The Iowa Capitol on Dec. 20, 2024. (Photo by Robin Opsahl/Iowa Capital Dispatch)
Iowa’s latest reduction of income tax rates has gone into effect for 2025.
The law, signed by Gov. Kim Reynolds in May 2024 , lowers individual income tax rates from 5.7% in 2024 to a single 3.8% rate. It will give Iowa the sixth-lowest income tax rates among the 41 states that have the tax, according to the Tax Foundation. The measure built on a 2022 law that moved the state’s individual income tax to a 3.9% single rate by 2026.
However, the change in taxation will have a significant impact on the state’s budget. The Iowa Revenue Estimating Conference projected in December that the state will collect an estimated $600 million less in revenue this fiscal year compared to last year.
Republicans, who hold a trifecta of control at the Iowa State Capitol with supermajorities incoming for both chambers, have said they do not think the loss of revenue will impact the Legislature’s ability to fund vital services. House Speaker Pat Grassley said in a December interview with the Iowa Capital Dispatch that Republican leaders set mechanisms in place to draw on existing state funds to make up for potential shortfalls while adjusting to the new tax system. Those funds include $3.75 billion now in the Taxpayer Relief Fund, as well as the state’s $2 billion budget surplus and $961 million in reserve accounts.