Iowans will pay a 3.8% flat income tax rate starting next year after Gov. Kim Reynolds signed a law Wednesday lowering the state’s rate and speeding up a series of cuts.

The law builds on a 2022 tax cut that was already set to take Iowa to a 3.9% flat income tax rate in 2026.

Iowa’s top income tax rate this year is 5.7%. Under the new law, all Iowans will pay a 3.8% income tax rate next year.

Reynolds, a Republican, signed Senate File 2442 Wednesday afternoon in the governor’s formal office in the Iowa State Capitol.

It’s the latest in a series of tax cuts Reynolds and Republican majorities in the Iowa Legislature have passed since 2018. Those cuts have brought Iowa from a top individual income tax rate of 8.98% to next year’s 3.8% flat rate, which will apply to Iowans across the board.

“Simply put, we’ve comprehensively transformed our tax code and dramatically increased our competitiveness within a few short years,” Reynolds said. “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.”

The latest changes to Iowa’s tax code are expected to reduce state revenues by more than $1 billion over the first three years, and more than $1.3 billion through fiscal year 2030.

Reynolds said when added together all the tax cuts she has signed into law as governor will save Iowa taxpayers $24 billion over a decade.

More: Iowa’s income tax rate is dropping to 3.8%. See how that stacks up against other states

Individual income taxes made up 46.8% of Iowa’s revenues in fiscal year 2023, the most recent year for which complete data is available.

The new law will give Iowa the sixth-lowest income tax rate in the country among states that impose an income tax. Nine states have no income tax for individuals.

Democrats have criticized the flat tax, saying most of the benefits go to the wealthiest Iowans.

There are also around half a million Iowans who do not receive any benefit because their income is low enough that they do not pay income taxes.

Instead, House Democrats this year proposed cutting the state’s sales tax by 1 cent, which they say would disproportionately benefit lower-income Iowans.

“As opposed to the legislation we’re considering, which will be a tax cut for about two-thirds of Iowans, this will be a tax cut for 100% of Iowans,” Rep. Sami Scheetz, D-Cedar Rapids, said April 19 during debate in the Iowa House. “And as so many people in this state know, the sales tax is the most regressive form of taxation. It hits the people in the state who need help the most, the hardest.”

More: What’s in Iowa’s $8.9 billion state budget for the coming year? We break it down:

Law taps Taxpayer Relief Fund to make up shortfall if state revenues fall below spending

If state revenues drop below state spending during a fiscal year, the law says 50% of the costs will be covered using the Taxpayer Relief Fund. The other half would come from the state’s ending balance.

That part of the law will be repealed on July 1, 2029.

The LSA analysis of the legislation says state revenues are not estimated to fall below the state’s spending levels through fiscal year 2029, meaning the relief fund would not need to be tapped.

The state ended the previous fiscal year with $2.74 billion in the Taxpayer Relief Fund. The amount is expected to rise to about $3.6 billion in July, when the fiscal year ends.

More: All-night marathon caps Iowa Legislature’s 2024 session. What’s changing: AEAs, your taxes

What else does the tax law do?

The law also allows county boards of supervisors to eliminate their county compensation boards, which review salaries for elected officials and recommend increases.

And it makes changes to a property tax law last year that limits how much city and property tax revenue can grow. The new law tweaks how much a community’s assessed property value can grow before the government must use a portion of its excess revenue to lower property taxes.

The legislation also repeals an 1848 law requiring Lee County, the only county in Iowa with two courthouses, to maintain courthouses in both Fort Madison and Keokuk.

Reynolds signs law authorizing tax credits for large projects

Reynolds on Wednesday also signed Senate File 574, which creates a new tax credit program for large manufacturing and research projects that cost at least $1 billion.

The new program, called the Major Economic Growth Attraction Program, applies to businesses “primarily engaged in advanced manufacturing, biosciences or research and development.” Data centers and retail businesses are not eligible for the tax credit.

Companies seeking the tax credit must demonstrate that their project will create jobs that pay benefits and meet a certain wage threshold.

The program allows the Iowa Economic Development Authority to authorize a tax credit for up to 5% of the cost of the businesses’ investment in the project. Companies cannot claim the credit until the project is in service and at least half of the jobs specified in the company’s contract have been created.

The tax credit can offset taxes paid by the company, and will be spread out over five years.

More: Kim Reynolds signs Iowa farmland law regulating foreign ownership. Here’s what it does:

The law also authorizes businesses to claim a withholding tax credit of up to 3% of gross wages paid to employees on the qualifying project.

And businesses can qualify for a sales tax refund on taxes paid on electricity, water, gas and sewer utilities, property or services performed by subcontractors. The Department of Revenue will pay the refund to the business over five years.

Reynolds signed a law in April strengthening disclosure requirements for foreign ownerships of Iowa farmland and stepping up penalties for owners that fail to comply.

Senate File 574 allows the tax credits to go to a foreign business as long as the business qualifies for the program and can establish that it is not associated with a foreign adversary and is not actively engaged in farming.

Stephen Gruber-Miller covers the Iowa Statehouse and politics for the Register. He can be reached by email at sgrubermil@registermedia.com or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.