Serious tax reform discussions are underway early this session. Typically, bills to cut taxes start getting looked at late in the session while the Legislature puts together the budget for the next fiscal year. This session, the Governor, the Senate, and the House ALL have tax proposals.

All three bills make large reductions in the Iowa personal income tax rate, with the House and Governor cutting the top rate from 8.53 percent down to 4 percent by 2026, and the Senate cutting it to 3.6 percent by 2027 with a mechanism for it to move to zero if revenues to do so are available. Iowa currently has the 8th highest income tax in the nation; all three plans would make Iowa the 4th lowest in the country (not counting the 8 states that have no income tax). 

All three tax bills also repeal income taxes on retirement income, exclude retired farmer lease income from income tax, provide a single lifetime exclusion of capital gains on a retired farmer’s land or livestock, and provide a similar one lifetime exclusion to an employee owner selling or exchanging capital stock (ESOPS).

In addition to these provisions, the Governor and the Senate’s bills include reductions to corporate income tax rates from the current top rate of 9.8 percent.  The Governor’s bill (SSB 3044) would reduce the State’s top corporate rate to the 5.5% flat tax if revenues are available to trigger such reduction. The Senate’s bill (SSB 3074) would lower the rate to 5.3 percent on the first $100,000, and lower the rate to 7.8% on revenue above that amount. The House bill (HSB 626) does not include a corporate income tax provision. 

The Senate tax bill, however, goes a lot farther. The biggest difference is that the bill converts the Local Option Sales Tax (LOST) that has been instituted in most jurisdictions across the State into a statewide sales tax. The change would hold most taxpayers harmless when they are making a purchase since they would still pay the 7 percent sales tax to which they are accustomed. The bill contains language for local governments clarifying it would protect the voter approved revenues to cities and counties by ensuring it gets directed back to them in the same manner as it is currently.

A state sales tax increase performed in this operation would trigger the start of the 3/8 cent funding toward the Natural Resources and Outdoor Recreation Trust Fund, an initiative that was passed by constitutional amendment many years ago and remains hugely popular among Iowans in multiple polls over the years. 

The Senate bill utilizes the same funding formula for the Trust Fund as the one that Governor Reynolds included in her Invest In Iowa proposal two years ago. That formula was developed over several months by the Governor, Senator Ken Rozenboom, Rep. John Wills, and others. The section of the bill would cause roughly $220 million per year to start flowing into water quality projects, parks, trails, the Resource Enhancement and Protection (REAP) program, and other quality of life initiatives that proved invaluable during the pandemic.

The Senate bill also makes changes to several tax credit programs, removes the sales tax exemption from several products, and contains other provisions.