Seniors in particular should be wary of Governor Reynolds’ tax-shift plan because, like most Iowans they would, in general, see little or no benefit and could even be worse off.
The list of those harmed by this plan is significant already.
- Poor and moderate-income Iowans will lose income and services.
- Environmental and outdoor recreation advocates who sought a sales-tax increase to fund their priorities will get far less than they expected because the Governor proposes to change the rules.
- Education, law enforcement and other services will suffer with net losses in general fund revenues that the governor is demanding.
Add seniors to the list. It is clear seniors are among the losers in this legislation unless they are (1) rich or (2) not concerned about the public services that will be lost.
Iowans at low and moderate incomes already can count on paying a greater share of their income in state and local tax under the plan. That’s because it trades a sales tax increase, which disproportionately affects those at lower incomes, for cuts in the income tax and property tax, which helps wealthier filers.
To get her way at the expense of low-income Iowans no matter their age, the Governor wants to change the law that set up the constitutional amendment approved by voters in 2010. The amendment directed the next three-eighths-cent sales tax to a Natural Resources and Outdoor Recreation Trust Fund. That law, set up to implement the fund, said trust fund moneys would “supplement and not replace” appropriations for the purposes named for the fund.
That is important on two counts. Besides throwing aside the expectation of all of the designated sales tax increase providing new money for those purposes, her plan shortchanges the specified purposes, cutting trails, REAP, and much of the funding for the Department of Natural Resources.
Beyond the formula change that should concern anyone who voted for the amendment in 2010, seniors in particular should be wary because the Governor is embracing the voters’ consent to a tax increase only if she can cut other taxes by a greater amount. Her proposed income tax cuts are guaranteed to hinder Iowa’s long-term commitments to other services, from education funding for grandchildren’s schools, to corrections to safety-net supports — and make the overall tax system less fair to the poor and middle-income Iowans and especially seniors.
A bad deal for seniors
The Governor’s plan would raise the sales tax by a full penny, not just three-eighths of a cent for the trust fund, and use the majority of the increased revenue to cut income taxes. That would be a bad deal for most seniors.
The Iowa Department of Revenue has estimated that an additional penny sales tax would cost the average lower income household in Iowa without children about $40 on average (with a range of $30 to $50). That includes all households making less than $30,000. Those in the $30,000 to $50,000 gross income range would pay $68 to $90 more. Data from the Institute on Taxation and Economic Policy indicate that 40 percent of Iowa households earn under $50,000.
But estimates from the Iowa Department of Revenue show that the income tax cuts would not provide any measurable benefit for the lowest-income 40 percent of seniors — an average tax savings of just one dollar, for those with taxable income under $10,000. Because of favorable tax treatment for seniors, many currently pay no income tax and thus would get no benefit.
Those earning $50,000 to $75,000 total income represent the middle 20 percent of Iowa households. They would pay $100 to $120 more a year in sales tax under the Reynolds plan, but save only about $33 in income taxes. At least 60 percent of seniors, in other words, pay more under this proposal — and they are paying more largely to finance bigger tax cuts for the wealthiest Iowans.
Seniors count on many public services that are funded by state and local government. So while seniors largely will not benefit on the revenue side, they will also lose on the expenditure side, in lost services. These services cannot avoid cuts if the Governor gets her way. Under her proposal, there will be about $175 million less revenue in the general fund each year, which means less funding for education, health care, and other services.
A key reason most seniors do not benefit
It also is helpful to remember that many seniors have several built-in exceptions to income tax. These exceptions make new income-tax cuts meaningless or minimal to them, unless they are quite well off already:
- All Social Security benefits already are exempt from state tax in Iowa.
- The first $6,000 in pension benefits per person ($12,000 per married couple) is exempt from tax.
- Those age 65 or older receive an additional $20 personal credit.
- While non-elderly taxpayers are exempt from tax on the first $9,000 of income, for those age 65 or older, the exemption rises to $24,000. For married couples, the threshold is $13,500 for the non-elderly, but $32,000 for seniors.
In short, under current Iowa tax law, seniors get very substantial income tax breaks.
For seniors especially, new tax-cut promises are hollow — just like, if the Governor gets her way, the promises that came with the 2010 campaign for a constitutional amendment for a sales tax increase to fund water quality and recreation.
 Those with taxable income under $10,000 account for 41 percent of senior tax filers for Tax Year 2022, according to Table 5 in the Iowa Department of Revenue memo to Jeff Robinson on the impact of SSB3116 on seniors, Feb. 14, 2020. Those with $10,000 to $20,000 taxable income account for another 17 percent of senior taxpayers.
Peter Fisher is research director of the nonpartisan Iowa Policy Project.
David Osterberg is IPP’s environmental researcher and co-founded the organization in 2001.