Iowa's tax code needs an overhaul
Recently we read of our state’s fiscal year 2017 budget revenue shortfall of nearly $250 million. Then we heard the news that 73 of our 99 counties have declined in population with more than half our population living in just 10 counties. Iowa is the only state in the nation that has not doubled in population since 1900. We are growing at a sluggish rate of 2.89 percent. Our state’s current budgetary woes paired with our stagnant population growth are all symptoms of a slow growth state.
Iowa is suffering from subpar economic growth and reduced long-term potential for growth. Iowa’s tax system is overly complex and no longer equitable. Years of tax breaks and tax credits has cluttered our current tax code. The fundamental purpose of an overhaul of our system would be to simplify our tax code, while improving economic growth and job creation.
This legislative session marks the 20th anniversary of the last income tax cut that we as Iowans have seen. As Speaker of the Iowa House in 1997, I spearheaded the effort to update Iowa’s income tax system. In that year, we successfully cut Iowa’s income taxes across the board by 10 percent. History indicates that there have only been a handful of tax overhauls of the modern code, which emphasizes tax reform as a profoundly challenging event. Albeit it difficult, tax modernization is necessary to help position the state for any future growth.
With our current state of economic need, Iowa is in need of sweeping, yet responsible tax modernization. Any update to our code must meet three key criteria:
Fair — Our system is no longer fair. We must work to simplify the code as the current process hurts the middle income and lower income earner. Our state has 13 different income brackets and countless deductions; would like to see two tiers with very limited deductions.
Simple — According to the Tax Foundation, the Iowa income tax return is only three fewer lines than the federal tax form. As a small state with a population of 3 million people, our tax returns need to be shorter than what is being offered by the IRS. Our tax code is made even more complex as our state isn’t coupling with the federal code; adding more discrepancies between the state and federal tax code.
Competitive — Everyone recognizes our personal income tax rate of 8.98 percent is too high as the fourth highest among U.S. states. All credits and deductions are hurting our state and ultimately leaves Iowa uncompetitive. We need to think beyond special interests for the overall financial health of the state.
Iowa has high marginal tax rates on personal incomes. Based on research from economists at Iowa State, that high marginal rates deter businesses from investing in Iowa and that has reduced average income by about 2.65 percent. The high income tax rate has caused a net outflow of high earners to states such as South Dakota and Texas. This outflow has cost the state $3.89 billion.
So what will the news hold for us next week and in the years to come?
Our state will continue to see a budget challenge unless changes are made soon. We cannot continue to do the same if we want to grow. A more simple, neutral, efficient, equitable and transparent tax system can help Iowans, our employers, and the economy. The plan must be conducive to growth as our state works to generate new revenue. The state can have a significant impact on the quality of life for Iowans by lowering income tax rates. As we explore the options of tax modernization, we want to ensure that the state builds a responsible tax system for a diversified economy and positions itself as a destination for investment, entrepreneurs, and talented individuals in the years ahead.
To read Engage Iowa’s full research-based income tax policy and our dynamic modeling scenarios, visit EngageIowa.org.
• Ron Corbett, president and founder of Engage Iowa, is mayor of Cedar Rapids and former Speaker of the Iowa House of Representatives.