Gov. Kim Reynolds signs law lowering individual income tax rate to 3.8% in 2025

Gov. Kim Reynolds, joined by Lt. Gov. Adam Gregg, left, Sen. Dan Dawson, right, and other lawmakers and lobbyists, signed into law on May 1, 2024, a bill that will reduce Iowa's individual income tax rate in 2025. (Photo by Robin Opsahl/Iowa Capital Dispatch)

Gov. Kim Reynolds signed into law a measure speeding up income tax cuts, lowering Iowa’s individual income tax to a 3.8% single tax rate beginning in 2025.

Reynolds signed Senate File 2442 into law Wednesday, a measure speeding up the cut made in 2022 to decrease Iowa’s individual income tax rate to a 3.9% single rate by 2026. The governor praised Iowa Republican leadership for working with her on tax measures that “comprehensively transformed our tax code and dramatically increased our competitiveness within a few short years.”

“When I took office, Iowa’s personal income tax rate was the sixth highest in the nation at 8.98%,” Reynolds said. “I think we had nine brackets and the list could go on and on. It was certainly clear that we needed to make a change, and that’s exactly what we’ve done.”

When this year’s tax cuts are implemented, Iowa will have the sixth-lowest income tax rate among the 41 states with an income tax, according to the Tax Foundation.

“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,” Reynolds said. “Even after these tax cuts, we closed Fiscal Year ’23 with $1.83 billion surplus, nearly $900 million in cash reserves and %3.7 billion and the Taxpayer Trust Fund. So it’s clear that we’re well-positioned to go further, faster.”

Lowering income taxes was one of the main priorities for both the governor and Republican legislative leaders this year. Earlier in the session, more dramatic reductions were proposed: Reynolds introduced legislation to reduce the individual income tax rate to a flat 3.65% in 2024 retroactively, in addition to another cut to 3.5% in 2025.

The chairs of both chambers’ Ways and Means committees, Rep. Bobby Kaufmann, R-Wilton, and Sen. Dan Dawson, R-Council Bluffs, introduced a bill to lower the tax to 3.775% in 2026 and 3.65% in 2027, as well as set up a system using money in the Taxpayer Relief Fund to finance future cuts until the state income tax was fully eliminated.

Some Democratic lawmakers, including Senate Minority Leader Pam Jochum, criticized the move to a flat income tax rate as unfairly benefiting wealthier Iowans over lower- and middle-class Iowans. She also said the tax cuts being made may not be sustainable if the state faces economic downturns in the future — and could put key funding priorities, like Iowa’s K-12 education system and other social services, at risk in the future.

“Sooner or later, it’s not going to work. It’s not good budgeting, it isn’t sustainable,” Jochum said in April. “I was trying to look at the long-term impact of all the different things that have been happening last few years in terms of educating our children, combined now with all the changes going on the tax system, that would reduce revenues very quickly.”

These larger proposals were not implemented this year, but both Reynolds and Republican lawmakers have indicated they plan to pursue further income tax cuts in the future. House Speaker Pat Grassley told reporters following the adjournment of session that the this year’s legislation ensures that tax cuts are done “responsibly and sustainably.”

The new law will be financed using excess tax revenue from this year’s budget plan, Republican lawmakers said, as well as through a withdrawal from the Taxpayer Relief Fund. If state revenues fall below state appropriations for a fiscal year, the measure also stipulates that the relief fund would be used to make up for a part of needed funding until July 1, 2029. The Legislative Services Agency analysis of the proposal stated that revenues are not expected to fall below state spending in this timeframe.

At the bill signing, Reynolds praised the tax cuts lawmakers have been able to implement since she took office, saying that from 2018 to Fiscal Year 2030, lawmakers will have saved Iowa taxpayers nearly $24 billion.

Lawmakers also passed two other proposals related to income tax this legislative session — the first steps to putting two proposed constitutional amendments on the ballot for Iowans in future elections. Senate Joint Resolution 2004, enshrining a flat tax rate, and House Joint Resolution 2006, requiring that increases to Iowa’s income tax reach two-thirds majority support in both chambers to pass, were both approved this session.

Both constitutional amendments must be passed by the next General Assembly before they appear on a general election ballot for voters to directly weigh in on. If the measures get a simple majority support on the ballot, the language will be added to the state constitution.

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