The Tax Foundation reported that if Gov. Kim Reynolds’ proposals laid out in her State of the State address were in effect today, Iowa would jump to 37th overall on its State Business Tax Climate Index. That would be an improvement from the 42nd position Iowa currently holds.
Legislation passed in 2018 is “gradually transforming Iowa’s nine-bracket individual income tax, with an initial top rate of 8.98 percent (now 8.53 percent) into a four-bracket tax with a top rate of 6.5 percent.”
The top corporate income tax rate is supposed to fall from 12 percent to 9.8 percent. Federal deductibility would be repealed in both cases.
The most recent proposal by Reynolds would:
– Increase the state sales tax by one percentage point, from 6-7 percent;
– Cut the individual tax by about 10 percent in 2021 with further cuts in 2023 that drop the top rate to 5.5 percent and reduce the number of brackets from nine to four;
– Repeal the water excise tax;
– Exempt diapers and feminine hygiene products from the sales tax;
– Reduce the statewide mental health property tax levy and instead have more mental health spending funded by the state directly; and
– Expand access to the Early Child Development and Child and Dependent Care tax credits by doubling the eligibility limit from $45,000 to $90,000.
The Tax Foundation also reported that the proposal would increase funding to water quality and quality of life efforts and invests additional state resources in the mental health system.
While some of the currently scheduled individual income tax reductions are subject to revenue triggers, the new proposal would lock reductions in place and take the top income tax rate to 5.5 percent in 2023.
“Were these additional reforms in place, Iowa would rank 20th on the individual income tax component of our State Business Tax Climate Index,” reported the Tax Foundation.
Iowa would jump from 15th to 26th in sales tax.
Other benefits of the proposal would include increased tax certainty and improvements to the state’s overall tax structure. Sales taxes tend to be more economically neutral, according to the Tax Foundation.