Legislation Introduced to Eliminate Iowa’s Income Tax

Years of conservative budgeting is leading our state to the main event for taxpayers — a path to eliminate Iowa’s individual income tax.  

The House and Senate jointly introduced two income tax reform bills. The first, SSB 3141, will cut Iowa’s income tax rates faster than currently planned and create a sustainable, formula-based path to eliminate the tax entirely. The second, SSB 3142, is a constitutional amendment to make it harder to increase taxes in the future.

Immediate Tax Cuts

Iowa currently has three income tax brackets for 2024, two for 2025, and one flat rate for 2026. The House-Senate plan would keep that the same, but the lowest rate would immediately be cut from 4.4 percent to 3.9 percent. Additional cuts would be made in 2026 (3.9 percent to 3.75 percent) and 2025 (3.75 percent to 3.65 percent).

The chart below compares Iowa’s current rates and brackets to the proposed changes:  

The Path to Eliminate

In a joint statement, Representative Bobby Kaufmann, chair of the House Ways and Means Committee, and Senator Dan Dawson, chair of the Senate Ways and Means Committee, called their plan responsible, predictable, and sustainable.

Their proposal uses the growth of the sales and use tax revenue along with the accumulation of budget surpluses to slowly eliminate the income tax. Here is an overview of how it will work:

  • An initial transfer of $2.6 billion from the Taxpayer Relief Fund would create the Iowa Taxpayer Relief Trust (ITRF). The Iowa Public Employees Retirement System (IPERS) would manage this new trust fund. This would allow for these dollars to be safely invested, rather than having the state simply hold on to the funds.
  • As budget surpluses flow into the Taxpayer Relief Fund, a formula will continue moving an amount to the new fund.
  • As the ITRF grows, 5 percent each year will move to the Income Tax Elimination Fund and will be used to replace general fund revenue that has been reduced by decreasing income tax rates.
  • There is no timeline for future income tax cuts after 2027. Rate reductions will be gradual and only occur after several fiscal benchmarks are met.

Think of it like an endowment for the state. When future tax cuts are triggered, this fund can help buffer the budget and help the state continue to fund its core obligations.

Kaufmann and Dawson said, “The Income Tax Elimination Fund will be used to help lower and eventually eliminate the income tax, while assisting with budget stabilization as rates are cut. If the Income Tax Elimination Fund has sufficient funds and sales tax growth hits a certain trigger, the income tax rates will then be automatically reduced.”

The 2022 tax reform included a path to gradually lower the corporate income tax rate. If corporate revenue for a fiscal year is over $700 million, the excess revenue is used to decrease the rate permanently. This bill would also reduce the final corporate income tax rate from 5.5 percent to 4.9 percent. Iowa’s corporate income tax rate is currently 7.1 percent.

This plan will not put legislators in a position to spend so much money that they must ask for more from the taxpayers.

Constitutional Protection from Tax Increases

The second bill is a constitutional amendment requiring a supermajority, or a two-thirds majority, to increase Iowa’s income tax rates. It also protects the new flat tax rate by prohibiting future legislatures from reverting back to a progressive income tax with multiple brackets.

The constitutional amendment would need to pass the House and the Senate and two consecutive general assemblies. That's not two consecutive years. A general assembly is defined as two years. So, if they pass the bill this year, it must be passed again by the legislature in either 2025 or 2026. It would then be voted on by Iowans and need a 50% majority vote. The earliest it could be on the ballot would be November 2026.

ITR’s Take:

Iowa taxpayers should take pride in Iowa’s effective leadership. The governor, legislative leaders, Chairman Dawson, and Chairman Kaufmann don't just talk about lowering taxes. They have turned their words into real tax reform bills that help everyone and promote economic growth.

This plan, along with Governor Reynolds wanting to “go further, faster,” have the discussion moving toward letting Iowans keep more of their hard-earned money.  

Read ITR Foundation’s analysis of SSB 3141.

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