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 As a result of following fiscal conservatism of prudent
spending and lowering tax rates, Iowa was able to weather the economic impact of
the COVID-19 pandemic. Iowa’s fiscal house is in order with full reserves and a
surplus. Policymakers should help Gov. Reynolds improve the tax climate by
lowering income tax rates.
Recently, Gov. Reynolds has proposed a tax reform plan that would provide $400
million in tax relief. The governor’s proposal calls for income and property tax
relief and eliminating the inheritance tax. The Iowa Senate has passed similar
measures and the House has considered legislation to phase-out the inheritance
tax.
Higher tax rates not only deter economic growth, but they also
penalize hard-working individuals, families and businesses. Taxes on income are
considered the most harmful of taxes as they discourage productivity, hiring and
investing in Iowa.
In 2018, Gov. Reynolds and the Republican-led legislature passed pro-growth tax
reform that lowered income tax rates and broadened the sales tax base. Reducing
tax rates and practicing responsible spending policies is making Iowa more
competitive and economically strong.
As a result of the 2018 law, this year Iowa’s corporate tax rate fell from 12
percent, the highest in the nation, to 9.8 percent – matching Minnesota’s. Even
at 9.8 percent Iowa still has the third highest corporate tax rate in the
nation.
In 2023, the income tax is scheduled to be reduced to 6.5 percent, making it
more competitive in the region. The caveat is, for the rate reduction to occur,
it must meet two stringent revenue triggers. First, state revenues must surpass
$8.3 billion. Second, revenue growth must be at least 4 percent during that
fiscal year.
Lowering the income tax should not be hindered by the 4 percent growth trigger.
Repealing the revenue triggers would reduce a major roadblock to income tax
relief and provide more certainty for taxpayers.
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Iowa is in direct competition with 49 other states
for businesses, jobs, and people. Our neighbor, South Dakota, does
not tax individual or corporate income, and is a direct economic
competitor. Recently, TEF Iowa interviewed Creighton University
economist Ernie Goss, Ph.D., and in responding to a question
regarding what policymakers should be doing in terms of economic
policy, Goss states that Iowa needs to “take steps that will make
your tax system and regulatory system more competitive.
“We have to think about competition,” stated Goss,
and he referenced that both businesses and people are more mobile,
and tax and regulatory climates will impact the state’s
competitiveness.
Gov. Reynolds and legislators have implemented some sound tax policy
in the past few years. It is vital for Iowa to continue to improve
the tax and regulatory climate. Many states are reducing tax rates
and even looking for ways to phase-out the income tax. Iowa should
not become complacent in terms of reducing the tax burden.
Tax reform is far from complete in Iowa and policymakers should
continue to lower both the individual and corporate income tax
rates. At the same time, property tax solutions, such as a
Utah-style Truth-in-Taxation law, would also help bring property tax
relief to taxpayers.
Nevertheless, eliminating the revenue triggers, the county mental
health levy, and the obsolete inheritance tax are all sound tax
policy solutions that place the taxpayer first.
Gov. Reynolds understands that the best way to grow Iowa’s economy
and create opportunities is to follow a path of fiscal conservatism
of prudent spending and low tax rates.
John Hendrickson is policy director of Tax Education
Foundation of Iowa, a public policy think tank
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