Week 14 of the 2018 legislative session saw the unveiling of the Iowa House Middle Class Tax Relief Act (HF 2489), a responsible, sustainable approach to updating our tax code. Our proposed changes mirror closely the Governor’s plan and focuses on middle class tax reduction.
Iowa’s tax code is outdated, too complicated, and has as its claim to fame some of the highest income tax rates in the nation. Due to recent tax reform on the federal level, Iowans will owe $1.8 billion less in federal taxes in tax year 2018. However, due to Iowa’s federal deductibility, Iowans will pay an additional $107 million in tax year 2018, which will grow to $153 million in tax year 2019 if tax reform is not accomplished. The tax relief delivered by President Trump was not intended to grow state government; rather it was intended to go to hard-working taxpayers and spur our economy.
Our Middle Class Tax Relief Act will reform Iowa’s tax code to make it fairer. It will be sustainable, responsible, and is built for the 21st century and the changing way people make purchases. Taxes on Iowans will be reduced $1.3 billion over 5 years while protecting budget sustainability in future years. This relief is largely achieved by reducing taxes that would have increased to the state because of the federal tax cut, and by leveling the playing field for our Main Street businesses competing with internet sales.
The average Iowan will see an 8.9% state income tax reduction, with 90% of middle-class Iowans seeing a reduction. For example, a single taxpayer making $25,000 a year will see a 14.9% reduction, while a family of four making $52,000 would see a 14.4% reduction.
For tax year 2018, our legislation would expand 529 education savings plans to include K-12 tuition. It also raises the Section 179 limit to $100,000/$400,000, up from $25,000/$200,000. For tax year 2019, the standard deduction is increased from $2,070 single to $3,000, and for family from $5,070 to $7,500. A small business deduction is also created to help our entrepreneurs with job-creating innovations. In tax year 2020, individual income tax rates for middle class Iowans are further reduced, with the largest cuts to the bottom five brackets. The Section 179 deduction also increases to $250,000/$1 million.
An important component of our tax reform package is addressing the reality of Main Street businesses being put at an unfair disadvantage as our economy moves more toward internet sales. We believe that the time is now to eliminate this inequity and modernize our tax system to reflect 21st-century realities before we no longer have Main Streets in Iowa. Our plan updates sales tax to create fairness and equity in the modern economy. Under our plan, sales tax would be applied to sellers like Zappos or Wayfair, and online marketplaces like Amazon and Ebay. These taxes have applied for decades to products being sold in a traditional way, but have not applied to internet sales, creating an increasingly profound challenge for Main Street businesses to remain competitive. The revenue that comes from these updates will then be put directly into the tax cuts I have discussed above, creating a tax code built for 21st century realities, while establishing a more level playing field for Main Street businesses in Iowa.
Modern, sustainable, responsible, and fair are important characteristics in the House Middle Class Tax Relief Act. I look forward to working for its passage in the weeks ahead.