DES MOINES — Gov. Kim Reynolds unveiled a significant tax reform package Tuesday that seeks to cut Iowans personal income taxes by $1.7 billion over six years, revamp rates by phasing out federal deductibility and equalize sales tax collections by treating Main Street and online businesses alike.
Calling her plan the “most significant tax reform package in decades,” Reynolds said the plan she is proposing to the Legislature will provide immediate relief to middle-class workers, small-business owners, farmers, families and teachers across Iowa. She said the plan, which starts in tax year 2019, is “making good” on the commitment she made in her swearing-in address last May and again in her Condition of the State address in January.
“My plan combines meaningful tax relief while protecting our budget priorities,” Reynolds said in a 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.”
Legislative reaction was mixed, with Republicans hailing it as a great starting point but something they may want to accelerate and compress into fewer rates, and Democrats questioning the plan’s affordability and the fact it “does not touch corporate tax credits, which is the fastest-growing part of the state budget.”
“Kudos to the governor for taking this upon herself,” said Sen. Randy Feenstra, R-Hull, chairman of the Senate Ways and Means Committee. “It’s a fantastic step. It’s a great step for the state of Iowa and now we can build on it from there.”
The governor’s plan seeks to cut income tax rates by 23 percent, resulting in $1.7 billion accumulated relief by 2023. According to the governor’s office, state individual income tax cuts would total $290 million through tax year 2019, $296.4 million in 2020, $337.7 million in 2021, $377.8 million in 2022 and $448.6 million in 2023.
Iowa’s current nine personal income tax brackets will be reduced to eight, with the top rate of 8.98 percent to 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.
Feenstra said eight brackets are a “great starting point,” but he believed Senate Republicans would like to compress Iowa’s system into four income brackets and deliver the relief in a shorter time span, possibly as quickly as two years. He said her $1.7 billion total “was in the arena” of the tax relief Senate Republicans would like to deliver to Iowans.
“I applaud her for how far she’s gone with this,” he said. “Now it’s our turn to create our ideas and piggy-back off hers.”
Rep. Guy Vander Linden, R-Oskaloosa, chairman of the House Ways and Means Committee, said he had not seen the governor’s bill but read her press release and liked what he saw.
“It’s simplifying the system. That’s the direction that I’d like to go,” he said, noting there likely will be separate approaches from the House and Senate that will have to be negotiated into a final package. “It’s going to take until the end of the session, I imagine.”
Along with lower rates, the governor plans to eliminate the alternative minimum tax and phase out federal deductibility – a feature that allows Iowans to deduct their federal tax liability from their taxable state income.
“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,” according to the press release issued by the governor’s office. Under the plan, federal deductibility would be reduced to 25 percent in the 2019 tax year, 15 percent in 2020 and eliminated in 2020, aides said.
Among the Reynolds’ plan features, middle-class Iowans would experience lower taxes-- a typical single mother with one child making $30,000 will see a 28 percent tax cut next year that would grow to 54 percent by 2023; a typical family of four making $55,000 will see a 10 percent tax cut next year growing to 23 percent by 2023; and a typical family of four making $70,000 will see an 8.7 percent tax cut next year growing to 20 percent by 2023., they'll see a 20 percent cut.
In 2019, the standard deduction will increase from $2,070 to $4,000 for single filers and from $5,090 to $8,000 for married filers and there will be an additional standard deduction of $1,500 for the elderly and blind in 2019, rising to $2,070 in 2021, according to the governor’s office.
Reynolds’ aides said the plan is designed to pass through the benefits of the federal tax cut plan to Iowans, roll the benefit of phasing out federal deductibility into the lower rates, recoup additional state sales tax currently going uncollected, and spur economic growth that will mean more taxable income.
“Gov. Reynolds’ tax reform proposal delivers immediate and meaningful relief to middle-class Iowans,” said House Speaker Linda Upmeyer, R-Clear Lake. “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. Pam Jochum, a Dubuque Democrat who is the ranking member on the Senate Ways and Means Committee, called the failure of the governor’s plan to address corporate tax credits was “a big, big mistake” that is unfair to working families and one of several “red flags” in the governor’s plan.
“Any tax cut plan for Iowa must be viewed in light of disastrous tax-cut plans approved in Kansas and Oklahoma, which have resulted in massive cuts to education, public safety, health care and other vital services,” Jochum noted. “In fact, Kansas abandoned failed trickle-down tax cuts and Oklahoma’s Republican Governor is actually proposing higher taxes to dig her state out a fiscal mess in the wake of massive tax cuts.”
Rep. Dave Jacoby, D-Coralville, ranking member of the House Ways and Means Committee, said three criteria should be met before any new tax cut plan is approved: the state budget is balance, the plan is fair and simple for all Iowans and it provides relief for middle –class Iowans.
“What was released was a great political cowboy card and now we want to go to the next step and look at true tax policy,” Jacoby said in an interview.
“The first questions is does it truly help the middle class and then the second question is can we do this and still balance the budget,” noted Jacoby, who said “at first blush” it appeared the cost could be well above $1.7 billion. “We’re in a current fiscal year crisis. Can we talk tax credits now or do we balance that budget first? I think we do that first. There’s some pieces in there that Democrats are willing to look at, but the devil is in the details.”
According to the governor’s office, the Reynolds’ plan includes revenue targets, or “triggers,” that will act as a safeguard in the event of a downturn in the economy and, if there is significant economic growth, the triggers will accelerate the tax cuts and return greater savings to Iowa taxpayers.
Under Reynolds’ approach, Iowans will -- for the first time -- be able to invest in section 529 plans tax-free for K-12 tuition, allowing for more choice in K-12 education. Also, Iowa will fully couple with the federal educator expense deduction, giving teachers’ greater tax savings when they purchase school supplies for their classrooms.
Iowa business owners will be able to deduct 25 percent of the new federal Qualified Business Income Deduction from their Iowa taxable income, and the section 179 expensing limit will increase immediately from $25,000 to $100,000.
Reynolds noted that many Iowa’s Main Street businesses must collect sales tax, but many online, out-of-state companies do not so she proposed putting them on a level playing field with out-of-state corporations in recognition that the economy is changing and Iowa’s tax code needs to adapt to it.
“All increases in sales tax revenue for these online sales will be passed on to Iowans through greater income tax cuts, ensuring that the size of the state’s government is left in check,” according to the governor’s office.