Another Big Reason Congress Should Make the Tax Cuts and Jobs Act Permanent

Preserving lower rates and other essential provisions while delaying or forgoing carve-outs would provide certainty for states.

‘A fter President Trump signed TCJA (Tax Cuts and Jobs Act) in 2017, it gave us just the opportunity we needed,” said Governor Kim Reynolds in reference to the start of Iowa’s historic income tax reforms.

Governor Reynolds was testifying barely six weeks ago before the United States House of Representatives Oversight and Government Reform Committee on a “Rightsizing Government” hearing.

Although Iowa has been a leader in fiscally conservative policies under Governor Reynolds, it is but one example of why state leaders are watching intently as Congress considers extending or making permanent the federal pro-growth tax reforms to which many states have linked their own laws and policies.

TCJA slashed the federal corporate tax rate from 35 percent to 21 percent, which, according to a recent study, will grow domestic capital stock by more than 3.5 percent, all while fully offsetting static revenue losses from the rate cut over the 2018–2028 budget window due to dynamic economic effects. Sweeping personal tax rate reductions and other types of relief were enacted as well.

TCJA not only fueled the national economy but also provided states an opportunity to reform their tax codes. Since its passage, numerous states have enacted or continued phasing in reductions to their income tax rates, a key driver of economic growth. This trend accelerated following Covid-19-related fiscal disruptions.

Arkansas, Louisiana, Missouri, North Carolina, Ohio, Oklahoma, and West Virginia have enacted significant individual income tax rate reductions over the past several years. Arizona, Georgia, Idaho, and Mississippi (as well as others mentioned above) have moved toward single flat-rate income tax structures to replace their graduated rate systems.

Meanwhile, states like Kansas, Nebraska, Pennsylvania, and even New Jersey have opted to reduce corporate tax rates.

Iowa has taken both approaches. Starting in 2018, Governor Reynolds and the legislature began reducing Iowa’s progressive multi-rate income tax.

“At 8.98%, our top income tax rate was one of the highest in the nation, as was our 12% corporate rate. Antiquated state policies made our tax code complex and hard to reform,” noted Governor Reynolds.

Iowa’s income tax is now a flat 3.8 percent, sixth lowest in the nation, and the 7.1 percent corporate tax rate is being reduced to a flat 5.5 percent.

But TCJA is not solely responsible for Iowa’s historic tax reforms. Iowa’s conservative budgeting practices and Governor Reynolds’s government reform initiatives have saved over $217 million. As she told the committee, “Iowa was doing DOGE before DOGE was a thing.” While TCJA provided the incentive for action, it was Iowa’s fiscal discipline that made substantial tax reform possible.

Beyond encouraging state-level reforms, TCJA’s provisions directly benefited taxpayers and businesses across the country; those businesses gained the ability to expand operations, increase hiring, and boost salaries. The resulting economic growth helped fuel state revenue increases as well.

With crucial provisions of TCJA set to expire at the end of the year, Congress must keep working to extend or make the tax cuts permanent. President Donald Trump has made this a policy priority. Republicans in Congress, however, are not unified on how to proceed, and the House and Senate are offering different policy paths.

The current debate involves not just extending the 2017 tax cuts but potentially adding new provisions. These include campaign promises such as eliminating taxes on tips and overtime pay, reducing the corporate rate to 15 percent for U.S. manufacturers, and increasing the State and Local Tax (SALT) deduction (which was wisely limited under TCJA).

Complicating matters is the concern over the $36 trillion national debt and persistent deficits. Federal outlays in the current fiscal year are 33.6 percent higher in inflation-adjusted terms than in 2019, with no return to pre-pandemic levels in sight. Rising interest payments combined with the pending insolvency of Medicare Part A and Social Security’s components in the mid-2030s paint a troubling fiscal picture without significant program restructuring.

Allowing TCJA to expire would have severe consequences. Beyond the immediate negative economic impact of this massive tax increase, state budgets would face significant pressure, particularly in states that haven’t practiced fiscal restraint. States with strong fiscal foundations, like Iowa, are better positioned to weather economic uncertainty, but even they would be impacted.

Uncertainty surrounding federal tax policy is already affecting state legislatures. Several states adopted SALT limitation workarounds after TCJA’s enactment. If the SALT cap is loosened federally, the incentive for these workarounds may diminish, but so might states’ motivation to reduce their own taxes. More generous federal deductibility of state and local taxes effectively subsidizes high-tax policies at lower levels of government, potentially cooling the tax-cutting momentum of recent years.

Meanwhile, many state policymakers have introduced legislation mirroring federal proposals like no tax on tips and no tax on overtime pay. While allowing taxpayers to keep more of their earnings is a worthy goal, these targeted exemptions would trigger unintended consequences.

Individuals in well-paying jobs could take unfair advantage of the law and recategorize their income. This, in turn, would likely lead to bigger budgets for the IRS as well as state revenue agencies, not to mention intrusive new audit and enforcement powers.

Furthermore, at the federal or state level, both tax exemptions would reduce revenue that could be put to better work simplifying and making the gains from TCJA permanent.

A more straightforward approach would be across-the-board rate reductions that benefit all taxpayers, regardless of profession or income source. This ensures that workers earning the same compensation receive the same tax relief, whether through a straight paycheck or a combination of base pay and tips. Similarly, raising the standard deduction would provide broad-based relief without creating disparities between different types of workers.

States with rolling conformity to the federal tax code, including Iowa, face additional challenges. When federal tax provisions change, these states automatically incorporate those changes into their own tax systems. If state legislatures make tax adjustments based on assumptions about federal action that don’t materialize, the result could be confused taxpayers, businesses struggling with compliance, and hastily crafted legislative fixes.

To resolve this uncertainty, Congress should prioritize extending TCJA by focusing on preserving lower rates, maintaining the enhanced standard deduction, child tax credit, and key business provisions while perhaps delaying or forgoing tax carve-outs that benefit only select groups. Spending restraint is a key ingredient, too.

This mirrors Governor Reynolds’s smart approach in Iowa: implementing a simple 3.8 percent flat tax while controlling spending through disciplined budgeting and government reform.

Iowa has followed a proven fiscal path to success; policymakers in Washington and across the country should do the same.

Pete Sepp is president of the National Taxpayers Union Foundation, and John Hendrickson is policy director for Iowans for Tax Relief Foundation.