Governor Kim Reynolds has made growing Iowa’s economy a priority. To accomplish this goal, she is working to ensure that Iowa has a competitive tax climate.
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 Governor Reynolds improve the tax climate by lowering income tax rates.
Recently, Governor 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, Governor 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.
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.
Governor 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.
Governor 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.
