years ago, folks, Iowa’s had a progressive or what many would say a regressive income tax system that’s penalized hard work and sadly pitted Iowans against Iowans in the public policy debate, as we heard today. Folks, today we are changing this 88-year history. For the first time, our state is charting a new way forward. Where, for the first time, we are treating all Iowans’ work fairly and equally by enacting the flat tax,” he said.
Senate Majority Leader Jack Whitver, R-Ankeny, praised the vote in a released statement.
“For years Senate Republicans have promised to provide income tax relief and today, we kept that promise again,” he said. “This tax bill is the third major tax relief package the Senate has delivered in the last 4 years. A nearly $1.9 billion tax cut creates an environment for more career opportunities for Iowans, gives Iowans more of an incentive to rejoin the workforce, and helps Iowans weather the impact of record setting inflation created by the reckless policies coming from Washington, DC.”
The Iowa House of Representatives approved the Senate changes by a 61 to 34 vote after a debate lasting 40 minutes on Thursday evening. State Reps. Steven Hanssen, D-Sioux City, and Kenan Judge, D-Waukee, joined House Republicans voting in favor of the bill. State Reps. Christina Bohannan, D-Iowa City, Jarad Klein, R-Keota, Bob Kressig, D-Cedar Falls, Sharon Steckman, D-Mason City, and Phyllis Thede, D-Davenport, were absent for the vote.
State Rep. Molly Donahue, D-Cedar Rapids, pointed out that many lower-income Iowans will see little to no benefit from the tax cuts.
“Who will benefit and how? 450,000 Iowans will not receive one penny according to the Department of Revenue with this tax cut. 557,000 of the lowest income Iowans will see less than 25 cents more each week in their paycheck. Almost 100,000 middle-income Iowans will receive an extra $11.40 a week,” she said, pointing out that 3200 of the state’s millionaires will see $1300 more a week.
State Rep. Marti Anderson, D-Des Moines, made a similar argument.
“I can’t believe that we are lowering taxes for people earning $75,000 and up, including those who make a million dollars or more rather than cutting the taxes first for working people struggling to pay rent, utilities, clothe their children, keep their car going, just make ends meet,” she said.
“We have a $1.2 billion surplus, but we aren’t inspecting our nursing homes, protecting children and elders. We aren’t providing a living wage for our home health care workers or childcare workers or investing adequately in our public schools,” Anderson added.
State Rep. Lindsay James, D-Dubuque, argued that under the bill, “it will take the average working everyday Iowan a century to receive the same tax benefits that the ultra rich will receive in a single year.”
State Rep. Jon Jacobsen, R-Council Bluffs, criticized the Legislative Service Agency’s fiscal note cited by House Democrats that said the state would lose revenue.
“They’re reined in. They can’t dynamically score this. They have to statically score this bill. And they say ‘well, this is going to cost this much revenue and this is going to cost that much revenues’ Balderdash. Arthur Laffer won a Nobel Prize showing how cutting taxes generates revenue,” he said.
“Ladies and gentlemen, the scoring done by LSA is incorrect. We’re not going to be losing a few million here in a few million there. We’re going to be generating a multiplier effect of up to 300 to 400 percent higher revenues than the cuts that we are going to be making,” Jacobsen added.
State Rep. Lee Hein, R-Monticello, the bill’s manager, defended the bill in his closing comments.
“Because of the decisions made in this chamber and the leadership from the Governor, our economy is strong. So strong that we have a historic opportunity in front of us. With a billion-dollar surplus, another billion in the Taxpayer Relief Fund, and our rainy day fund and cash reserves full – we can deliver the largest tax cut in Iowa history while continuing to fund Iowans’ priorities,” he said.
“We said from the start of session that we were going to deliver tax relief for Iowans in the face of this record-high inflation. We said the tax plan would cut taxes for all Iowans. We said that if we were to lower the corporate rate, we were also going to reform corporate tax credits. We said that we were going to eliminate taxes on retirement income so that more folks can continue to call Iowa home after they retire. Well folks, promises made. Promises kept,” Hein added.
Gov. Kim Reynolds responded to the legislature passing the bill, signaling that she would sign the bill.
“When I took office, Iowa had the sixth-highest individual income tax rate in the nation at 8.98 percent. I believed Iowans deserved better. Since then, I’ve worked with the Legislature across multiple sessions to make transformative changes to our tax code, let Iowans keep more of their hard-earned money, and make our state more competitive. Today’s bipartisan, consensus bill shrinks individual income tax rates to a flat and fair 3.9%, the fourth-lowest in the nation. It eliminates state income tax on retirement income, overhauls our corporate tax system, and accelerates the incredible momentum we’ve built since 2018,” she said.
“There’s never been a better time in Iowa for bold, sustainable tax reform. This bill rewards work, takes care of our farmers, and supports our retirees, all while protecting key state priorities. Iowans will reinvest these dollars in our economy, communities will prosper, and families will rest a little easier. Once again, we’re putting our faith in Iowans, and they won’t let us down,” Reynolds added.