Iowa’s 2022 Tax Reform Sets Gold Standard for State Tax Debt Relief, Aims to Eliminate Income Tax in Pro-Growth Move

Iowa has become a trailblazer in state tax debt relief with its groundbreaking 2022 tax reform.

State Tax Debt Relief at the Forefront of 2022 Reform

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Not only is this state tax debt relief reform the largest in the state’s history, but it also stands out as one of the most extensive nationwide. Analysts predict that by 2026, only four states will boast a lower income tax rate than Iowa. Prominent figures in the tax policy arena, including Patrick Gleason, Vice President of State Affairs at Americans for Tax Reform, and Jared Walczak, Vice President of State Projects at the Tax Foundation, have lauded Iowa’s recent developments as the dawn of a “golden era of state tax debt relief.” This surge in tax cuts marks the most significant wave since the inception of state income taxes over a century ago. For decades, Iowa’s tax landscape had been weighed down by a progressive income tax structure, with rates peaking at 13 percent in 1975. The burden of high tax rates was somewhat mitigated through federal deductibility and various tax credits. However, in 2018, the state took a pivotal step by passing its most substantial income tax cut at that time, state tax debt relief. Subsequently, in 2022, Iowa furthered its efforts with a comprehensive “flat tax” reform or the state tax debt relief, which will phase out the progressive income tax entirely, reducing it to a flat 3.9 percent rate by 2026.

How Iowa’s Tax Reform Brings State Tax Debt Relief

State Tax Debt Relief a New Gold Standard (PHOTO: Jonathan Borba)

The success of Iowa’s tax reform or the state tax debt relief stems from conservative budgeting, emphasizing the importance of limiting spending. Governor Reynolds has made this fiscal prudence a priority, leading to substantial budget surpluses. Iowa anticipates a surplus of $1.7 billion in 2023, building upon a $1.9 billion surplus in 2022, with an estimated $2 billion surplus projected for 2024. Moreover, Iowa’s reserve funds are fully funded, and the Taxpayer Relief Fund is expected to grow its balance to $3.5 billion in 2024. While the 2022 state tax debt relief marks a significant milestone for Iowa, Governor Reynolds affirms that the state is not done yet. She aims to completely eliminate the income tax, and Senator Dan Dawson, Chair of Ways & Means Committee, has introduced a state tax debt relief bill to accelerate rate reductions, leading to the ultimate goal of abolishing the income tax altogether. Senator Dawson’s proposal targets lowering the individual income tax to a flat 2.5 percent by 2028 and continuing corporate tax rate reductions to reach a flat 4.75 percent. Additionally, the plan would utilize the Taxpayer Relief Fund to achieve the goal of state tax debt relief. With a well-established framework for further reform in 2024, Iowa is resolutely on its way to becoming a model for state tax debt relief and pro-growth tax policy.

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