Gov. Kim Reynolds began the 2022 legislative session with a “comprehensive” proposal to cut the state’s income tax, retirement income tax and corporate tax rates.
“All of these tax cuts have one thing in common — they reward work,” Reynolds said in prepared remarks for her Jan. 11 Condition of the State speech. “Work to be done and a lifetime of work to be proud of.”
But although Reynolds, a Republican, enjoys Republican majorities in the House and Senate, her plan is far from final.
Legislative leadership released their own tax bills this week, each using the governor’s proposal as a template but making their own significant changes.
Senate leaders want an even more significant income tax cut than Reynolds proposed and they would adopt a mechanism to eventually eliminate the income tax altogether. Meanwhile, the House stuck close to Reynolds’ initial proposal on income tax, but they scrapped a $300 million corporate tax cut.
Lawmakers will need to find a compromise among the three proposals before the legislative session ends in the spring. Here’s where they’re starting out:
Senate proposes lower income taxes, with goal to eliminate
Republican leaders are taking roughly the same approach to income tax this year. All three proposals would reduce the state’s income tax rates over several years. Ultimately, leaders say it would be a flat tax, with every income bracket paying the same rate.
Governor: Reynolds proposed a 4% tax for all income brackets, which she described as “flat and fair.”
The new income tax rate would phase in over four years, beginning in tax year 2023 and ending in tax year 2026. Each year, the state would essentially eliminate the highest tax bracket until all Iowans are paying the same rate.
The governor’s office projects the plan will eliminate nearly $1.6 billion in taxes by 2026. Reynolds does not plan to use the Taxpayer Relief Fund for the tax cuts, instead relying on continued revenue growth in the state.
House: House Republicans endorsed Reynolds’ proposal for lowering the income tax to 4%.
“I think the 4% is a very bold plan that the governor laid out, and that’s why you’re seeing the House is working off of that, as far as where we want to get to,” House Speaker Pat Grassley said Thursday.
However, the House would tap into the Taxpayer Relief Fund to offset the cuts. Grassley emphasized that both proposals were sustainable, but explained House Republicans wanted to commit the money that had been set aside specifically for the purpose of tax cuts.
Senate: The Senate GOP plan would lower income tax rates over five years, eventually paring the rate back to 3.6% for all taxpayers. That will eliminate more than $2 billion in taxes, according to Senate Majority Leader Jack Whitver.
Senate leaders said they’re still working toward an ultimate goal of eliminating the income tax altogether. Their proposal creates an automatic mechanism to eventually bring the income tax down to zero: The Taxpayer Relief Fund would become the Income Tax Elimination Fund. If the state brings in a surplus, money would go toward the fund and allow the state to continue lowering the income tax over time.
House proposes no corporate tax cuts
Governor: Reynolds proposed a plan to reduce the top corporate tax rate gradually, based on how much surplus corporate tax the state collects each year. The goal is to work down to a 5.5% rate for all corporations, which is significantly lower than the current top-bracket rate of 9.8%.
The Department of Revenue estimated the corporate cuts would reduce state revenues about $300 million over five years.
House: The House plan does not include changes to the corporate tax rate or to corporate tax exemptions.
Grassley said he was open to discussions about eliminating some of the state’s corporate tax credits, but that those talks should be separate from the main tax proposal. He said making significant changes to tax credits could be “difficult.”
“If that’s the route that the Legislature decides to go, we obviously are going to be at the table,” Grassley said.
Senate: Senate leaders are closer to Reynolds on the corporate piece. They want to reduce the corporate income tax to 7.8% and eliminate $141 million worth of corporate tax credits.
“Some of these are exemptions we’ve had in our code for 30 or 40 years, but we lack the political courage around here to lower our rate and actually deal with those credits,” said Sen. Dan Dawson, chair of the Senate Ways and Means committee.
Leadership agrees on eliminating state retirement income tax
Governor: Reynolds proposed removing the state tax on retirement income, beginning in tax year 2023. She also proposed new exemptions for retired farmers.
“You’ve worked hard all your life, saving for retirement and paying your fair share in taxes,” she said in the Condition of the State address. “It’s time you get a break from the tax collector; you’ve earned it, now you should enjoy it.”
House: The House proposed the same retirement income tax changes as Reynolds.
Rep. Lee Hein, chair of the House Ways and Means committee, told reporters earlier in the week that the House would push for the changes to take effect in tax year 2022, but the House proposal enacts them instead in 2023.
“I don’t think there was a significant amount of pushback on what the year was,” Grassley said. “The important piece is making sure that it was part of the tax bill.”
Senate: The Senate also proposed the same language on retirement income taxes.
“We understand there’s going to be a lot of conversation about that, and some details that need to be worked out, but really, that’s the legislative process,” said Whitver, promising to get started on negotiations next week.
Senate proposes sales tax change for water and land preservation
The Senate added one extra thing to their tax plan: a change to the local option sales tax that would fund water quality and trail improvement.
The proposal would classify the local option sales tax, which already exists in a majority of Iowa communities, to a statewide tax. That change would allow them to use some of the money to fund Iowa’s Water Land and Legacy program (IWILL).
Dawson said it was the “most conservative and constitutional solution to IWILL.”
“It’s a vision to improve Iowa’s water qualities, it’s a vision to improve Iowa’s trail system,” Dawson said. “You know, those placemaking things that are going to attract people to Iowa.”
Democrats criticize GOP tax plans
Democrats were not enthusiastic about any of the three Republican tax proposals. Leaders in the House and Senate argued the income tax changes unfairly advantage higher earners, and they objected to corporate tax cuts.
“The latest GOP tax scheme will leave too many Iowans behind,” said House Minority Leader Jennifer Konfrst of the House tax plan. “We don’t need more tax giveaways to the special interests, corporations, and millionaires.”
Senate Minority Leader Zach Wahls raised concerns that, with fewer dollars coming into the state, the Legislature would need to cut essential programs.
“Senate Republicans won’t solve the Reynolds Workforce Crisis with another tax giveaway to millionaires and big corporations,” Wahls said in a statement. “The Republican plan would result in higher taxes for hardworking Iowans and the defunding of public education, public safety, and health care services.”
The Iowa Capital Dispatch will be following the various tax proposals as lawmakers negotiate. For that news, and other goings-on at the Capitol, subscribe to our newsletter.
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