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Issue Guide

Income Tax Reform 2.0

posted on April 30, 2019

The Problem:

Last year's state income tax reform was a good start. However, Iowa's tax rates remain among the highest in the nation.

ITR Solution:

  • All planned future tax cuts should be implemented sooner.
  • Legislators should create a path of continued rate reductions for individual and corporate income taxes.

What Has Happened:

  • As expected, legislators passed a “clean-up” bill that addresses some technical aspects of 2018’s income tax reform law.
  • Additional, substantive reforms were not addressed by either chamber this year.

Work Left to Do:

Remind policymakers that individuals, entrepreneurs, and businesses will vote with their feet by moving to states with the best regulatory and tax climates.

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Iowa’s Income Tax Rates Must Be Competitive

In 2018, the legislature passed a tax reform measure that begins the process of lowering rates, increases conformity with the federal tax code, and modernizes the state sales and use tax. This was the first major tax legislation passed by the legislature in 20 years. 2018’s tax reform will begin to provide relief for Iowa taxpayers, but the work is far from complete.

Tax rates matter, and Iowa’s tax code must become more competitive. While tax relief is off to a good start, Iowa’s tax rates remain some of the highest in the nation. The Tax Foundation ranks Iowa in the bottom ten states (45 out of 50) for business climate. High tax rates deter economic growth and productivity. High tax rates also provide a competitive disadvantage as states race to attract and retain residents and businesses. Individuals, entrepreneurs, and businesses will vote with their feet by moving to states with the best regulatory and tax climates.

One of the best illustrations of this is Iowa’s shared border with South Dakota. South Dakota has no state income tax. In the past ten years, the South Dakota counties that border Iowa have seen 75 percent job growth compared to 5 percent in Iowa’s border counties. In the healthcare industry alone, South Dakota saw 95 new healthcare facilities open compared to only eight new healthcare facilities on the Iowa side of the border.

In this competitive climate where tax rates matter, how exactly does Iowa compare to our Midwestern neighbors? Iowa’s top income tax rate of 8.53 percent is 11th (highest) out of 12, and when the next scheduled cut to 6.5 percent occurs in 2023, we will improve to 9th out of 12. When the first corporate tax cut occurs in 2021, Iowa’s top corporate income tax rate of 9.8 percent will be tied for the 11th (highest) out of 12.

The national economy is growing at a rate over 4 percent, and Iowa is benefiting from the pro-growth policies of tax and regulatory reductions. Daniel J. Mitchell, a noted economist, offers three points that Iowa policymakers need to consider regarding taxes:

  1. Economic growth occurs when we increase the quantity and/or quality of labor and capital.
  2. Taxes increase the cost of whatever is being taxed, and people respond by doing less of whatever is being taxed.
  3. To get more prosperity, lower tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

It is vital that Iowa’s policymakers continue their work to reduce tax rates. Ideally, all planned future tax cuts should be implemented sooner to allow taxpayers to keep more of their hard-earned income and fuel economic growth in Iowa. Additionally, legislators should create a path of continued rate reductions for individual and corporate income taxes.