DES MOINES — After weeks of closed-door negotiations, Gov. Kim Reynolds and GOP leaders in the House and Senate on late Friday afternoon announced what they hailed as the largest tax relief and reform package in Iowa history.
Negotiators did not include an overall price tag for the plan, but they said families and small business owners will receive $398 million in income tax relief in 2019 by providing an average tax reduction of nearly 10 percent.
When fully implemented by 2023, the plan will reduce the number of individual income brackets from the current nine to four, with a top rate of 6.5 percent. It eventually will eliminate the ability for Iowans to deduct their federal taxes paid on their state returns.
The top corporate tax rate will be lowered to 9.8 percent from the current 12 percent.
“This historic state-level tax reform — coupled with tax reform at the federal level — will bring significant relief to working-class Iowans in a fiscally responsible fashion that will allow the state to meet its budget responsibilities in the future,” Gov. Kim Reynolds said. “These tax cuts are meaningful to Iowans making tough decisions about what they can and cannot afford. I commend the Iowa House and Senate for sharing in my priority of putting Iowans first.”
What it means
According to a joint GOP news release, the fully implemented plan by 2023 would mean:
• A single taxpayer with no children making $25,000 annually would see a 22.3 percent tax reduction.
• A single taxpayer with one child making $48,000 a year would see a 25.8 percent tax cut.
• A couple with two children making $75,000 a year would see a 25.7 percent tax reduction.
The analysis did not provide information on how various income classes and corporations would fare under the revamped rates and provisions.
The plan is intended to make Iowa’s tax code more competitive and transparent, simplify Iowa’s complicated tax code and modernize the state sales tax system to create more fairness between Main Street businesses and online merchants, its architects say.
Other provisions automatically couple the state system with most federal tax laws and provide a comprehensive review of tax credits.
“With some of the highest tax rates in America, our state was long overdue for reform,” Senate Majority Leader Jack Whitver, R-Ankeny, said.
He said Iowa currently has the fourth-highest individual income tax rate in the country — due in part to federal deductibility, which most states don’t have — as well as the nation’s highest corporate tax rate.
“With this tax reform package, Iowans will keep more of the money they earn, employers will have incentives to create new career opportunities and the tax climate for job creators will be more competitive with other states,” he said.
Triggers
If no changes are made to the state’s tax code this session, Iowans’ state taxes would increase as a result of federal tax reform — because of Iowa’s federal deductibility. That’s because when federal income taxes go down, the amount Iowans can deduct from their state taxes decreases, meaning Iowans would have to pay higher state taxes.
State revenue officials have estimated Iowans’ federal tax liabilities will be reduced by at least $1.8 billion due to the federal changes.
Also, to address state budget concerns, sponsors say the GOP tax plan utilizes a trigger to protect budget sustainability in future years.
It ensures full repayment of the cash reserve fund this year and does not reduce the property tax backfill, which cities and counties rely on.
The agreement also maintains large ending balances in both fiscal year 2019 and 2020 and protects budget commitments made to education, health care and public safety, according to backers.
“This plan strikes a balance between providing Iowa families and small business owners with significant tax relief while also protecting budget sustainability for future years,” said House Speaker Linda Upmeyer, R-Clear Lake. “This will ensure that we are able to continue making investments in key priorities like education, health care, and public safety.”
Along with the individual tax cut provisions, the agreement also provides relief to farmers and small business owners by increasing the Section 179 to $1 million in 2020 and beyond and the Qualified Business Income deductions from 25 percent in 2019 to 100 percent by 2023 and beyond, if triggered, according to the GOP release.
‘Tax giveaways’
Rep. Dave Jacoby, D-Coralville, ranking member of House Ways & Means Committee, called the tax package “new GOP tax giveaways” that he said are “great news for the wealthy and special interests, but bad news for everyday Iowans.” The plan, he said, will cause more state budget woes.
“With hundreds of millions in new giveaways, the plan will not balance the state budget and means more budget cuts in the future,” Jacoby said in a statement. “After Republicans just raised tuition, made millions in budget cuts, and put $144 million on the state’s credit card this year, Iowans should be skeptical of any GOP tax scam that costs the state $400 million next year.”
Sen. Randy Feenstra, R-Hull, chairman of the Senate Ways and Means Committee and a key negotiator, called the final package a compromise that landed somewhere between the competing House and Senate plans.
While most Iowans will see a 10 percent tax cut, on average, the minimum cut for all income classes would be 7 percent.
The phaseout of federal deductibility and the reduction in rates and tax brackets will begin after two years.
The plan will have economic triggers for a set level of revenue growth before the tax changes will proceed, Feenstra said.
Debate next
Senate President Charles Schneider, R-West Des Moines, said the tax agreement should clear the way for the House and Senate to resolve their remaining budget differences and begin the process of debating the remaining issues that will end the 2018 session.
“Right now, we’re just trying to figure out what’s in or out of the budgets,” Whitver said Friday. “We’re continuing to meet with the House.”
Reynolds and GOP leaders of the House and Senate have been working on the details of a state income tax reform and reduction package since she made the issue a focal point of her priorities when she became governor in May 2017. She again highlighted the issue in her first Condition of the State address in January.
During the speech, Reynolds made the case that Iowa’s income-tax system is outdated, overly complex and uncompetitive due in part to Iowa being one of three states that allow taxpayers to deduct their federal taxes from their state liability. She called for an end to federal deductibility to unfetter Iowa from federal tax policy changes.
“It creates complexity, and worse, it means that when your federal taxes go down, your Iowa taxes go up, and it often punishes those who we want to help the most,” Reynolds told legislators.
In February, the governor proposed a plan that sought to cut Iowans’ personal income taxes by $1.7 billion through 2023, revamp rates by phasing out federal deductibility and equalize sales tax collections by treating Main Street and online businesses alike — but not change current corporate income tax provisions.
Reynolds’ plan also was contingent on certain economic triggers being met to ensure enough state revenue would be available to fund priorities as tax burdens were reduced.
Senate Republicans took a bolder approach, starting with an 8 percent across-the-board cut in personal income taxes in tax year 2019 and cut nearly $2 billion in five years if certain economic bench marks were met. It also included triggers and a plan to eliminate federal deductibility, cut rates, compress brackets, reduce the corporate tax rate and make other changes.
House Republicans initially worked off the governor’s plan but made revisions that would cut state personal income taxes by $1.3 billion over five years while protecting budget sustainability in future years.
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