(Photo illustration with Capitol photo by Iowa Capital Dispatch and background via Getty Images)
A study from an Iowa research institute found that the latest individual income tax cuts will result in $1.85 billion in tax savings for income tax payers in the next decade.
The Common Sense Institute Iowa, the Iowa chapter of a think tank with chapters in Colorado, Washington and Arizona focused on the “future of free enterprise,” released the study Monday. It was authored by the institute’s Director of Policy and Research Ben Murrey — a former campaign and legislative staffer for U.S. Sen. Ted Cruz, R-Texas.
The research looked the impact of Senate File 2442, a new law from the 2024 legislative session, that will lower Iowa’s individual income tax rate to a 3.9% single rate by 2026. This year’s individual income tax cuts will speed up the implementation of a 2022 measure, reducing the state’s individual income tax rate to a 3.9% single rate by 2026.
In addition to the reduced taxes, the study found that the income tax cuts will result in other economic growth for the state, including a $3 billion increase in after-tax income and $1.72 billion growth in Iowa’s gross domestic product. These figures were calculated using information from the state Legislative Services Agency analysis of the bill, Revenue Estimating Conference (REC) projections as well as modeling using REMI Tax-PI, a commercial tool analyzing dynamic macroeconomics and fiscal impacts of policies.
While the tax cut was praised by Republican lawmakers during the legislative session as providing taxpayers more than $1 billion in tax relief, members of the minority party expressed concerns that the cuts could put the state government in a difficult position for budgeting in future years.
The tax cut is paid for using excess tax revenue from this year’s budget as well as funding from the Taxpayer Relief Fund. In future years, if state revenues fall below the state’s spending for a fiscal year, part of funding the disparity would come from the Taxpayer Relief Fund until July 1, 2029.
Democrats argued that this system is unsustainable, as the relief fund is one-time money, and can not be used indefinitely to make up for funding deficits — especially in the case of an economic recession.
While the state REC projected a 2.2% decrease from revenue in the 2023 fiscal year in their March meeting, Iowa Department of Management director Kraig Paulsen said the state remains in a “very strong financial position.”
The study modeled three scenarios using the REC estimates and other data documenting the impact of tax cuts on the state’s finances. In one scenario, Iowa has good economic conditions through 2034. In another, the state faces revenue decreases due to a mild recession followed by a recovery. In the third, the state faces a major economic downturn similar to the 2008 recession.
In all three models, state spending is predicted to be higher than state revenue in fiscal year 2026. In the scenarios showing regular economic growth and a mild recession, revenues return above appropriations in fiscal years 2027 and 2028 respectively, but in the case of a severe recession, the analysis predicts revenues will only exceed spending in 2030.
In the study, Murrey argues the state could respond to a severe recession by “slowing the rate of growth in state spending,” allowing the state to avoid budget cuts or withdrawals from the Taxpayer Relief Fund.
Democrats have argued that the income tax cuts could result in budget constraints on spending priorities of the state government, including schools and public safety. But in the study’s conclusion, Murrey argues that even in a recession, state lawmakers could avoid budget cuts.
“Lawmakers have taken a measured and incremental approach to the recent tax reforms that make them sustainable over the long term,” Murrey wrote. “Forecasting three scenarios, including a mild and severe recession, CSI found that over at least the next decade, Iowa can maintain existing tax reforms without the need for budget cuts. Indeed, the state of Iowa could maintain its historic average 3% annual increase in spending under all three scenarios and adopt additional tax reductions if done thoughtfully.”
Iowa Gov. Kim Reynolds praised the study for showing that “Republicans’ conservative budgeting practices are paying off for everyone, even those who don’t pay income tax.”
“Despite challenging national headwinds, Iowa’s economy is steady and strong,” Reynolds said in a statement. “… Our commonsense policies are creating jobs and putting more money in the pockets of hard-working Iowans just as intended.”
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