Photo Credit: Stephen Matthew Milligan (CC-By-SA 3.0)

(Des Moines, Iowa) Iowa Governor Kim Reynolds’ office announced an agreement between the Governor and Iowa House and Senate leaders on the tax reform package under consideration this session. The legislation when passed  represents the largest tax reform package in state history.

Iowa has the fourth highest individual income tax rate in the country and the highest corporate tax rate in the county. Iowa is ranked 40th in business tax climate by the nonpartisan Tax Foundation. U.S. News and World Report, while ranking Iowa first overall, ranked Iowa’s business environment 46th.

Due to Iowa’s federal deductibility allowance, many Iowans faced a state income tax increase because of the federal income tax reform package.

According to the Governor’s office, the tax reform package focuses on accomplishing the following:

  • Prioritizes Iowa’s hardworking, middle-class families
  • Reduces rates and eliminates federal deductibility, making Iowa’s tax code more competitive and transparent
  • Dramatically simplifies Iowa’s overly complicated tax code
  • Ensures fairness for Main Street businesses in the modern economy
  • Protects budget sustainability in future years

The Reynolds’ administration stated in their announcement that Iowa families and small business owners will receive $398 million in income tax relief in 2019. Immediately, the tax plan will provide average tax reduction of nearly 10 percent and continues to provide tax relief beyond 2019. When fully implemented as soon as 2023, the plan will reduce the number of individual income brackets to four, with a top rate of 6.5 percent. Iowa currently has nine brackets with a top rate of 8.98 percent.

The top corporate rate will be lowered to 9.8 percent. Iowa currently has four corporate rate brackets with a top rate of 12 percent.

The Reynolds Administration shared the following examples of how it will help Iowans when fully implemented.

  • A single taxpayer with no children making $25,000 will see a 22.3% tax reduction
  • A single taxpayer with one child making $48,000 will see a 25.8% tax reduction
  • A couple with two children making $75,000 will see a 25.7% tax reduction

The tax reform agreement simplifies Iowa tax law by eventually eliminating federal deductibility, reducing the number of individual income tax brackets, automatically coupling with most federal tax laws and provides for a comprehensive review of tax credits.

The tax plan utilizes a trigger to protect budget sustainability in future years, ensures full repayment of the Cash Reserve Fund this year and does not reduce the property tax backfill. It maintains large ending balances in both Fiscal Year 2019 and Fiscal Year 2020, according to estimates from the REC, and protects key budget commitments made to education, health care and public safety.

The tax reform package will also introduce a sales tax for online sales.

The agreement also provides relief to farmers and small business owners by increasing the Section 179 and Qualified Business Income (QBI) deductions:

Section 179 Deduction  

  • $70,000 in 2018 (individual only)
  • $100,000 in 2019
  • $1 million in 2020 and beyond

QBI Deduction

  • 25% in 2019 and 2020
  • 50% in 2021
  • 75% in 2022
  • 100% in 2023 and beyond (if triggered)

“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. 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,” Reynolds said in a released statement.

“This historic tax reform plan puts a focus on hard-working, middle-class Iowans, allowing them to keep more of their own money,” House Speaker Linda Upmeyer (R-Clear Lake), said.  “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.  This will ensure that we are able to continue making investments in key priorities like education, healthcare, and public safety.”

“With some of the highest tax rates in America, our state was long overdue for reform,” Senate Majority Leader Jack Whitver (R-Ankeny), said. “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. Making Iowa’s tax code simpler, fairer and less costly has been a principal goal of our caucus during this General Assembly, and I was proud of the role Senate Republicans played in reaching this goal.”

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