Written by ERIN MURPHY The Cedar Rapids Gazette
DES MOINES — Most Iowa workers are taking home more money from their paychecks as the state collects less income tax — the result of recent tax cuts enacted by the Republican-majority statehouse.
Those Republican lawmakers, along with advocates for limited taxes, want to continue cutting and reduce Iowans’ taxes even more.
The impact of those tax reductions, though, is beginning to show in the state’s revenues. There essentially will be no revenue growth from the current state budget year to the next: overall state tax revenue is projected to be just shy of $11.5 billion in both the 2024 and 2025 fiscal years, according to the latest estimates from the state’s three-member Revenue Estimating Conference, the panel that projects future state revenues.
That flattening of overall state revenue is being driven largely by reductions in state income tax revenue.
But while overall state revenue projections have flattened, statehouse Republicans point to a $2.1 billion state budget surplus — which is projected to grow to $3.1 billion in the next fiscal year — plus another $3.7 billion in the state’s Taxpayer Relief Fund as reasons to pursue further state tax reductions.
So when legislators return Jan. 8 to the Iowa Capitol for the 2024 session of the Iowa Legislature, Republican lawmakers plan to accelerate the state income tax reductions already on the books, with a possible eye toward gradually eliminating the tax altogether.
Before the recently enacted reductions, the state income tax produced nearly half of the state’s tax revenue that it spends on such things as education, health care, public safety, infrastructure and the environment.
“Financially here in Iowa, we’re in the strongest position we’ve ever been in. And so that makes possible a conversation about expediting those cuts, bringing them up sooner — quicker — and getting those in place for Iowans,” said Jack Whitver, the Republican Senate majority leader from Grimes. “That’s part one of that conversation. Part two is what happens after that. If we’re able to expedite that a couple of years, that really finishes off the last bill that we passed. What do we need to do to add on to it?”
Under legislation passed in 2022, state income tax rates are being gradually reduced until, in tax year 2026, most Iowa workers will pay a 3.9 percent state income tax.
That reduction was projected to reduce Iowans’ collective state income tax burden — and thus reduce state revenues — by $1.9 billion. Iowa’s current state general fund budget is $8.5 billion.
Now Republican lawmakers want to expedite those reductions by getting to the 3.9 percent state income “flat tax” sooner, and perhaps even lowering that rate.
Pat Grassley, the Republican Iowa House speaker from New Hartford, said accelerating the state tax cuts can be a way for the state to address financial pressures that Iowans are feeling as a result of inflation.
“We feel that tax cuts and getting money back in the hands of Iowans as quickly as possible is probably the fastest thing that we can do to truly impact it. We’re going to be fully engaged in that conversation,” Grassley said. “Part of the reason why we can do that is we’re fortunate, as a state, our economy has continued to stay strong. (And) we’ve budgeted in a way that puts us in a position to be able to do things like this.”
Iowa Gov. Kim Reynolds declined to be interviewed for The Gazette’s legislative preview series. This past February, she said at an event in Washington, D.C., hosted by the conservative Cato Institute, that her goal is to eliminate the state income tax by the end of her current four-year term, which ends in 2026.
Statehouse Democrats, which are in the legislative minority, said their preferred tax reductions would target middle class and lower-income Iowans, and would ensure long-term stability in the budget.
“We think that Iowans are feeling the pinch of the economy, and that tax cuts are not a magic wand solution that will address all of the cost issues that Iowans are facing,” said Jennifer Konfrst, leader of the Democrats in the Iowa House. “So we’re going to introduce several pieces of legislation as well to address costs for Iowans, and that does include some affordable housing and child care, but other things as well. We want to look at any tax cut and see who benefits from it.”
Pam Jochum, leader of the Democrats in the Iowa Senate, asserted the middle class has not yet benefited from the current state income tax reductions, and expressed concern for the long-term health of the state budget if more tax cuts are enacted.
“We are going to hold Republicans accountable. Does their plan actually help Iowans who really need it, number one. And number two, can we afford it and will it jeopardize essential services long term?” Jochum said. “There could be some real budget issues.”
Statehouse Republican leaders insisted that their previous tax cut bills have been fiscally responsible, and that any future reductions will be the same.
“All the tax bills we’ve done over the last seven years, we’ve always looked beyond five years, six years, seven years out just to see what it might look like,” Whitver said. “We’ve been fortunate to this point that every time we pass a tax bill, our revenues have come in stronger and we’ve been able to sustain it even more than the original thought. So we continue to look out many, many years.”
The conservative tax policy group Iowans for Tax Relief is advocating for accelerating the current tax cuts and developing a long-term plan to eventually eliminating the state income tax.
Analysis by the Institute on Taxation and Economic Policy for the liberal-leaning group Common Good Iowa suggests the state income tax reductions are disproportionately benefiting higher wage earners in Iowa. According to the analysis, an Iowan making roughly $1.5 million annually will see a monthly savings of $5,000, while an Iowan making $73,000 annually will see a monthly savings of $122 and low-income Iowans will see a reduction of just $4 per month.
According to the analysis, 63.4 percent of the tax cuts will benefit people earning more than $146,000, which is the top 20 percent of residents by income.
“We already know the income tax is the only general tax in Iowa based on ability to pay. The ITEP analysis lays out how eliminating the income tax would make our tax system more unfair at the same time it guts revenue for education, health care, child care, clean water and public safety,” Anne Discher, executive director of Common Good Iowa, said in a statement.
General fund spending for the current state budget year, as set last session by the Iowa Legislature and Reynolds, is $8.5 billion. That was roughly 80 percent of the $10.6 billion available for legislators to appropriate.
There will be $11.5 billion available for legislators to appropriate in the next state budget year, which begins July 1. Lawmakers will craft that next state budget during the upcoming legislative session.
