(The Center Square) – Tax cuts enacted by the Iowa Legislature are sustainable and will save taxpayers $1.85 billion over the next 10 years, according to a report from the Common Sense Institute of Iowa.
Lawmakers passed Senate File 2442 this year, which gradually reduces the income tax rate before a 3.8% flat rate begins in tax year 2025.
The change would spur a $3 billion increase in after-tax income, a $1.72 billion growth in the state’s gross domestic product and 6,800 new jobs in 2025.
CSI Iowa compared possible outcomes to three recession scenarios, including one similar to the 2008 recession, and found the cuts to be sustainable at least through fiscal year 2029 without requiring money from the state’s rainy day fund for general expenses.
“If revenues were to fall below appropriations due to the tax cuts, the law permits the state to make up the difference with the previous years’ surpluses carried forward or by transferring TRF (rainy day) funds to the state’s general fund,” the report said. “State forecasters currently anticipate a $2.4 billion surplus in FY 2025. The TRF balance currently sits at $3.74 million.”
Iowa will have a lower income tax rate than any of its neighboring states, except for South Dakota, which has no income tax, the report said.
Democrats raised concerns about SB 4442 during floor debates, saying the income tax cuts do not help everyone, including the 500,000 Iowans who do not pay income tax.
Twelve states have a flat income tax rate. Four states — Colorado, Illinois, Michigan and Pennsylvania — include it in their state constitution. Illinois voters rejected an amendment in 2020 that would have scrapped the constitutionally protected flat tax rate for a progressive income tax.
Lawmakers also passed a resolution that would make it more difficult for future legislatures to increase the flat income tax rate. The resolution must be approved by next year’s legislature before appearing on the ballot in 2025 for voters to approve.
Iowa Gov. Kim Reynolds said the report shows how Republican policies create jobs and return money to the taxpayers.
“Despite challenging national headwinds, Iowa’s economy is steady and strong,” Reynolds said in a statement. “The CSI study shows that Republicans’ conservative budgeting practices are paying off for everyone, even those who don’t pay income tax.”
