New Republican tax break won't paper over Iowa's unfair system of raising revenue

Yahoo

07-05-2025

(Photo illustration by Kathie Obradovich/Iowa Capital Dispatch)
Rest assured, Iowa. Republicans in Des Moines have heard your concerns about high prices, and they're doing something about it.
Members of the Iowa House took the bold step recently of voting to eliminate the sales tax on toilet paper. This was such a high priority that Speaker Pat Grassley led the charge, along with nearly two dozen other members of the House GOP. The Senate and Gov. Kim Reynolds still must act before it becomes law, but judging by the non-partisan estimates, if all of them get on the same page, this will save every Iowan about $2.65 a year.
Go to town, Iowa. Buy a couple of candy bars.
To be fair, this isn't the only item Republicans want to shelter from the state sales tax this session. They're talking about adding laundry detergent, too.
In all seriousness, I can see why Republicans might be eager to look like they're reducing the sales tax burden on Iowans. Public opinion polls say Americans are worried about high prices. Meanwhile, the tariffs President Trump is imposing have convinced people, correctly, that prices will go up even more.
Still, Republicans in Iowa have more to be concerned about than just what their party's leader is doing to shrink American bank accounts.
They've created problems of their own.
Big shift in Iowa tax collections
Over the past few years, the Iowa GOP has slashed personal and corporate income taxes that, historically, have taken a bigger percentage out of the incomes of the rich, even as they have collected more and more sales and use taxes, which exact a higher toll on low- and middle-income Iowans.
Here's a good illustration. The March report by the state Revenue Estimating Conference on general fund revenues predicted that in fiscal year 2026, 55% of total tax receipts, or $5.6 billion, will come from personal and corporate income taxes. Meanwhile, 44%, or $4.4 billion, will come from sales and use taxes. (These figures don't include refunds, the vast majority of which are personal income tax refunds.)
That's an extraordinary shift.
In 2019, almost 63% of total tax receipts came from personal and corporate income taxes, while nearly 34% of the total came from sales and use taxes, a 29-point difference. That gap fell to 24 points in 2023. In 2026, the REC says, it will shrink to about 11 points.
Percentage of Iowa's total tax receipts by fiscal year and tax type, not including refunds. (Data source: Revenue Estimating Conference reports on General Fund revenues. Graphic: Ed Tibbetts)
This is an easy trend to miss.
Republicans have made a big deal out of cutting income tax rates, and they get plenty of news coverage from it, too. Meanwhile, the state's sales and use tax rates have remained the same. But don't think the state isn't collecting more money every year just because those tax rates stayed the same. It clearly is.
People are spending more money each year on goods and services, and they're paying more sales tax as a result. In addition, the Legislature expanded the sales tax, beginning in 2019, to include digital goods, subscription services and other online sales.
This was no small tax increase. In fiscal year 2024, the state raised about $349 million from the tax on remote sales. Six years earlier, that number was zero.
Meanwhile, the money the state is raising from the income tax is steadily declining. Between fiscal years 2023 and 2026, Iowa will collect nearly $1 billion less from personal and corporate income taxes, according to the Revenue Estimating Conference. At the same time, the state will raise almost $500 million more from sales and use taxes, the REC estimates.
Again, the state is raising more money from the tax that hits low- and middle-income Iowans the hardest and less from the tax that traditionally has had a bigger impact on higher-income Iowans.
Think of it this way: The sales tax on the $50 spent for clothes or dinner at a restaurant takes a bigger chunk out of the income of someone making $30,000 a year than it does from someone who's making $1 million. Last year, a study by the Institute on Taxation and Economic Policy said the 20% of Iowa households with the lowest incomes in the state paid 6.6% of their family incomes on sales and excise taxes. The top 1% only paid 1.1%.
(Source: Institute on Taxation and Economic Policy)
This should not be a surprise. The same principle is at work with Trump's tariffs.
The tariffs, which are a sort of sales tax, will hit low-income families harder than the wealthy.
A new study by ITEP said for households making less than $29,000 next year, Trump's tariffs will impose an additional 6.2% tax on them, according to CNBC. Households making more than $915,000 a year will also see an increase, but it will be much smaller—only 1.7% of their incomes.
Meanwhile, those tariff revenues will undoubtedly backfill some—but certainly not all—of the revenue lost to the federal treasury by extending the Trump tax cuts, which favor the wealthy.
Hedging their bets
In Iowa, Republican lawmakers support their president. And they are working to permanently freeze the shift they've implemented in state tax collections. They've pressed forward with a proposed amendment to the Iowa Constitution that would require supermajorities in the state Legislature to raise the personal or corporate income tax. But not the sales tax. They purposely excluded this tax from their proposal.
Why?
I think it's because they're hedging their bets.
Iowa Republicans already see that their income tax cuts have yielded a $900 million deficit for fiscal year 2026. They have suggested they'll use one-time reserve funds to close the deficit this year. But what about down the road? What happens if Iowa's economy hits the skids? Or if lawmakers find they can't squeeze public education budgets more than they have already? Or if the economy doesn't grow as much as they promised and state reserves drain faster than expected?
If this constitutional amendment is approved by voters, it will be practically impossible to raise personal or corporate income taxes, even on the wealthy who have benefitted the most from the Republicans' new flat income tax. Which may leave them no alternative but to raise sales and use taxes.
The trend here isn't hard to figure out. The state of Iowa is relying more on the taxes that hit low- and middle-income Iowans the hardest, even as they lean less on the tax that has traditionally taken more money from the wealthy.
This is a big shift, and saving $2.65 on a year's supply of toilet paper does nothing to change that fact.
This column was originally published by Ed Tibbetts' Along the Mississippi newsletter on Substack. It is republished here through the Iowa Writers' Collaborative.
Editor's note: Please consider subscribing to the collaborative and the authors' blogs to support their work.