Iowa’s Tax-Cut Triumph

The Hawkeye State shows how to cut rates and grow revenue

WSJ editorial. 

"Kim Reynolds is spending time with the Republican presidential hopefuls barnstorming her state, and we hope they’re taking notes on her record. The Iowa Governor has made her state a model of good tax policy, and she says she’s only getting started.

Ms. Reynolds said last week that Iowa wrapped up its fiscal year with a surplus of $1.83 billion. That may sound small compared with overgrown blue-state budgets, but it’s about 22% of what the Hawkeye State spent in 2023. It’s also the third surplus in a row in the Governor’s tenure.

These results have followed significant tax cuts that have helped the state’s economy. Since revenue surged during the pandemic recovery in 2021, Ms. Reynolds and the GOP Legislature have cut the state’s individual income tax rates. The top rate has dropped to 6% from 8.53% since 2022, and it is scheduled to drop to a flat 3.9% rate by 2026.

Iowa’s top corporate tax rate next year will drop to 7.1% from 9.8% in 2022, and it is scheduled to fall to 5.5% if the state keeps hitting its revenue targets. For property owners, the Legislature this year capped the annual increase in assessed value, reducing local tax collections by about $100 million.

Ms. Reynolds connected these dots when she announced the budget surplus last week. “We’ve seen what the powerful combination of growth-oriented policies and fiscal restraint can create,” she said in a statement. Income, corporate and franchise-tax receipts rose by about $500 million from 2021 to 2022 after the tax cuts.

Crucially, state spending has grown modestly since 2021, despite annual increases in per pupil school funding. Steady job growth has pushed the state’s unemployment rate down to 2.9%.

Now the Governor wants to raise her bet on this winning formula. “My goal is to get to zero individual income-tax rate by the end of this second term” in 2027, she said.

If that happens, Iowa will join its neighbor South Dakota in the club of states with no tax on income. Iowa is already charging ahead of most Midwestern peers—particularly Minnesota, which resembles the progressive states on the coasts with a 9.85% top income-tax rate. As for the fiscal risk to Iowans, the state is sitting on a $2.74 billion taxpayer relief fund that will grow again in January.

The Iowa tax experience belies the claims of the left that cutting taxes produces deficits. In Iowa the tax cuts have helped to produce record surpluses that then can be used to cut income-tax rates further. Ms. Reynolds has also shown that you can cut rates across the board, even at the top, and succeed politically. The GOP presidential candidates could stand to ask her for a few tax-cutting pointers."