The exterior of the Iowa State Capitol building can be seen in Des Moines on Tuesday, June 8, 2021 (Andy Abeyta / The Gazette)
“Today’s legislation ushers in a new era of growth and opportunity in Iowa,” Gov. Kim Reynolds said upon signing the 2021 Tax Reform Bill. “But we don’t. are not done yet. Next year I will be proposing additional income tax cuts as we continue to make Iowa America’s most attractive place to open a business, raise a family and start a career, Gov. Reynolds said. Iowa was one of 11 states that passed tax reform bills this year due to good fiscal health. Other states, such as North Carolina , are currently considering adopting additional tax reforms In recent years, Iowa has made progress in enacting growth-friendly tax reform, but there is still work to be done.
Iowa’s tax climate is important because it not only impacts the incomes of hard-working Iowans, but also determines how competitive and attractive the economy will be compared to other states. Recently, the American Legislative Exchange Council (ALEC) released the 14th Annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. In this report, Iowa’s ranking for economic outlook fell from 27 in 2020 to 33 in 2021. One reason for Iowa’s decline in the rankings is that other states are working to reduce their tax rates.
Iowa cannot get complacent as it competes with 49 other states for jobs and people. Data from the recent census shows that states that have no income tax or states with low tax rates are gaining in population.
In addition to the phasing out of inheritance tax, a crucial element of the 2021 tax reform law was the removal of income tax triggers that were put in place in 2018. The maximum rate will drop to 6.5% in 2023, and the personal tax brackets will condense from nine to four brackets with a lower rate of 4.4 percent.
This year, Iowa’s corporate tax rate was lowered from 12%, the highest in the country, to 8.9%, which ties us to Minnesota. For comparison, Nebraska passed a corporate tax cut this year, which will gradually reduce its rate to 6.84%.
In 2022, the Iowa legislature will have the opportunity to build on previous tax reform. Priority should be given to reducing personal and corporate income taxes and combating property taxes.
It is imperative that the Iowa legislature continue to practice budget conservatism through sound budgeting. Governor Reynolds and the Republican-led legislature deserve credit for conservative budgeting.
Currently, Iowa is expected to have a surplus of over $ 500 million. In addition, there is a lot of money available for a rainy day, including $ 817.9 million combined in the cash reserve fund and the economic emergency fund and $ 316.4 million in the fund. taxpayer assistance.
In addition to keeping spending levels low, policymakers should also look at Iowa’s many tax credits and incentives. Lower tax rates are much better than relying on a tax code dominated by credits and incentives that benefit selected particular interests.
Governor Reynolds even said the ultimate goal is to eliminate income tax from Iowa. Eliminating income tax is a laudable political goal, but states like Utah, North Carolina, and Indiana have passed pro-growth tax reforms without eliminating their income taxes. Iowa’s goal should be to continuously lower tax rates.
Lowering tax rates may take time, but policymakers should consider several policy tools such as revenue triggers, gradual rate cuts, elimination of unnecessary tax credits and incentives, expansion of the sales tax base, among other things, as measures to help reduce rates. When it comes to triggers, policymakers need to be careful not to repeat the 2018 mistake, which unnecessarily created obstacles to lowering rates.
Finally, lawmakers have the opportunity to tackle Iowa’s high property taxes. High property taxes are not only burdensome and damaging to the taxpayer, but they also hamper economic growth. Fortunately, there is a solution that will benefit all Iowa property taxpayers.
This year, Kansas and Nebraska both passed laws inspired by the Utah Tax Truth Act. Utah’s law is considered the most taxpayer-friendly property tax law in the country, making it the gold standard for reform. Utah’s Tax Truth Act is income-based, which means that when assessments go up, property tax rates go down. The Tax Truth Act ensures that each tax entity receives the same property tax revenues as the previous year, including new growth. This prevents local governments from getting a windfall because valuations have gone up.
Through the Truth Tax Process, local governments must justify why they want to raise taxes for additional spending. A crucial aspect of Utah law is a direct notification requirement, where notices are sent to taxpayers, providing information about the proposed tax increase and its impact on their tax bill. It also includes the date, time and location of the Tax Truth Budget Hearing. Kansas is already enjoying success because many local tax authorities do not increase tax rates.
The most difficult obstacle to tax reform will be the need for policymakers to say ‘no’ to the many vested interests arguing for new or additional spending. Whether it’s income taxes or local property taxes, spending is the main driver of high tax rates.
Navigating future tax reform won’t be easy, but Iowa can’t afford to get complacent and fall behind as other states become more competitive by enacting growth-friendly tax reforms. The goal of the 2022 legislative session should be to put Iowa taxpayers first.
John Hendrickson is director of policy at the Tax Education Foundation of Iowa.