DES MOINES — Lt. Gov. Kim Reynolds, soon to be Iowa’s next governor, told a business group Thursday that reworking the state’s complex income tax system is the next policy change needed to grow the economy and be competitive.
“There’s no doubt that we can do better when it comes to our tax structure,” Reynolds told about 450 business leaders from around Iowa attending the state’s annual Smart Economic Development Conference. “It’s a big piece of the puzzle in the overall cost of doing business calculations that site selectors and business-decision makers use when they’re comparing states.”
The lieutenant governor praised the GOP-led Legislature for passing bills this past session to make Iowa more competitive by revamping laws dealing with public-sector collective bargaining, medical malpractice and workers’ compensation.
Reynolds, who could be sworn in as governor this month if Gov. Terry Branstad is confirmed to be the next U.S. ambassador to China and resigns the post, said work began on comprehensive tax changes, but tight state budgets and other pressing needs delayed action on tax policy, water quality and a few other priority issues until the 2018 session.
Senate Republicans are formulating a plan that would shrink state income brackets from nine to three, gradually phase out federal deductibility in order to cut rates and provide at least $500 million in relief to Iowa taxpayers by 2022, according to Sen. Randy Feenstra, R-Hull, chairman of the Senate Ways and Means Committee.
Feenstra said the plan he is working on would reduce the top rate of 8.98 percent for Iowans making $77,040 or more annually to 5.65 percent.
Iowans would not pay any state tax on incomes below $6,848, and the rate would be 2.08 percent on incomes up to $25,680, 5.20 percent on incomes from $25,680 to $34,240 and 5.65 percent on incomes above that.
Currently, Iowa has nine tax brackets that begin with 0.36 percent on the first $1,712 earned and gradually work up to the 8.98 percent top rate, which is high among state rates nationally — but closer to an effective top rate of about 6 percent with the deductibility of federal tax liability.
Iowa is one of a handful of states that allow taxpayers to deduct their federal tax liability on their state income tax return — a feature backed by groups like Iowans for Tax Relief, but one that business groups say skews Iowa’s position in rankings and makes it appear less competitive with other states.
Reynolds said a tax overhaul will be a major topic during the interim leading to the 2018 legislative session. Branstad told the group changing tax policies are among “the next big issues” that need to be addressed as part of an economic strategy aided by recent action to establish a “cutting edge” renewable chemical tax credit that is the first of its kind.
“We’ve made great progress — both for existing business to expand and grow, as well as attracting new and significant investments for our state,” Branstad said in addressing his last Smart conference as governor.
Debi Durham, director of the state Economic Development Authority, said tourism now is an $8 billion industry and capital investments from projects with state involvement top $14.1 billion since 2011 and likely will grow.
Reynolds said she hopes new growth will come in Iowa’s manufacturing sector, which contributes more than $29 billion to the state’s economy and employs more than 200,000 Iowans.
She noted the administration has embarked on a “Year of Manufacturing” initiative with a goal of increasing Iowa’s manufacturing GDP from $29 billion to $32 billion by 2022.