Iowa's Bold Tax Reform

Iowa Gov. Kim Reynolds delivers her Condition of the State address before a joint session of the Iowa Legislature at the Statehouse in Des Moines, Jan. 11


Charlie Neibergall/Associated Press

The economic recovery has state governments rolling in tax revenue, and most are spending the windfall, on pace to spend an average of 9.3% more than in 2021. Iowa’s

Kim Reynolds

is among a handful of governors returning money to taxpayers to sustain the economic rebound.

Gov. Reynolds is proposing a bold tax reform that would increase the incentives to work and invest in the Hawkeye State. Her proposal unveiled last week would reshape the state income tax, gradually consolidating brackets en route to a flat 4% rate by 2026. “When the bill’s fully implemented,” she said, “an average Iowa family will pay more than $1,300 less in taxes.”

The flat 4% levy would drop the state’s top rate by more than a third. Under current law Iowans are set to pay 6.5% on earnings above about $80,000, a threshold that catches much of the middle class. That and three other income-tax brackets would be swept away by Gov. Reynolds’s reform.

The plan would also slash the state’s corporate tax, which is even more punishing. Iowa-based companies pay 9.8% of their earnings above $250,000 in state tax. Ms. Reynolds’s reform would gradually reduce the top rate to 5.5%, capping corporate-tax revenue at $700 million a year and using excess revenue to offset annual rate cuts. An immediate rate cut would be better economically, providing more clarity for corporate investment decisions. But the revenue target should be met if the economy continues to grow.

These moves will help the Hawkeye State keep up amid intensifying Midwest tax competition. To the west, Nebraska cut its top corporate tax rate to 7.25% from 7.81% last year, and to the east, Wisconsin’s Democratic

Gov. Tony Evers

signed the GOP Legislature’s bill cutting the tax rate on middle incomes to 5.3% from 6.27%. Illinois voters defeated a referendum in 2020 that would have killed that state’s 4.95% flat tax.

Iowa closed 2021 with a $1.24 billion budget surplus, notwithstanding Gov. Reynolds’s previous income-tax cuts in 2018. Democrats in Des Moines call the cuts fiscally irresponsible, but recent budgets say the opposite. Gov. Reynolds’s staff estimates that revenues have increased by about 4% annually in recent years while spending has grown by 2% a year, according to the Des Moines Register. Business growth and cuts to state agencies have powered this fiscal progress.

Gov. Reynolds also wants to exempt retirement income, such as from 401(k)s, from state tax. Her budget would let owners or employees of local businesses avoid the state capital-gains tax for a one-time sale. Both provisions are meant to reduce the financial incentive for older Iowans to decamp to lower-tax states.

Gov. Reynolds made the crucial point in her Condition of the State speech last week, saying forgone tax dollars will be “spent every single day on main streets.” That thinking has helped Iowa’s economy and competitiveness, and the state is setting a good example for others.

Journal Editorial Report: The week’s best and worst from Kim Strassel, Kyle Peterson and Dan Henninger. Images: Getty Images/University Of Maryland School Of Medicine/ZUMA Press Composite: Mark Kelly

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Appeared in the January 20, 2022, print edition.


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