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Tax Rates Matter

From: ITR Foundation Tax rates matter. Whether it is allowing individuals to keep more of their hard-earned income or creating a more competitive economic climate, tax rates have a significant impact on a state. States are in economic competition with each other for both businesses and people. It is important for Iowa not to become complacent as numerous states are looking at reducing tax rates in 2022. Governor Reynolds and the Republican led legislature are making sure that Iowa does not become complacent by making tax reform a priority.

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.

Governor 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. Governor 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.

Governor 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.

Governor 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.

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.

Governor 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,” stated Governor Reynolds.

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. Governor 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.”

Governor 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.