Iowa’s Big Tax Cut for the Rich Already Straining State Services

Iowa is bracing for a $1.1 billion budget hit as it phases in its 2022 flat tax, according to new revenue forecasts. The 3.8 percent flat income tax structure benefits Iowa’s wealthiest residents far more than low- and middle-income families, who already pay a greater share of their income in state and local taxes than the wealthy. Recent estimates from the state’s Department of Revenue show that nearly half of the tax benefits go to the top 5 percent of taxpayers. Millionaires in Iowa will see an average tax cut of $23,471, while households earning under $20,000 will receive just $24 on average — a disparity of over 900 times. 

While cutting taxes, Iowa has underfunded services, budgeting only about 80 percent of available resources for four straight years. Iowa’s anti-tax leaders have instead excessively padded the state’s reserve funds, feeding a nearly $4 billion fund set aside for more tax cuts and creating a “flush-with-cash” narrative that has been used to justify these and future cuts. They’ve also compounded the damage by diverting public funds to a new private school voucher program that is already proving costlier than anticipated.

Lower-income residents will face the brunt of reduced funding for public services, education, and health programs as the state shifts resources to fund tax cuts for the wealthy. For example, the projected $517 million revenue gap this year alone could have covered almost a third of the state cost of Medicaid or nearly all of the state’s spending on its three flagship universities. Already, health care and student tuition are big challenges for families. Now, Iowa will need to find alternative sources to make up these funds or consider cutbacks in critical services for families and communities.

Gov. Kim Reynolds and some Iowa policymakers have also called for eliminating income taxes entirely, a move that would put even more money in the pockets of the wealthy while taking away funding for the essential public services that help Iowa thrive. Until the recent cuts started, income taxes accounted for about half of Iowa’s state revenue, and their elimination would give massive savings — estimated at around $5,000 a month — to the wealthiest 1 percent of residents, while providing only minimal benefits for most Iowans. This approach would make the tax code even more regressive, widening the gap between wealthy households and the rest of the state’s residents.

As the revenue drop becomes evident, it’s clear a policy of tax cuts for the wealthy is not sustainable. Iowa’s 2022 tax cut experiment is already showing the strains on public resources, limiting the state’s ability to invest in critical needs for Iowa families and communities.

The scale of revenue loss Iowa is already experiencing — an 11 percent reduction over two years — is comparable to Kansas’ disastrous tax cuts a decade ago. Billed as a way to boost the state economy, the 2012 Kansas tax cuts led instead to plunging revenues and cuts in K-12 schools, higher education, and other public services. In 2017 Kansas lawmakers agreed on a bipartisan basis to repeal most of the tax cuts.