Iowa Gov. Kim Reynolds proposed Tuesday night that Iowa cut taxes by nearly $2 billion by moving to a 4% flat income tax phased in over four years and repealing all state taxes on retirement income beginning next year.
The plan would allow retirees 55 and older to exempt income from individual retirement accounts, pensions and annuities and would include farmers who can exempt income earned from cash rent on farmland or capital gains on sale of their farmland. The flat tax proposal would reduce state revenue by an estimated $1.58 billion by tax year 2026 when it would be fully implemented.
Reynolds made the proposal in the annual Condition of the State message to the Legislature. It follows the spirit of her party’s legislative leaders’ desire to reduce income taxes in light of the $1.2 billion Iowa has in its Taxpayer Relief Fund.
“The cuts will occur gradually over the next four years so that we protect priorities like education and public safety,” she said. “But in the first year alone, taxpayers will save almost $500 million. And by 2026, when the bill is fully implemented, an average Iowa family will pay over $1,300 less in taxes, which is on top of their $1,000 tax cut from the 2018 bill.”
She acknowledged the hole that would put in the state’s budget.
“Yes, we’ll have less to spend once a year at the Capitol, but we’ll see it spent every single day on Main Streets, in grocery stores and at restaurants across Iowa,” she said. “We’ll see it spent in businesses instead of on bureaucracies.”
Iowa Rep. Lee Hein, R-Monticello — who chairs the House of Representatives Ways and Means Committee, which manages tax policy — called the governor’s proposal “something to take a look at.”
“We will have to see the numbers, but it points us in the right direction,” he said.
Iowa Rep. Shannon Lundgren, R-Peosta, said she thought what Reynolds laid out was “a direction we want to go in.”
“It is aggressive and really quick in parts but is a good step,” she said.
Iowa Sen. Carrie Koelker, R-Dyersville, said she was impressed with the address.
“We had a meeting before the speech, with her staff, and everything the governor’s put forward is doable,” she said. “This is a way to move Iowa forward.”
Iowa Rep. Steve Bradley, R-Cascade, already had signed onto the legislation for retirees earlier on Tuesday.
“What that will do if we get that through is make it so, if you retire in Iowa, you’re not moving to Florida or Texas,” he said. “Because you won’t have to. A lot of people are doing that.”
Reynolds requested various changes and programs in an attempt to address the state’s workforce woes.
She said “the safety net has become a hammock.” So, she proposed cutting the months someone can receive unemployment benefits after losing their job from 26 weeks to 16 weeks, while also requiring that applicants not turn down “suitable” jobs while on unemployment.
Iowa Rep. Lindsay James, D-Dubuque, said Reynolds’ unemployment period reduction is not a solution.
“To take vulnerable Iowans and pull back, in such a significant way, that safety net for them is not a way to solve the larger workforce process,” she said. “It’s a way to further throw up barriers for people who are struggling to get back into the workforce.”
To further address workforce problems, Reynolds also announced two apprenticeship programs for high school students as a pipeline for new health care workers and teachers.
“Starting in high school is amazing,” Lundgren said. “Get them to see what their teachers fell in love with early.”
As schools see mass departures nationwide, Reynolds also announced that she will use federal emergency relief money for schools to give $1,000 “thank-you” bonuses to teachers who worked through the COVID-19 pandemic to date.
She announced similar $1,000 bonuses, using American Rescue Plan Act funds, to law enforcement officers.
Iowa Sen. Pam Jochum, D-Dubuque, called those a nice idea but not one that solved the root problem.
“Our state is a low-wage state,” she said after the speech. “And we are paying a heavy price for those low wages. I heard a speech that painted a nice, rosy picture, but workers need to be paid a better wage.”
Reynolds also acknowledged the need for furthering child care access, as a way to address workforce, and pointed to recent grant programs as early successes — including a grant to Aspire Home Daycare Network in Dubuque to remodel and equip homes that will help stay-at-home moms start their own day care businesses.
Education and fuel
In an effort to further Republicans’ “school choice” agenda, Reynolds proposed allowing middle- and low-income families and students with an individualized educational plan to take 70% of their state allocated per-pupil funding — about $5,300 per student — to move their child to the education system of their choice.
She also proposed requiring school districts to publish class materials online and provide a list of books available in school libraries with a process for anyone to challenge a book.
Reynolds also proposed a new program to pay for gas station upgrades so more stations can carry E15 and B20 biofuels. She would require all gasoline retailers with compatible gas pumps and lines to offer E15 by 2026. Any newly installed equipment must be E85 compliant for gasoline or B20 for biofuel.
Iowa Sen. Dan Zumbach, R-Ryan, said the governor’s proposal could work well with the renewable fuel standard legislation he has been working on with Hein for a year, but “the details are really going to matter.”