By Katarina Sostaric, Iowa Public Radio
Iowa’s income tax rate dropped to 3.8% Wednesday for all residents who pay income tax, the result of several rounds of tax cuts passed by Republican lawmakers in recent years.
The top income tax rate was 5.7% in 2024, but it started out much higher.
Republican lawmakers started setting personal income tax cuts in motion in 2018, when the top rate was just under 9%. They sped up and deepened the cuts over time, eliminating income brackets along the way and ending with a single income tax rate of 3.8% as of Jan. 1, 2025.
Gov. Kim Reynolds, who signed the most recent tax cut bill into law in 2024, said the latest round of cuts will save Iowans about $1 billion in taxes in the first two years.
State economic forecasters have estimated that means the state will bring in less revenue in the next budget year than it is spending this year. Iowa will take in an estimated $8.7 billion in fiscal year 2026, after budgeting $8.9 billion for state services in fiscal year 2025.
Senate President Amy Sinclair, R-Allerton, said lower taxes are important, especially when Iowans are dealing with high food prices.
“Iowans want and need more of their own money in their pockets,” she said. “So of course revenues are going to be down, because we’re letting Iowans keep the money that they earned. It doesn’t concern me. That’s the outcome of reducing taxes.”
Republicans say they have been collecting too much money from Iowans in the form of taxes. They have spent far less than the available revenue in recent years to save up money for tax cuts.
House Speaker Pat Grassley, R-New Hartford, said House Republicans helped ensure sure there were budget surpluses and money saved in the Taxpayer Relief Fund and cash reserves.
“These are there in case we need to smooth out any reductions in revenue or bumps in the road that we may see on the path to 3.8%,” he said. “And we find ourselves in a position with roughly $7 billion projected in those ending balance accounts that we can easily withstand any level of uncertainty that we see at this point in time.”
Democrats have said the income tax cuts give the biggest benefits to wealthy Iowans and could jeopardize funding for state services like education and health care.
House Minority Leader Jennifer Konfrst, D-Windsor Heights, said the tax cuts, combined with increasing state spending on Education Savings Accounts for kids to go to private schools, are “not sustainable.”
“We’ll be keeping an eye on whether or not Republicans are willing to use one-time money for ongoing expenses, because that’s not responsible budgeting,” she said. “Basically, school vouchers are not sustainable, and our current budget picture is not sustainable.”
She said the money spent on ESAs should be shifted to public education, child care and housing.
Senate Minority Leader Janice Weiner, D-Iowa City, echoed Konfrst’s concerns.
“If it were I, and this were my personal budget, I would be worried,” she said.
While some Republicans have a goal of eliminating the state income tax, GOP leaders have said more income tax cuts are not likely in the 2025 legislative session. Instead, they plan to turn their attention to property tax relief. Republicans also plan to continue the process of considering proposed constitutional amendments that would make it more difficult for future legislatures to raise income taxes.
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