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 The Tax Foundation’s 2022 State Business Tax Climate Index
provides a good overview of each states’ tax climate. Iowa’s ranking has
improved and is ranked 38 out of 50. Previously, Iowa was in the top ten states
for worst tax climate. A reason why Iowa’s ranking has improved is the
significant progress that is being made on reducing tax rates.
Since 2018, Iowa has been working to lower income tax rates to
provide tax relief and create a more competitive economy. Last year, Iowa’s
corporate tax rate fell from 12 percent, the highest in the nation, to 9.8
percent, which ties with Minnesota. In addition, the legislature passed a tax
reform measure that will ensure that the individual income tax will be reduced
to 6.5 percent in 2023 and it phases out the inheritance tax.
Gov. Reynolds, who has made tax reform a priority, has recently introduced a
pro-growth comprehensive tax reform plan. The proposal calls for lowering the
individual tax to a flat 4 percent rate by 2026. Gov. Reynolds is also pushing
to lower the corporate tax to be reduced from 9.8 percent to a flat 5.5 percent.
Finally, her proposal will eliminate taxes on retirement income.
Gov. Reynolds is demonstrating that fiscal conservatism works. Prior to the
pandemic, Iowa’s fiscal house was in strong condition. During the pandemic, the
governor kept the economy going and Iowa’s economy was able to weather the
economic impact of the pandemic. Currently, Iowa’s budget has a $1.24 billion
surplus and revenue projections are healthy. The surplus is expected to continue
to grow. Iowa’s Taxpayer Relief Fund, which already has a $1.8 billion balance,
is estimated to grow to $2 billion later this year.
Gov. Reynolds is correct in calling for lowering both the individual and
corporate income tax rates. Reducing corporate taxes are often mistakenly viewed
as “tax cuts for the rich,” but high corporate rates impact jobs and
productivity. In addition, high corporate tax rates are passed onto consumers.
Having a lower corporate tax will also encourage more economic growth.
Taxes on income, whether individual or corporate, are the most
harmful for economic growth. Income taxes punish work, investment, savings, and
productivity. Tax rates have a significant influence on the economic decisions
individuals and businesses make on a regular basis. Both lose incentive to work
if their earnings are consumed by taxes.
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A major lesson from the federal census demonstrates
that an exodus is taking place as people are leaving high tax
states. A significant economic challenge for Iowa is the need for
more workers and a lower tax climate will help attract new
residents.
This is especially true as more Americans, both
workers and employers, take advantage of remote work or who are
looking to escape the plethora of problems plaguing many cities
across the nation. “The ongoing migration from high- to low-tax
states, and particularly states with low income taxes, is likely to
accelerate with the growing viability of telework,” argues Timothy
Vermeer, a Senior Policy Analyst with the Tax Foundation.
This year has the potential to be a record setting year for state
tax reform across the nation. Currently, 30 states are considering
some form of tax relief and/or reform. These are not just Republican
“red” states, but also Democrat “blue” states. In 2021, 15 states
enacted tax reforms.
Gov. Reynolds in her Condition of the State address made a crucial
point when she noted that her tax reform plan rewards work. “All of
these tax cuts have one thing in common – they reward work. Work to
be done and a lifetime of work to be proud of,” Reynolds said.
Tax reform is about rewarding work, allowing
individuals and businesses to keep their hard-earned income, and in
return that creates a stronger and economically competitive Iowa.
Gov. Reynolds stated that allowing taxpayers to keep more of their
income will result in more dollars being “spent every single day on
Main Streets, in grocery stores, and at restaurants across Iowa.
We’ll see it spent in businesses instead of on bureaucracies.”
Gov. Reynolds, along with the Iowa House and Senate, have each
introduced tax reform bills that will make Iowa more competitive.
Iowa is demonstrating that prudent budgeting along with responsible
tax reform is creating a more competitive economy, while unleashing
opportunities.
John Hendrickson is policy director for Iowans for Tax Relief
Foundation.
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