Iowa Gov. Kim Reynolds signs 3.8% flat income tax into law (2024)

DES MOINES — Iowa taxpayers will pay a flat 3.8% on their income next year under a law Gov. Kim Reynolds signed on Wednesday, as she lauded the “transformation” of Iowa’s tax code Republicans have ushered in over the last six years.

The law, Senate File 2442, builds on a tax overhaul Reynolds signed in 2022, which set Iowa’s tax rate on a path to a flat 3.9% by 2026. The latest change sets a lower tax rate, and brings it sooner than initially planned.

Republicans have continually pushed income taxes lower since they gained control of all the state's legislative levers in 2017, pointing to annual budget surpluses as evidence Iowans are paying too much in taxes.

“Simply put, we’ve comprehensively transformed our tax code and dramatically increased our competitiveness within a few short years,” Reynolds said as she signed the bill in her office at the Iowa State Capitol on Wednesday. “At the same time, conservative budgeting practices have kept us living within our means and allowed us to continue making historic investments in key priorities of Iowans.”

Iowa’s top income tax rate this year is 5.7%.

The new law makes a number of other changes to Iowa’s tax code, including tweaking property tax rules, following up on a law Republicans passed last year. It also allows county supervisors to eliminate county compensation boards, which recommend salaries of elected officials in the county. If county supervisors eliminate their compensation board, they would be tasked with determining those amounts on their own.

The law is expected to cut income taxes — and reduce state revenue — by an extra $1 billion over three years, and will reduce revenue by about $100 million each year from 2028 to 2030, according to the nonpartisan Legislative Services Agency.

If tax receipts come in below what the Legislature spends in any year over the next five years, the new law states that half of the difference will come from the Taxpayer Relief Fund, which is estimated to have about $3.66 billion by the end of this fiscal year.

The tax law was passed in the last hours of the legislative session this year after Republicans in the House and Senate spent much of the session crafting an agreement.

Several Democrats in the House and Senate voted for the bill, but Democratic leaders opposed it. They argued the overwhelming majority of the benefits would go to the richest Iowans, and said they were concerned about long-term impacts of waning revenues.

House Minority Leader Jennifer Konfrst said during the session that the changes give no benefit to around 500,000 Iowans who do not pay income taxes.

“They’re not giving the money back to all Iowans. They’re giving the money back to the wealthiest Iowans, middle-class Iowans, and leaving 500,000 Iowans in the dust,” she said. “So our argument will be, continually, this overwhelmingly benefits the rich. Those who are at the top bracket get five figures of benefit. Those at the bottom, five dollars.”

Reynolds signs “megasites” bill

Another bill Reynolds signed into law on Wednesday will create tax incentives designed to attract major businesses to set up shop in the state.

The new law, Senate File 574, creates tax breaks for “megasites,” which will be business developments that occupy at least 250 acres and have at least $1 billion in investments. Up to two qualifying projects could be approved under the bill.

Businesses that qualify for the sites would be eligible for an investment tax credit, a refund on sales tax for construction services, and a withholding tax credit. They will also be eligible for local tax breaks.

To qualify, a site must meet the following criteria:

The program will cost the state about $97 million in the first year if all eligible projects are approved, and it will cost around $18 million in subsequent years, according to the Legislative Services Agency.

The bill was proposed last year, but it did not pass. Reynolds told reporters on Wednesday that state officials have been using the prospects of the tax credits to attract businesses to the state.

“We have used it as a competitive tool for us to land significant economic development projects in the state of Iowa,” she said.

Correction: The bill number for the megasites bill was incorrect in an earlier version of this article. It has been corrected.