![]() Iowa is Transitioning to a Low, Flat-Rate Income Tax AboveĮconomic decision-making happens at the margin. The following table shows current tax rates and brackets, along with the consolidation-ultimately to a flat 3.9 percent rate-beginning next year. The median household in Iowa ($60,523 in income) would see its income tax burden decline by 26 percent, from about $2,765 to $2,052. Initially, marginal rates below about $16,000 in income are slightly higher, and this will be true for income below $7,000 once the tax plan is fully phased in, but at nearly all income levels, Iowa taxpayers will experience tax relief. These tax reductions come with a significant price tag-most notably, the individual income tax cuts involve forgoing $1.65 billion a year in revenue by FY 2027, when reforms have fully phased in-but based on current revenue forecasts, state lawmakers believe that this can be accomplished out of future revenue growth without even dipping into a taxpayer relief fund with a balance surging toward $2 billion.Īccording to the governor’s office, 98 percent of Iowans with $10,000 or more of taxable income will see lower tax liability under the 3.9 percent flat tax. Source: Tax Foundation, State Business Tax Climate Index, with new projections. Iowa Could Improve 31 Places on the State Business Tax Climate Index Index Rank In the wake of historic reforms beginning in 2013, North Carolina improved from 41st to 10th overall in seven years (currently 11th). This would tie North Carolina for the largest improvement in the Index’s history. With the full phase-in of the newly enacted reforms, Iowa would rank 15th overall, an improvement of 31 places. Before the reforms of 2018 took effect, Iowa ranked 46th overall on our State Business Tax Climate Index, a measure of state tax structure. 2317, builds on reforms adopted in 20, and is broadly consistent with recommendations made by the Tax Foundation in our 2016 guide to Iowa tax reform. Additionally-a more mixed bag economically-the state will exempt retirement income and certain farm rental income from taxation. Improvements have been made to the state sales tax base and several tax credits have been reformed. Once current reforms have phased in, Iowa will be able to boast a 3.9 percent single-rate individual income tax, a 5.5 percent flat corporate income tax, and no inheritance tax or alternative minimum taxes. In 2018, Iowa had a nine-bracket individual income tax with a top marginal rate of 8.98 percent and a graduated-rate corporate income tax with a top rate of 12 percent, both with alternative minimum taxes an inheritance tax and a well-intentioned but distortive policy of federal deductibility. The ongoing transformation of Iowa’s tax code is certainly remarkable. That’s less than half of what it was just four years ago.” Kim Reynolds (R) delivered the Republican response to the State of the Union Address on March 1, she touted a state tax reform package on which the ink was barely dry: “Today, I signed legislation that eliminates Iowa’s tax on retirement income and sets our tax rate at 3.9 percent. ![]()
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