William Petroski and Brianne Pfannenstiel, The Des Moines Register Published 2:04 p.m. CT Feb. 13, 2018 | Updated 5:05 p.m. CT Feb. 13, 2018
Gov. Kim Reynolds unveiled plans Tuesday for major cuts in state income taxes, proposing a reduction in rates by as much as 23 percent, while simplifying the state tax code and lowering taxes for middle-class Iowans and small business owners.
Reynolds, who succeeded Gov. Terry Branstad in May when he became U.S. ambassador to China, said in a news release her proposal to the Iowa Legislature is projected to cut income taxes by a total of $1.7 billion between the 2019 and 2023 state fiscal years, while maintaining expected growth in state revenue.
Minority legislative Democrats immediately said they were willing to work in a bipartisan manner with the Republican governor on tax policy issues. But they expressed concerns that Reynolds’ proposal could make the state’s current budget problems even worse. They also warned that other states — particularly Kansas — have slashed state taxes with disastrous results.
The plan anticipates the Iowa Department of Revenue will strengthen efforts to collect Iowa sales taxes from online retailers for a wide array of goods and services in which state taxes aren’t always collected now. It would also ensure Iowans aren’t taxed more at the state level because of federal tax reform recently approved by Congress. In addition, it anticipates continued growth in Iowa’s economy.
“My plan combines meaningful tax relief while protecting our budget priorities,” Reynolds said in a prepared statement. “We’ve prioritized tax relief for middle class taxpayers, small business owners, teachers and working families across the state. We’re long past due for real tax reform that simplifies and updates our system while allowing Iowans to keep more of their hard-earned money in their communities.”
A typical family of four making $55,000 would see a 10 percent state tax cut next year, the release stated. By 2023, they would a 23 percent cut, the governor said. Meanwhile, a family of four making $70,000 would see an 8.7 percent tax cut next year. By 2023, they would see a 20 percent cut. The release said a typical single mother with one child making $30,000 would see a 28 percent tax cut next year. By 2023, she would see a 54 percent cut.
Reynolds said her plan will include revenue targets — or “triggers” — that will act as a safeguard in the event of an economic downturn, though it wasn’t immediately clear what those triggers would be. In addition, if there is significant economic growth, these triggers will accelerate the tax cuts and return greater savings to Iowa taxpayers, she said.
Sen. Pam Jochum, D-Dubuque, the top Senate Democrat on tax policy, said Reynolds’ plan leaves many unanswered questions. But she expressed two specific concerns that she described as red flags.
“This plan does not touch corporate tax credits, which is the fastest-growing part of the state budget. That’s a big, big mistake and it’s unfair to working families,” Jochum said.
In addition, Jochum said any tax cut plan for Iowa must be viewed in light of problematic tax-cut plans approved in Kansas and Oklahoma, which have resulted in “massive cuts” to education, public safety, health care and other vital services.
But House Speaker Linda Upmeyer, R-Clear Lake, praised Reynolds’ proposal, saying House Republicans are ready to work with the governor to reform Iowa’s “outdated and complex tax code.”
“Governor Reynolds’ tax reform proposal delivers immediate and meaningful relief to middle class Iowans,” Upmeyer said. “We appreciate that her plan leaves more money in the pockets of hard-working Iowans while also including safeguards that protect the sustainability of the budget.”
Sen. Randy Feenstra, R-Hull, chairman of the tax-writing Senate Ways and Means Committee, pledged that the Senate will use Reynolds’ proposal as a foundation in developing legislation to address individual and corporate taxes.
Feenstra predicted the Senate’s tax reform plan, which he anticipates will be introduced in seven to 10 days, will also address state tax credits and financial incentives provided to Iowa businesses.
“We absolutely have to pass a bill this session,” Feenstra said. If lawmakers don’t take action, Iowans will face a state tax increase as result of federal tax reform recently approved by Congress, he said.
President Donald Trump in December signed into law a major federal tax cut, which Iowa Department of Revenue officials estimate will reduce Iowans’ federal tax burden by about $1.775 billion during the 2018 tax year. They also estimate Iowans will pay more in state income taxes as a result, beginning with about $33 million during the 2018 budget year. That is estimated to rise to about $148 million the next year and again to $192 million in 2020.
Rep. David Jacoby of Coralville, the ranking Democrat on the House Ways and Means Committee, said Iowans want to know if Reynold’s tax plan will fix the state’s current budget problems or make them worse.
“While we are still reviewing the governor’s plan, the devil is always in the details with new tax cuts,” Jacoby said. “At first glance, her plan could cost well above $1.7 billion. We’ve seen similar tax cut plans passed in other states like Kansas with disastrous results. Iowa families have already been forced to pay higher property taxes and tuition to pay for hundreds of millions in corporate tax giveaways given out by the GOP the last few years.”
Here are some key elements of Reynolds’ proposal:
- The top income tax rate of 8.98 percent — which she said is the fourth highest nationally — would be reduced to 6.9 percent by 2023 and would only apply to income above $160,965. Currently income above $73,260 is taxed at 8.98 percent.
- The Alternative Minimum Tax would be eliminated with Reynolds saying this is an outdated provision that unnecessarily complicates the tax code.
- Federal deductibility would be phased out. The deduction of federal taxes from Iowa taxable income — known as federal deductibility — is a policy that once served a laudable purpose but over time has distorted Iowa’s tax code, the governor said.
- In 2019, the standard deduction would increase from $2,070 to $4,000 for single filers and from $5,090 to $8,000 for married filers.
- There would be an additional standard deduction of $1,500 for the elderly and blind people in 2019, rising to $2,070 in 2021.
- Iowans would, for the first time, be able to invest in section 529 plans tax-free for K-12 tuition – not just higher education.
- Iowa would fully couple with the federal educator expense deduction, giving teachers greater tax savings when they purchase school supplies for their classrooms.
- Iowa business owners would be able to deduct 25 percent of the new federal Qualified Business Income Deduction from their Iowa taxable income.
- The section 179 expensing limit would increase immediately from $25,000 to $100,000, with the goal of encouraging small businesses owners to invest in their companies and in Iowa.
- The increased effort to collect online sales taxes would be based on the idea that Iowa’s Main Street businesses must collect sales tax, but many online, out-of-state companies do not. All increases in sales tax revenue for these online sales would be passed on to Iowans through greater income tax cuts, ensuring that the size of the state’s government is left in check, Reynolds said.