Iowa Senate Republicans unveiled their long-awaited tax reform plan this week, capitalizing on a top legislative priority of the party heading into this year’s session. The plan ultimately proposes reducing state income taxes by $1 billion per year by reducing tax rates by approximately 30 percent overall, through the year 2022. Beyond that, the plan states that it will feature built in calculations for inflation that will automatically continue reducing the tax rates. The Senate Republicans’ tax proposal is similar to a proposal released last week by Governor Kim Reynolds, which was valued at $1.7 billion in tax reductions.
Unlike Reynolds’ plan, which reduces Iowa’s income tax brackets from nine to eight, the Senate bill consolidates the brackets even further, down to five. A big difference between the two proposals lies in the taxation of the highest wage earners in the state. The Senate proposal has the top bracket for an individual locked in at $75,000 in net income or above, being taxed at a final rate of 6.3 percent. In Reynolds’ plan those making $75,000 are in the seventh highest tax bracket, taxed at the same rate of 6.3 percent. In Reynolds’ plan however, there remains one additional tax bracket for those making approximately $160,965 or more, taxed at a rate of 6.9 percent.
Dr. Ernie Goss, MacAllister Chair in Economics at Creighton University, said that compared to Iowa’s neighbors, the state still has a high number of brackets, compared to Nebraska (3), Illinois (1), and Missouri (3), and that Iowa’s highest tax rate is still relatively high, compared to South Dakota (which doesn’t have income tax), Missouri (6.3 percent), and Nebraska (6.84 percent).
Still a major feature in the bill is the ending of federal deductibility, which has been an issue that Republican legislators have been in support of, seeing as the enactment of federal tax reform now results in Iowans having a higher liability to the state. In addition, the bill would automatically couple the Iowa tax code with the new federal tax code, and the Iowa Revenue Code, and would be automatically updated if something were to ever change in either.
According to Senate Republicans, a single parent with one child earning $30,000 a year will see a 65 percent reduction in taxes. A single taxpayer earning $40,000 a year will see a 16.4 percent reduction, while a married couple with two kids earning $48,000 will see a 20.5 percent reduction. These large savings come mostly as a result to federal deductibility.
Illustrated more clearly in the Senate plan than in Reynolds’ proposal are changes to the corporate income tax rates. Under the bill, Iowa will retain all four of its tax rates, but will phase down nearly all rates to 5.5 percent for businesses taking in less than $250,000 in net income. For businesses taking in more than $250,000 in net income, a final tax rate of seven percent will be assessed. The bill also maximizes the new federal benefit of a 20 percent deduction on all qualified business income for Iowa’s job creators.
In calculating the impact of corporate tax rates, Goss said it can be difficult to identify the true impact of reduced corporate tax rates due to the fact the state incentivizes businesses to come to the state. This can skew the total number a corporation pays and the rate at which they pay, though even with the cuts, Iowa’s corporate tax rate is on par or on the higher end of corporate tax rates compared to its neighbors.
As to how Senate Republicans proposed funding the tax reform, a major policy proposal includes repealing a sales and monies tax on in-state credit unions, and replacing it with a franchise tax, similar to the way in which all other financial institutions are taxed in the state. In addressing the franchise tax, the state would only apply a franchise tax rate of two percent on the first $7.5 million made, and an additional four percent on anything above $7.5 million made. The Iowa Bankers Association and the Iowa Credit Union League have previously spoken with InsideSources about the impacts and necessity of such a policy.
In addition to adjusting the franchise tax applicability, Senate Republicans also proposed taxing all digital products (audio, video, and ebook products) at a sales tax rate, including streaming services, as well as taxing certain online sales. The bill would establish a tax on companies with a place of business in Iowa. The state would also tax third party vendors with an operation Iowa, who sell out of state products online. The bill also proposes curtailing several tax credits, as well as assigning a committee to continue evaluating tax credits in the state and making recommendations on their efficacy.
When it comes to the agricultural economy, the bill also increases, from five percent and 15 percent, and seven percent and 17 percent, the two tax credit rates of the agricultural asset transfer tax credit, beginning January 1, 2019. The bill also increases, from $6 million to $8 million, the number of tax credits that may be issued per fiscal year under the agricultural asset transfer tax credit program beginning July 1, 2018. The bill also repeals numerous sales and use tax exemptions related to agricultural production, and creates a new sales and use tax exemption for sales of tangible personal property used primarily in agricultural production by a commercial farmer.
“There’s so much flexibility and judgement that really economists don’t know how those deductions are going to iron their way out,” Goss said. “‘Are you going to provide it to manufacturers, provide for farmers, are you going to provide it to economists, for example, in my case,’ and I don’t think we know that yet with the pass through deduction. I think farmers will get it and in the end that’s going to be good for agriculture.”
As too whether or not those deductions will be able to help struggling farmers in rural towns throughout the state, Goss said that commodity prices would be the only thing that can strengthen the agricultural economy.
“In the end the commodity prices are still too low and at this point in time farmers need more help on the top line, not the bottom line,” Goss said. “I don’t want to minimize the importance of this in the long run and at some point we’ll get to return to sufficient commodity prices, but right now, the real problem for farmers is not what can be deducted and what will be taxed, it’s just their top line is in trouble.”
According to a statement from Reynolds’ office, the administration is “pleased” that the bill aligns with the Reynolds’ priorities.
“We’re still studying the bill, but the governor is pleased the Senate has built upon some of her proposals and that their bill not only cuts taxes, but also simplifies our complex tax code,” the statement reads. “We look forward to working with both the Senate and the House to pass a bill that cuts taxes and does it in a fiscally responsible way.”