Senate panel approves bill aimed at fully eliminating Iowa income tax

The Senate Ways and Means committee advanced legislation Wednesday to reduce and eventually eliminate Iowa’s income tax.

Changes to Iowa’s income tax rates are already underway through laws signed in 2018 and 2022, moving to a single rate of 3.9% by 2026. Senate Study Bill 1126 proposes further cuts, lowering Iowa’s income tax to a 2.5% single rate by 2028. Beginning in 2030, the income tax rates would be adjusted each year until the tax is eliminated, provided there is sufficient revenue in the taxpayer relief fund (TRF).

Democrats argued Iowa is already headed for a struggle with loss of revenue from the tax cuts passed in previous sessions, and that this bill would further short-change public services Iowans rely on. But Sen. Dan Dawson, R-Council Bluffs, said Iowa has not seen the loss of revenue Democrats warned about. In fact, since last year’s income tax changes, the state has “darn near a billion dollars more in the TRF than we planned,” Dawson said.

It’s the state’s responsibility to use that fund to provide tax relief to Iowans, he said, which this bill does.

“So the purpose of the Taxpayer Relief Fund in code, which has been set in … law for over a decade now is that the monies shall be used for tax relief,” Dawson said. “And that’s the question before this committee and going forward is — we keep on having more money is deposited in here — how do we meet the letter of the law and provide the broadest amount of tax relief possible, that reforms our code and makes it more competitive?”

Sen. Herman Quirmbach, D-Ames, said the loss of revenue has not hit Iowa yet because of the amount of aid provided by the federal government to help states recover from the COVID-19 pandemic and recession. But that’s “one-time money,” he said.

“It used to be Republican orthodoxy that we shouldn’t be spending one-time money to finance ongoing programs,” Quirmbach said. “What happened to the Republican belief in that principle? You were right. You were right, when you said that. But now it seems that that principle is out the window when you have your priority for cutting taxes for rich folks.”

Quirmbach said the state Revenue Estimating Conference last week estimated Iowa’s revenues will be down 0.5% in the current fiscal year and down 1% in the upcoming year.

With cuts already signed into law — and those proposed by this bill — Iowa will continue to underfund services like mental health and education, Democrats said. Republicans strongly disagreed with that characterization. Sen. Mike Bousselot, R-Ankeny, said only in Iowa can “you increase the amount you spend on schools for a decade straight and have that be called a cut.”

“Get real,” Bousselot said. “I also have to say that none of what is in the Revenue Estimating Conference is one-time money, none of it. … Could it be impacted by the huge amounts of money the federal government has chosen to flush into the economy that has driven up the cost of literally everything for every single Iowan? Yes, yes, absolutely. Which only underscores the need for this bill, to let Iowans keep more of their money when they face higher costs at a time when we’re running record surpluses and record amounts in our savings accounts. That’s called common sense.”

The committee passed the bill on a 12-5 vote, sending it to the full Senate for further consideration.