DES MOINES — State revenue experts project Iowa taxpayers will see individual federal income tax liabilities cut by nearly $1.8 billion in the 2018 tax year, but the changes could mean paying an extra $373 million over three years in state taxes due to Iowa’s federal deductibility law.
Director Courtney Kay-Decker and analyst Amy Harris of the Iowa Department of Revenue on Friday revised their preliminary analysis of federal tax reforms passed last year by Congress and signed by President Donald Trump. They predict the bill will reduce overall income tax liabilities for 1,440,403 Iowa taxpayers by more than $1.775 billion. That is up from their initial run in January that projected federal taxes paid by Iowans would be lowered more than $1.538 billion.
The revised numbers estimate the average tax cut will range from $202 for 435,222 Iowans earning $20,000 or less up to an average cut of $3,288 for 327,234 Iowans making more than $80,000 annually. The average cut for 324,828 Iowans making between $20,001 and $40,000 was pegged at $655 and another 353,119 Iowans earning from $40,001 to $80,000 would see a 2018 tax year federal income tax liability reduced by $1,128, according to the revised revenue agency estimates.
Because Iowa is one of three states that allows its taxpayers to deduct federal tax liability on state income taxes, experts calculated Iowa would collect an extra $33 million in the current budget year that ends June 30; an additional $148 million in fiscal 2019; and $192 million in additional state revenue in fiscal 2020 when the changes are fully implemented, according to the report. In January, those projections called for an extra $16 million in state revenue yet this fiscal year, $106 million in fiscal 2019 and $138 million in fiscal 2020.
The revised numbers are good news for Gov. Kim Reynolds and state lawmakers who are grappling with a projected $34.5 million state budget shortfall for the current fiscal year that ends June 30. They are formulating plans to reform Iowa’s complicated income tax system by reducing rates and possibly eliminating federal deductibility.
“It’s definitely a positive message,” said David Roederer, the governor’s budget director who also leads the state Department of Management and the Revenue Estimating Conference, which received Friday’s reports, “but we also need to be very cautious.”
Roederer said the numbers are in line with what the governor projected in the state budget blueprint she laid out for lawmakers in January, and hopefully would give budget-makers “a little more leeway” with a bigger ending balance in case this fiscal year’s revenue growth estimates shift.
“I think it should give us all some confidence that the numbers aren’t going to drop from what the governor’s budget was looking at in January,” he told reporters after the REC meeting. “That’s the positive side.”
Reynolds is expected to unveil her tax reform/relief plan soon and the projected higher state tax collections resulting from the federal tax cut will factor into what she proposes, Roederer said.