Kim Reynolds Wants To Make Iowa The Nation’s Tenth No-Income-Tax State

2023 is now the third straight year in which lawmakers in 10 or more states approved income tax relief. Based on recent comments from leading state officials, 2024 is poised to be another year in which lawmakers in a number of states pursue rate-reducing tax reform.

During an August 10 interview at the Iowa State Fair, Governor Kim Reynolds (R-Iowa) said that even after the significant state income tax rate reduction that she has enacted, which transitioned the state from a progressive income tax code with a top rate of 8.53% to a flat tax of 3.9% that will be fully phased by 2026, she thinks there is more work to be done. A big part of the impetus for the ongoing pursuit of tax reform in the Hawkeye State and elsewhere is, as Governor Reynolds said during her August 10 interview with the Ruthless podcast, “you’ve got Republican governors that are trying to outdo each other, so that’s why I’ve got to come back and cut taxes again.”

“They’re all cutting taxes,” Governor Reynolds, who currently chairs the Republican Governors Association, said about her counterparts in other state capitals. During that August 10 interview at the Iowa State Fair, Reynolds reaffirmed her goal is to make Iowa the nation’s tenth no-income-tax state. Reynolds pointed out the reforms she has already enacted have put Iowa’s income tax rate “on the path to zero.”

Governor Reynolds’ record of achievement, the manner in which she has enacted her policy goals, and her ongoing pursuit of further reform demonstrates how, in attacking Kim Reynolds, former President Donald Trump is trying to make a political enemy out of a governor whose conservative bona fides are arguably unmatched. Many believe this to be an unforced error on Trump’s part. Aside from the obvious foolishness of lashing out at the top Republican in the state that’s home to the first nominating contest, one who hasn’t even endorsed any of his opponents, the way in which Governor Reynolds went about enacting universal school choice shows she is not someone who the former president should want to cross, at least not if he wants his old job back.

“Over 40 states have recently enacted some type of income tax reform, but what Iowa has accomplished is the most extensive of them all,” notes Iowans for Tax Relief. “Legislation passed in Iowa over the last five years has delivered the deepest set of income tax cuts ever done in this country. It is the new ‘gold standard’ that other states want to copy.”

Not only has Governor Reynolds made the state tax code more competitive, she’s delivered income tax relief in what many believe to be a responsible manner. Governor Reynolds has facilitated tax reform in part with spending restraint, with the growth of state spending held under the rate of population growth plus inflation. In addition to old-fashioned spending restraint, Reynolds and Iowa legislators have also facilitated income tax relief with a more novel mechanism, the Taxpayer Relief Fund, which lawmakers in other states have already expressed interest in adopting.

“The Taxpayer Relief Fund originated in 2011 as the Taxpayer Trust Fund, which the legislature enacted to capture excess revenue for income tax relief,” writes John Hendrickson, policy director for Iowans for Tax Relief. “Lawmakers at the time believed it to be the best way to ensure surplus tax collections ended up back in the pockets of taxpayers, not used for more state-level spending. With the fund originally capped at $60 million, Iowans received credits on their state tax returns each year there was a balance.”

Iowa lawmakers passed legislation in 2018 that removed the $60 million cap and renamed the fund the Taxpayer Relief Fund. That 2018 reform also provided lawmakers with more discretion when it comes to how and when funds are returned to taxpayers. As of fiscal year 2023, Iowa’s Taxpayer Relief Fund has a balance of $2.7 billion, up nearly 69% from the $1.6 billion balance in fiscal year 2022. Over the next year the Taxpayer Relief Fund is projected to grow by 25%, reaching a balance of $3.4 billion by fiscal year 2024.

Given the upward trajectory of Taxpayer Relief Fund balance, some legislators believe it can be used to facilitate a total phaseout of the income tax. Senator Dan Dawson (R), chair of the Iowa Senate Ways and Means Committee, has introduced legislation to completely phase out the state income tax with the help of the Taxpayer Relief Fund.

Only one state, Alaska, has repealed its income tax completely. In recent years, however, Tennessee and New Hampshire lawmakers enacted legislation phasing out the investment income taxes levied in those states, which already avoid taxing wage income. An income tax phaseout will strike many as a daunting objective, understandably so. An examination of how Kim Reynolds made Iowa one of the first states to offer universal school choice, however, indicates she has the political instincts, will, and courage needed to enact transformational reform, even if it is difficult to achieve because of opposition from powerful interests and constituencies.

Governor Reynolds’ universal school choice bill, which would make all Iowa families eligible for education savings accounts (ESAs), was defeated in her GOP-run state legislature in 2022. Reynolds subsequently went out and backed primary challengers to incumbent Republicans who blocked her universal ESA bill, ultimately defeating a half dozen of them in the August 2022 primary. With the help of those new Republican legislators, Governor Reynolds signed her universal ESA legislation into law before the first month of 2023 had ended.

It’s not just Republican governors in red states who have been following Reynolds’ lead on tax policy. Governor Reynolds approved corporate tax relief that has even been emulated by Democratic counterparts. Reynolds signed legislation reducing Iowa’s corporate tax from 9.8% down to 5.5%.

The corporate tax cut signed by Governor Reynolds left Pennsylvania with the dubious distinction of being home to the nation’s highest corporate income tax rate. Governor Tom Wolf (D) responded by signing legislation that is phasing Pennsylvania’s corporate income tax from 9.99% down to 4.99% in the coming years.

Thanks to the efforts of Governor Kim Reynolds, Senate Majority Leader Jack Whitver (R), and others, Iowa has demonstrated that uncompetitive tax rates can be reduced in a relatively short period of time. Another state that has demonstrated this is North Carolina, where lawmakers are working to finalize a new budget that is likely to include further reduction in the state’s 4.75% flat tax. The new budget enacted in North Carolina could bring the income tax rate down to 3% and perhaps as low as 2.49%, which would be the lowest flat tax in the nation, besting the 2.5% rate that took effect in Arizona at the beginning of 2023.

A new budget that speeds up already codified relief and schedules further rate reduction would get North Carolina, where lawmakers share Governor Reynolds’ tax goals, further down the path to zero. Enactment of additional income tax relief in North Carolina, the state that kicked off the flat tax revolution a decade ago, would also demonstrate that when it comes to Governor Kim Reynolds’ goal of making Iowa the nation’s tenth no-income-tax state, she and other leaders who share her goal face stiff competition. That competition, however, is and will continue benefitting millions of taxpayers.