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.
Though Democrats have criticized the use of one-time funds to make up for permanent changes to the state’s taxing system, Grassley said the Taxpayer Relief Fund was created to help “equalize revenue” while lowering taxes – and this use of funds does not signify the state spending beyond its means.
“We have a very sustainable path to be able to withstand any of those unforeseen things due to our tax policy that we’ve had,” Grassley said. “… But I think the one thing we have to be smart about is not utilizing those just to fund new growth within state spending on ongoing programs.”
Senate Minority Leader Janice Weiner said using these funds to finance tax cuts could put the state in a bad position if an economic downturn like the 2008 financial crisis were to occur.
“That’s not the way to run a responsible budget,” Weiner said. “If I’m personally not bringing enough in in my salary to pay my bills one month and I have to dig into my savings, that money is not there anymore when I really have an emergency. And (that’s) going to be the same thing for the state.”
Though most laws passed in 2024 took effect in July, several measures went into effect Jan. 1. Here are a few of the other changes to Iowa law that begin in 2025:
Postpartum Medicaid coverage
Beginning this year, new Iowa mothers will be able to stay on Medicaid coverage for a year — a significant increase from the 60 days previously offered under Iowa law. However, fewer mothers will be eligible for the coverage under the new state law.
The state measure extended postpartum Medicaid coverage through provision allowed under a 2021 coronavirus pandemic emergency plan signed by President Joe Biden. However, the Iowa Legislature added an income limit, restricting the coverage to families with incomes at or below 215% of the federal poverty line — a more restrictive cap than required under the federal funding plan.
While Democrats argued that the law should keep coverage available at 375% of the federal poverty line limit, as was previously allowed for postpartum Medicaid coverage, Republicans said the higher income limit would come at a cost of $6.2 million. The nonpartisan Legislative Services Agency estimated in March the income limit changes would disqualify 1,300 mothers and 400 babies each month who were previously eligible for postpartum Medicaid coverage through the program.
Vehicle registration, title fees
Iowa drivers seeking to register and title their vehicles will see higher costs compared to previous years under House File 674, a law signed in May 2024.
The law includes a $10 increase to the fees for new vehicle registrations, issuing certificates of title for vehicles and for replacement copies of vehicle titles. The law also includes higher fees for those applying for a new title while transferring a vehicle or applying for certificates of title for foreign registered vehicles from a dealer.
Many of these higher fees will be retained for deposit by local county treasurers for the county’s general fund.