House, Senate committees advance proposal lowering income tax

(Photo illustration via Canva with Capitol photo by Perry Beeman/Iowa Capital Dispatch and background via Getty Images)

As lawmakers aim to end the 2024 legislative session, one major policy priority named by both Gov. Kim Reynolds and Republican legislative leaders had yet to reach floor debate: income tax cuts.

While members of the Republican trifecta all said they were committed to speeding up the 2022 individual income tax reductions, Reynolds and GOP lawmakers had advanced differing proposals on how to approach earlier in the session. But on Thursday, Republican legislators said they have reached a compromise — Senate File 2442 and its House companion, House File 2705.

These bills, passed through their respective chambers’ Ways and Means subcommittee and committee meetings Thursday, would lower Iowa’s individual income tax to a 3.8% flat tax rate beginning in 2025 — lower than the 3.9% flat income tax by 2026 that was approved in the 2022 legislation.

The House Ways and Means Committee advanced its version of the tax omnibus bill in meeting April 18. 2024. (Photo by Robin Opsahl/Iowa Capital Dispatch)

Speaking with reporters Thursday morning, Rep. Bobby Kaufmann, R-Wilton, said the legislation puts Iowa “in the driver’s seat for being one of the most conservative states in the country, yet again, when it comes to taxation.”

The bill is less extensive than the income tax cut proposals discussed earlier this session. Reynolds’ income tax proposal would have lowered Iowa’s individual income tax rate to 3.65% retroactively in 2024, with another decrease to 3.5% in 2025. Kaufmann and Sen. Dan Dawson, R-Council Bluffs, introduced a separate proposal in February that would have lowered the income tax rate to 3.775% in 3.65% in 2027, with additional changes creating a process for gradually allocating money from the Taxpayer Relief Fund to put toward eliminating the individual income tax entirely.

While Kaufmann said he believed the new tax bill offers a good path forward for the state, he said he supports further cuts to the individual income tax rate in the future.

“I would like to continue to go down as low as we can,” he said. “But we, as House and Senate Republicans, are continually making sure that our tax relief plans are paid for and responsible.”

Republicans said these tax cuts will be financed using excess tax revenue from this year’s budget plan, in addition to a withdrawal from the Taxpayer Relief Fund. The bill includes language stipulating that if state revenues fall below state appropriations for a fiscal year, the funding needed to make up the difference would come, at least in part, from the relief fund. This language would be repealed July 1, 2029.

But Democrats and some advocates said this mechanism to fund tax cuts and move to a flat rate system is not sustainable, as the Taxpayer Relief Fund contains one-time money. In a Senate subcommittee meeting on the proposal, Senate Minority Leader Pam Jochum questioned what would happen if the state were to face a recession, or if the costs of programs like the Education Savings Accounts, government funding for private school tuition, push state spending above its revenues.

“I’m just looking at long term on the fiscal health of the state and making sure we can maintain our education system because to me, public safety and educating our children are probably the two of the most important things we can do in state government,” Jochum said. “And I want to make sure we’re taking care of those issues.”

Mike Owen, executive director of Common Good Iowa, said Republican lawmakers are making “cuts we cannot afford” for a state — and that those cuts unfairly benefit wealthier Iowans while putting a higher burden on lower- and middle-income families. Owen and advocates speaking against flat-rate taxes have argued for keeping a graduated tax rate, applying a higher percentage of income tax to those with higher incomes.

“I would add that this is one more case of taxes directing budget choices rather than the other way around — where we can determine our needs, transparently set priorities, find the best way to fund them,” Owen said.

Dawson said while lawmakers want to ensure state services are funded, the Legislature also has a duty to “respect the taxpayer.” In the case of a major economic downturn, Dawson said it would be incumbent on lawmakers to find a way to make state government more efficient, and to find areas where spending could be decreased.

He also said the state is in a sound financial position, and Senate Republican projections show the state will be able to afford these cuts.

“We have $2 billion structural surplus, and $3 billion in the Taxpayer Relief Fund,” Dawson said. “That’s a lot of money. Even with this plan right here to some of the calculations that we run, we might have to use, maybe on a normal three-and-a-half percent growth rate — about $700, $800 million — there’s gonna be a lot of money here left over when it’s all said and done.”

Reynolds praised lawmakers for advancing the legislation and moving toward decreasing the income tax rate.

“Cutting taxes has been a priority of mine since taking office, and I’m pleased that the Senate has introduced an income tax cut that further reduces and accelerates the implementation of a flat tax rate that will benefit every Iowan who pays income tax,” Reynolds said in the statement. “This was a key piece of the tax reform bill I proposed this year, and this common-sense compromise will allow hard-working Iowans to keep more of what they earn in every paycheck.”

Property taxes revisited

The bill also includes several other components, including several changes that follow up on last year’s property tax cuts. That law implemented a requirement that if a city or county’s total assessed property value increases by more than 3%, some excess revenue must go toward reducing its general fund levy, including different tiers of required reductions for values between 3% and 6% and those that grow more than 6%. The bill proposes changing the thresholds, moving the system to tiers of 2.75% or below, between 2.75% and 4%, between 4% and 6% and growth rates above 6% for determining if, and how much, a locality must decrease its general fund levy.

Rep. Dave Jacoby, D-Coralville, said during the House Ways and Means Committee meeting that the system punishes Iowa cities and counties for growing and for becoming more desirable places to live — changes that are needed to bring more people to the state, he said.

“Why are we penalizing a local entity that performs well, treats the consumer, the constituents, Iowans well, with the healthy growth?” Jacoby said. “But we’re still knocking them down for doing what we always asked them to do.”

Another portion of the bill allows counties to eliminate county compensation boards, the bodies that review and make recommendations on salaries for elected county officials. Kaufmann called compensation boards “Ponzi schemes,” saying that they are effectively “a group of friends getting together and recommending raises for each other.”

“In my opinion, county compensation boards are one of the largest contributors to an explosion of growth of property taxes,” he said.

After clearing the committee process, both bills are available for debate in their respective chambers.

The post House, Senate committees advance proposal lowering income tax appeared first on Iowa Capital Dispatch.