Governor’s income tax cut bill moves forward, but other proposals still in play
by Robin Opsahl, Iowa Capital Dispatch
February 19, 2024
Republican lawmakers gave initial approval Monday to the governor’s individual income tax cut bill, though Sen. Dan Dawson, R-Council Bluffs, said other tax proposals could also move forward.
Senate Study Bill 3038 received approval in a Senate subcommittee. It would speed up and expand 2022 legislation that would reduce the number of individual income tax brackets to a single rate of 3.9% by 2026.
Gov. Kim Reynolds’ proposal would retroactively take Iowa’s current 5.7% individual income tax rate to 3.65% in 2024, with another drop to 3.5% in 2025. Additionally, the legislation lowers property taxes for commercial child care providers and makes changes to Iowa’s unemployment insurance system.
“Despite the tax cuts already delivered, Iowa ended the year with a $1.83 billion surplus, $902 million in reserve funds and $2.74 billion in the Taxpayer Relief Fund,” Molly Severn, the governor’s office legislative liaison, said. “The state is over-collecting from Iowans, and they deserve to keep more of their hard-earned money.”
Multiple business and conservative advocacy groups spoke in support of the legislation. Dustin Miller, speaking on behalf of the Iowa Chamber Alliance and several metropolitan chamber groups, said the tax cuts make Iowa a more competitive state to welcome businesses.
“Especially from an economic development standpoint, we are now on the playing field directionally with site selectors that we weren’t competing with,” Miller said.
But other speakers said the tax cuts made in the bill will only benefit wealthy Iowans. Anne Discher with Common Good Iowa said the measure would provide an average annual benefit of over $30,000 each year to millionaires, but would only provide $34 to Iowans making under $20,000 a year.
“Just as importantly, it will blow a huge hole in the budget,” Discher said. “Under the 2022 tax changes now being implemented, we already face enormous revenue threats to education, health care, other services that help Iowans succeed.”
The legislation, in part, would use funding from the Taxpayer Relief Fund for the immediate tax cuts. Dawson said this legislation is part of a larger conversation on how to best approach the use of the “one-time monies” available through the fund.
Income tax elimination still on table
Another plan that remains on the table is a bill Dawson introduced with Rep. Bobby Kaufmann to gradually reduce and eventually eliminate the state income tax.
“We owe it to Iowa, since we’ve accumulated those monies in the Taxpayers Relief Fund, to really kind of think through responsibly what a long-term plan is,” Dawson said.
Dawson, the Senate Ways and Means Committee chair, introduced Senate Study Bill 3141 in February with Kaufmann, who holds the same position in the House. The proposal would reduce Iowa’s individual income tax rate to 3.775% in 2026, 3.65% in 2027, and then using funding through the creation of the “Iowa Taxpayer Relief Trust” to finance future income tax cuts.
The trust would receive a $2.6 billion transfer from the Taxpayer Relief Fund, and 5% of the trust’s funding would be dedicated to the “Income Tax Elimination Fund” each year until Iowa’s individual income tax was cut to 0%.
At the subcommittee meeting for the governor’s proposal, Dawson praised the Reynolds’ office for introducing the legislation, but said that it is one piece of a bigger discussion, saying he expects to see other tax bills move through subcommittees in coming weeks.
“The governor’s office certainly has brought forward a very bold plan on a vision on what to (do with) these one-time monies,” he said. “The Senate Republicans, as well as the House, we’re gonna start to move our pieces of legislation forward the next couple of weeks. And I really do think it’s important that we do get fiscal notes for both these pieces of legislation, and have a larger public dialogue.”
Dawson introduced two measures that separately address components of the governor’s tax bill: Senate Study Bill 3181, designating child care facilities as residential properties to decrease property tax costs, and Senate Study Bill 3182, lowering businesses’ rates for unemployment taxes to a maximum 5.4% contribution. He said having these measures as separate bills will allow lawmakers and lobbyists more time and space to “think through those pieces” more extensively.
Senate Democratic Leader Pam Jochum, D-Dubuque, criticized Republicans for using state funds to further cut taxes for the wealthy, instead of investing the budget surplus in “quality of life,” infrastructure and government services that will help Iowans and draw new people to the state.
She said the costs to “backfill” previously enacted tax cuts is already a looming concern. Republicans should not rely on the one-time funding from the Taxpayer Relief Fund for further tax reductions, she said, especially as the state has fallen short on funding for services like public education.
“I would hope that we’re going to slow this down, and really spend a lot of time dissecting it and really understanding the long-term impact this is going to have on our state in the years to come,” Jochum said.
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