The Center Square first published this opinion piece.

“When I first took office in 2017, Iowa’s top income tax rate was 8.98%, among the nation’s highest. So was our 12% corporate tax rate. Those taxes weren’t just numbers on a page. They were eating into paychecks, increasing the cost of doing business, and quietly making life more expensive for Iowa families,” stated Gov. Kim Reynolds in her 2026 Condition of the State Address. 

In 2025, Iowa’s 3.8% flat tax was fully phased in, representing close to a 60% reduction in the income tax rate since 2017. Iowa’s flat tax is not only one of Reynolds’s signature policy achievements, but it is the most significant tax reform in state history. 

This is not to downplay the other pro-growth tax reforms that have been implemented, because all these policies are working to make the state more competitive, but the 3.8% flat tax is vital to Iowa’s economic success. 

Even in these challenging times, the flat tax is benefiting taxpayers and the economy, by reducing the tax on investment income. “Today, the momentum is real. Despite a challenging global economy, we’ve attracted over $20 billion in new capital investment since 2024, creating new jobs and new opportunities,” stated Reynolds. With the lower flat tax rate, investors have more certainty and return on their investments in Iowa.

The income tax is the most harmful tax because it punishes productivity and reduces the incentive to work and invest. Tax rates matter, and recent history has demonstrated this by the mass exodus of people and businesses from high-tax states. 

Further, many progressive states continue to address budget shortfalls and high spending by increasing taxes. The state of Washington recently went from a zero-income-tax state to a 9.9% income tax on income over $1 million, and several New England states have also enacted taxes aimed at the successful. The result is that many targeted taxpayers depart for lower tax jurisdictions. 

The flat tax is beneficial not just for economic reasons, but also for creating a fairer, simpler tax structure. A low flat tax will benefit both families and businesses across Iowa. A single rate makes it easier for taxpayers to calculate their liabilities, reducing confusion and saving time. This is particularly beneficial for small businesses, who often calculate their own tax liability.

Going forward, Iowa is confronted with two main challenges regarding tax policy. The first is to ensure that government spending is limited. The chief reason Iowa was able to implement the flat tax was its adherence to conservative budgeting and limited spending. 

Iowa’s fiscal foundation remains secure and the reserves are strong, including close to $4 billion in the Taxpayer Relief Fund. However, Iowa’s revenues have been lower than expected because of challenges in the economy and federal policy changes. Protecting the flat tax and sound tax policy will begin and end with conservative budgeting. 

The second challenge is battling complacency.  At one time, Iowa was the leader in the state “flat tax revolution,” but now other states are starting to surpass it. In 2027, Ohio will move to a 2.75% flat tax and South Carolina recently passed a tax reform law, which over the next five years will move from a progressive rate to a flat 1.99%. Iowa is in economic competition with these other states, and Iowa cannot just sit idly at 3.8%.

Iowa’s economy is becoming more competitive because of the flat tax. It is imperative that the flat tax is protected through conservative budgeting and that policymakers continue to look for avenues to further lower the rate. Lower taxes produce prosperity over time, and Iowa is benefiting from Gov. Reynolds’s strong reforms.
 
John Hendrickson is Policy Director for Iowans for Tax Relief Foundation and Rea S. Hederman Jr., is Vice President of Policy at The Buckeye Institute.