Iowa Senate GOP proposes $1 billion in annual state tax relief

William Petroski
The Des Moines Register

Iowa Senate Republicans have proposed a sweeping plan to reform state individual and corporate taxes that would offer $1 billion annually in overall tax relief.

The Iowa Senate chamber.

Senate Study Bill 3197, a 130-page document described as the "Iowa Working Families Tax Relief Act," was introduced Wednesday by Senate GOP leaders, who said it will make Iowa one of the most tax-friendly states in the nation. It arrives in the wake of a plan proposed last week by Gov. Kim Reynolds, a Republican who wants to cut Iowa income taxes by a total of $1.7 billion between the 2019 and 2023 state fiscal years.

"Working families in Iowa deserve big, bold tax relief,” said Sen. Randy Feenstra, R-Hull, who chairs the tax-writing Senate Ways and Means Committee. He characterized the proposal as a complete rewrite of Iowa's tax code, offering the largest tax cut in state history.

Senate Republicans signaled they intend to put the tax reform package on a fast track for approval. The measure is scheduled for a hearing  before a Senate subcommittee at 8 a.m. Thursday and for consideration by the Senate Ways and Means Committee at 2 p.m. The bill could become eligible for floor debate and a full Senate vote as soon as next week. 

Democratic lawmakers said at least some of the bill's provisions reflect their own tax reform priorities. However, Democrats said they want to ensure the state still has sufficient revenue to fund education, public safety health care and other key state government programs. They also bitterly complained that Republicans are trying to move the bill so quickly that there won't be sufficient analysis of tax and revenue data and the public policy implications.

"With a $1 billion price tag every year, I’m extremely skeptical that the state can afford this plan without making the state’s budget crisis even worse. We’ve seen the devastating reality of similar tax cut plans passed in other states like Kansas," said Rep. Dave Jacoby, D-Coralville, ranking member of the House Ways and Means Committee

Senate Republicans said their plan would lower taxes on Iowans by an average of $1,000 annually. The top rate now paid by many Iowans is 8.98 percent, the fourth-highest in the country, Republicans said. The rate is 6.3 percent under the Senate GOP's proposal, lowering the rates for most Iowans by 30 percent.

Iowa’s top corporate tax rate of 12 percent, the highest in the country, would be reduced  to 7 percent in an effort make Iowa more competitive with other states.

Senate Republicans said the proposal includes a host of other significant changes aimed at addressing the fact that over the years Iowa’s tax code has become a collection of tax deductions, exemptions and credits standing in the way of economic growth, job creation and Iowa family priorities.

The bill would "sunset" most state tax credits to reflect Iowa’s new tax rates. Republicans said the tax credits have been a symptom of problems with the state's existing tax code. In addition, the legislation would permanently "couple" Iowa's tax code with federal tax changes.

The bill would also eliminate federal deductibility for Iowa taxpayers, which has resulted in state tax increases when federal taxes have been reduced.

Senate President Jack Whitver, R-Ankeny, described the tax bill as "real, meaningful reform coupled with a significant reduction — not just tinkering around the edges." 

Senate Majority Leader Bill Dix, R-Shell Rock, remarked: "This money will boost the local economy and provide opportunities for Iowans to invest in retirement, save for college or make important upgrades to the family home.”

Brenna Smith, spokeswoman for Reynolds, said the governor and her staff are still studying the Senate Republicans' tax plan. But she said Reynolds is pleased the Senate has built upon some of her proposals and that the Senate bill not only cuts taxes, but simplifies Iowa's complex tax code.

"We look forward to working with both the Senate and the House to pass a bill that cuts taxes and does it in a fiscally responsible way," Smith said.

Sen. Pam Jochum of Dubuque, the ranking Democrat on the Senate Ways and Means  said her first concern is how the Republicans' plan will align with the state's budget, and whether it will force additional cuts in government programs and services. But there are provisions in the bill that Democrats can agree with, she added, and efforts will be made to cooperate with Republicans when possible.

For example, Jochum said Senate Democrats would support Republican proposals to strengthen efforts to collect online sales taxes, because some estimates indicate the state is losing as much as $200 million annually. She also favors eliminating some corporate tax credits, because some of Iowa's biggest corporations are currently not paying any Iowa corporate income taxes, she added.

But Jochum said she wants to look closely at the idea of phasing out the state's historic preservation and cultural and entertainment district tax credits which have been extensively used in Des Moines, Dubuque and Cedar Rapids.

About the tax plan

According to Senate Republicans, here are some of the key benefits of the new tax plan.

  • Provides more than a $1 billion a year in overall tax relief.
  • Reduces, on average, middle-income earners' state taxes by more than in $1,000 personal income tax.
  • Cuts overall individual income tax rates by 30 percent.
  • Lowers Iowa’s top individual income tax rate from the fourth-highest in the country at 8.98 percent to a more competitive rate of 6.3 percent.
  • Simplifies the current maze of tax forms and reduces tax code confusion by allowing for a more taxpayer friendly income tax form.
  • Couples Iowa tax law automatically to new federal tax code changes.
  • Eliminates federal deductibility, which Senate Republicans say creates confusion and forces state tax rates to be artificially higher.
  • Maximizes the new federal benefit of a 20 percent deduction on all qualified business income for Iowa’s businesses creating jobs. Farmers could potentially be provided a significantly larger Section 199A deduction.
  • Drops Iowa’s top corporate tax rate of 12 percent, the highest in the country, to 7 percent.
  • Modernizes Iowa’s sales tax to protect Iowa’s Main Street retailers and create fairness between Iowa local businesses and online businesses.
  • Sunsets most tax credits to reflect Iowa’s new competitive tax rates.
  • Directs the Iowa Tax Expenditure Committee with the task of reshaping the future of Iowa’s tax credits.
  • Institutions providing financial services, such as credit unions and banks, would pay based on the same new financial institution tax structure.
  • Eliminates Alternative Minimum Tax for both individual and corporate taxes.
  • Maintains Iowa's current Social Security benefit exemption from  state income tax.
  • Increases the pension exemption for Iowa seniors from the current $6,000/$10,000 to $10,000/$20,000.
  • Clarifies and limits the definition of "manufacturer" for purposes of the state sales tax exemption for the sale or rental of computers, machinery and equipment of used by a manufacturer.
  • Consolidates current and creates a new, broader sales and use tax exemption related to agricultural production by a commercial farmer.
  • Creates a sales tax exemption for the sale of grain bins or materials used to construct a grain bin.
  • Clarifies sales tax law as to when tax is due related to a construction equipment dealer.
  • Excludes from state income employer-provided payments to an employee or lender for the principal or interest on any qualified education loan incurred by the employee with the goal of attracting and building a skilled workforce.

The impact of the proposal:

Iowans would experience lower tax liability (examples from Tax Year 2022), according to Senate Republicans:

  • A single mother with one child making $30,000 would see a 65 percent reduction
  • A single taxpayer making $40,000 a year would see a 16.4 percent reduction
  • A married couple with two children making $48,000 would see a 20.5 percent reduction