A compromise tax reform package that will create a 3.9% flat individual income tax, eliminate state taxes on retirement income and lower the state’s corporate tax rate was approved by the Iowa Legislature Thursday and now awaits the signature of Gov. Kim Reynolds.

The amended bill was agreed upon by Republican leaders in both chambers and Reynolds on Wednesday, opening the door to Thursday’s votes.

The Republican-controlled Senate approved House File 2317 on a 32-16 vote Thursday afternoon. The House, where Republicans hold a 60-40 edge, approved the bill early Thursday evening on a 61-34 vote, with five representatives not voting.

Reforming the state’s tax structure was a priority of Reynolds in her Condition of the State speech on Jan. 11. Days later, bills outlying Reynolds’ proposal were introduced, followed by bills introduced in the House and Senate.

Reynolds’ version and the House version sought to lower the state’s individual income tax to a flat 4%, while the Senate version wanted to create a flat rate of 3.6%.

Reynolds and the Senate also sought to lower the state’s corporate tax rate, while the House version initially did not address corporate tax rates.

All the versions eliminated taxes on retirement income.

Under the bill approved Thursday, the individual income tax would be reduced over several years until it reaches 3.9%. The state currently has eight income tax brackets ranging from 4.1% for lower-income workers up to 8.53% on the highest-income workers.

On the corporate side, the tax reduction would also be phased in, with the rate being reduced each year state revenues are at least $700 million until it reaches a flat rate of 5.5%

There would also be reductions in some corporate tax breaks and incentives, including the research and activities tax credit.

Once the reductions are fully implemented, they would result in tax savings of $1.9 billion, or a reduction in state revenues by that same amount.

Senate Majority Leader Jack Whitver said the cut creates “an environment for more career opportunities for Iowans, gives Iowans more of an incentive to rejoin the workforce, and helps Iowans weather the impact of record-setting inflation.”

Senate leaders said the bill will take Iowa from a state with the eighth-highest income tax rate to one with the fourth-lowest in the country.

Democrats say the tax cuts benefit wealthier Iowans and place a greater burden on lower- and moderate-income working families.

Leaders of some of the state’s largest business groups lauded the tax reductions as necessary to make Iowa more competitive and attract more businesses — and workers — to the state.

J.D. Davis, vice president of public policy for the Iowa Association of Business and Industry, said the bill will “make Iowa a more attractive place to live, retire and to run a small business.”

“By reducing personal income taxes on all Iowans, including smaller, closely held businesses, to a flat 3.9% and by eliminating all retirement taxes, Iowa will be noticed,” Davis said.

Matt Everson, state director of the National Federation of Independent Businesses, said the tax cuts approved Thursday are “the best way to get money back into the hands of our small business owners and their employees.”

Dustin Miller, executive director of the Iowa Chamber Alliance, said the tax reform “instantly moves Iowa to the front of the class from both a rate and simplification standpoint.”

“Rather than trying to explain away a complex system with high personal and corporate rates to business prospects, Iowa’s tax system can now be a selling point to individuals and businesses looking for a business friendly environment,” he said.

Joe Murphy, executive director of the Iowa Business Council, said the bill was a “bold and innovative approach to reforming Iowa’s tax code.”

“Achieving significant reductions in the corporate and individual rates … will help create opportunities for growth and expansion in Iowa,” he said.