Iowa Republican lawmakers reach deal to speed up flat tax, lower rate to 3.8%

Iowa Republicans have struck a deal to speed up and slightly deepen a series of income tax cuts, and they intend to move swiftly to pass it as the legislative session enters its final days.

The bill, unveiled by the top Republicans on the House and Senate Ways and Means Committees. would take Iowa to a 3.8% flat income tax rate by next year.

Iowa's income tax is already set to go to a 3.9% flat rate by 2026, thanks to a law Gov. Kim Reynolds signed in 2022, which is still phasing in.

The state's top rate this year is 5.7% and will drop to 4.82% next year unless the law changes.

"We are accelerating the promised tax cuts, taking it lower and returning an extra billion dollars back to Iowans," said Sen. Dan Dawson, R-Council Bluffs, who chairs the Senate Ways and Means Committee.

Lawmakers passed identical companion bills, Senate Study Bill 3207 and House Study Bill 752, through committees Thursday, setting up a possible final vote Friday.

The tax deal released this week does not go as far as Reynolds' proposal in January, when she called for lowering the rate to 3.65% for 2024 and 3.5% in 2025 and beyond.

Some House and Senate Republicans also had proposed eventually eliminating the individual income tax altogether. Although the bill does not go that far, GOP lawmakers said it preserves their ability to cut taxes further in future years.

"Are we done? No. I would like to continue to go down as low as we can," said Rep. Bobby Kaufmann, R-Wilton, who chairs the House Ways and Means Committee. "But we as House and Senate Republicans are continually making sure that our tax relief plans are paid for and responsible."

The deal is a sign of progress as Iowa lawmakers work toward adjourning the 2024 legislative session in the coming days.

The legislation also makes other changes to Iowa's tax laws, including tweaking last year's property tax overhaul, which limits revenue growth for cities and counties.

In a statement, Reynolds called the bill a "common-sense compromise."

“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.

Bill taps Taxpayer Relief Fund, if needed, to pay for 3.8% flat tax

If state revenues drop below state spending during a fiscal year, the bill would take half of the difference from the state's Taxpayer Relief Fund to cover the costs. The other half would come from the state's ending balance.

That part of the bill would be repealed on July 1, 2029.

Dawson said the bill provides "a good cushion" if state revenues don't meet expectations.

"If the economy outperforms, we won’t have to use any of it," he said.

The state ended the previous fiscal year with $2.74 billion in the Taxpayer Relief Fund. The amount is expected to rise to about $3.6 billion in July, when the fiscal year ends.

House Republicans say they expect the Taxpayer Relief Fund to be at $2.66 billion in 2029, once that part of the bill expires, before rising to $2.73 billion the following year.

What are Iowa groups saying about the bill?

Brad Hartkopf, a lobbyist for the Iowa Association of Business and Industry, praised the bill in a Senate subcommittee meeting Thursday.

"We appreciate all the progress that has been made over the last several years to make our tax plan more competitive for both individuals and businesses," he said. "We believe this bill takes us in another step going in that direction and we support it."

Mike Owen, executive director of Common Good Iowa, told the subcommittee that lawmakers should have pursued more targeted tax policies like strengthening the earned income tax credit and creating a child tax credit.

"We could have done so much better this year on targeted tax cuts to those who actually need help getting by," he said. "There’s been a lot of nonsense talking about competitiveness here. We have been competitive for many years. Some people haven’t wanted to acknowledge that."

Unemployment tax cuts for businesses not in the bill

Reynolds had also proposed changes that would lower the unemployment taxes paid by businesses and lower taxes on commercial child care centers. Neither of those changes were included in the bill released Wednesday, although the tax change for child care centers is included in a separate bill.

"I completely agree with her that it needs to be addressed," Kaufmann said of the unemployment tax system. "We just made a decision that that’s probably a 2025 issue because of the significance of how big a piece of policy that is and the amount of time that we have left."

Bill gets rid of county compensation boards, makes property tax changes

The bill gives counties the ability to eliminate county compensation boards, which review the salaries for elected county officials and recommend increases.

"In my opinion, county compensation boards are one of the largest contributors to an explosion of growth of property taxes," Kaufmann said. "You’ve essentially got a group of friends getting together and recommending raises for each other."

Iowa law tasks the compensation boards with annually reviewing salaries for county supervisors, auditors, treasurers, recorders, sheriffs and county attorneys by comparing salaries in that county to other comparable counties, the private sector and the federal government.

Under current law, county boards of supervisors may not raise elected officials' pay by more than the compensation board's recommendation. If the board of supervisors decides to reduce the pay recommended by the board, it may do so only by an equal percentage for all officials.

Lawmakers look to tweak limits on revenue growth for cities and counties

The legislation makes changes to a property tax law passed last year that limits how much city and county property tax revenue can grow.

Under current law, if a city or county's total assessed property value grows by more than 3%, it must use some of the excess revenue to reduce its general fund levy. Different tiers specify how much the government must reduce its levy, depending on whether its values grow 3% to 6% or more than 6%.

The legislation proposes changing those thresholds. Under the bill, if a county's revenue grows by 2.75% or less, it will not need to reduce its general property tax levy.

The bill creates new tiers for cities and counties whose property values grow from 2.75% to 4%, from 4% to 6% and more than 6%.

Des Moines City Manager Scott Sanders spoke to Thursday's Senate subcommittee, asking members to allow cities more breathing room before they would have to use their excess revenue to lower property taxes.

"I would ask with adjustments moving forward that there’s an opportunity for a community like ours to reasonably grow at 3 and a half percent and that there’s no penalties until you get above that," he said.

What other actions are Iowa lawmakers taking on taxes?

Republicans this year are in the process of approving two amendments to the Iowa Constitution that would make it more difficult for the Legislature to raise taxes in the future.

Both chambers have passed a proposed amendment that would require a two-thirds vote of the Legislature to increase Iowa's individual and corporate income tax rates.

Currently, all legislation is approved through a simple majority vote (50% plus one).

The Senate has also passed a proposed amendment that would require Iowa to have a flat individual income tax rate, rather than a graduated income tax system, if the state imposes an income tax at all.

The House hasn't passed that measure.

Both the proposed constitutional amendments would need to pass the Iowa Legislature again in 2025 or 2026 before they could be placed on a statewide general election ballot. If a majority of Iowans vote to approve the measures, they would be added to the Iowa Constitution.

Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at sgrubermil@registermedia.com or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.

This article originally appeared on Des Moines Register: Iowa GOP lawmakers reach deal to speed up flat tax, lower rate to 3.8%