When Governor Reynolds took office in 2018, Iowa had the sixth highest individual income tax rate in the nation. With the Governor's plan proposed this year, Iowa's rate will be fifth lowest among all states that charge income tax, ranking us among the most tax-friendly states in America.
Thanks to the administration’s strong, conservative budgeting practices and fiscal responsibility, Iowa is in a formidable economic position. Last fiscal year, Iowa closed its books with a general fund balance of $1.24 billion and nearly $1 billion in cash reserves. In December 2021, the Revenue Estimating Conference projected that the state’s net general fund revenues for the current fiscal year (FY22) will exceed $9 billion, a 3% increase over the prior fiscal year, and that Iowa’s Taxpayer Trust Fund balance could top $2 billion.
There's never been a better time in Iowa for bold, yet practical tax reform that meets the priorities of the state, allows Iowans to keep more of what they earn, and creates a highly competitive tax system.
Governor Reynolds proposes:
- Establishing a flat 4% individual income tax rate, further reducing individual income tax for all taxpaying Iowans.
- Eliminating retirement income tax.
- Exempting net capital gains on sale of employee-awarded capital stock.
- Reforming Iowa’s corporate income tax.
State finances are strong and it’s time that Iowans reap the benefit. Hardworking taxpayers deserve a raise. Rather than overpaying the government and waiting for a refund, Iowans should keep more of their hard-earned pay upfront.
4% Flat Income Tax
- Beginning in tax year 2023, implement four tax brackets ranging from 4.4% to 6.0%.
- In subsequent tax years, eliminate the top rate annually until a 4% flat tax rate is achieved in tax year 2026.
- A 4% flat tax is projected to save Iowa taxpayers more than $1.583 billion by tax year 2026.
According to the AARP, the market activities of Iowa’s 50+ population create jobs, wages and salaries. In 2018, adults 50-plus supported $6.3 billion in state and local taxes, 38% of Iowa’s total. That figure is projected to more than triple to $22 billion by 2050.
Retirement Income Exemption
- Beginning in tax year 2023, Iowans age 55 and older would be exempt from state tax on retirement income earned from individual retirement account (IRA) distributions, taxable pensions and annuities.
Farmer Retirement Income Exemption
- Beginning in tax year 2023, Iowa farmers age 55 and older who farmed for at least 10 years but have retired from farming operations, can elect an exemption of income from either cash rent or farm crop shares for all years the income is earned; or elect one, lifetime election to exclude the net capital gains from the sale of farmland.
Iowans who are awarded capital stock from their employers currently pay all or some of the net capital gains taxes on those shares when they choose to sell them. Many states, including some neighboring Iowa, offer exemptions to encourage residents to remain in the state.
- Allow one lifetime election to exclude the net capital gains from one stock of one qualified corporate or employee stock ownership plan (ESOP) from state income tax.
- Qualified corporations must have done business in Iowa for a minimum of 10 years. Employee owners must have acquired capital stock while employed by the corporation for at least 10 years.
- Under current law, 50% of net capital gains from an ESOP is allowed for deduction. The proposal would allow 100% of the net capital gains to be deducted.
Corporate tax levels directly affect economic activity in states, and those with more competitive structures and rates are in much better positions to grow existing businesses and attract new ones. Just a few years ago, Iowa’s rate was the highest in the country, but recent reforms have improved our national standing. Through continued common sense, pro-business strategies, Iowa can maximize its competitive advantage by offering businesses an opportunity to reduce their tax rate when they increase their revenue in Iowa.
- For every fiscal year in which net corporate income tax receipts exceed $700 million, the surplus will be used to buy down the current top rate.
- Following the close of the fiscal year, the Department of Revenue will determine the new top corporate income tax rate and apply it effective January 1 of the following tax year.
- New top rates will be determined each fiscal year that net corporate income tax receipts exceed $700 million, until a uniform 5.5% corporate income tax rate is achieved, at which time it would be capped.
- Once the rate is capped, excess tax revenue beyond $700 million will go into the state’s general fund.