Tax reform will be one of the issues the Iowa Legislature will consider in the 2018 session. Iowa’s tax code is outdated, complex, and it is not taxpayer friendly for the individual or business. Part of the complexity of Iowa’s tax code is the numerous tax credits and incentives that are offered to individuals and businesses. Iowa’s tax credits are utilized for a variety of purposes from helping households with lower incomes to offering incentives for job creation. One concern with the tax credits is that the Iowa Department of Revenue cannot conclude if the credits are helping Iowa compete. Nor can the state determine if each credit is having the impact it is intended to. A review of existing tax credits is needed to ensure that they are serving the taxpayers. Ineffective credits should be reigned-in and offset by lower rates for all.
Tax credits and incentives help alleviate the burdens of taxes that Iowans bear under the highest corporate tax rate in the country and the second highest personal tax rate in the Midwest. Tax credits and incentives also are used as tools for economic development.
Iowa’s Department of Revenue reports on tax credits to the legislature’s Tax Expenditure Committee. This committee is tasked with reviewing and evaluating Iowa’s various tax credit programs based upon the Department of Revenue reports. Although these credits are reviewed on a rotating five-year basis, there is concern that more accountability and evaluation is needed to make sure that these credits and incentives are worth the cost.
Pew Charitable Trusts, a non-partisan research organization, evaluated Iowa’s tax credit system and found that Iowa is “leading” other states in terms of evaluating tax credits, but there is room for improvement. Pew’s evaluation found “that for all their analytical rigor, (Iowa Department of) Revenue’s studies do not typically include clear conclusions on how to improve incentive programs; like other state tax-collecting agencies around the country, Revenue’s staff does not typically make policy recommendations.”
Beneficiaries of Iowa’s tax credits defend them as necessary, especially regarding business growth and economic development. Nevertheless, Iowa’s tight budget situation caused by lower than expected revenues has resulted in a bipartisan call for a review of Iowa’s credits and incentives. Regardless of state revenues, Iowa’s taxpayers deserve clarity on a $400 million issue.
This reliance on tax credits reflects the need to reform the Iowa tax code. Rather than depending solely on tax credits and incentives for economic growth, business expansion, and balancing household budgets, the Iowa tax code should be reformed to allow for across-the-board lower rates that would provide tax relief for all.
If the legislature works to make the tax code friendlier to individuals and businesses by lowering rates, it will result in not only better incentives for economic growth, but it will be protecting the interests of the taxpayer.
• John Hendrickson is a policy analyst for Iowans for Tax Relief, West Des Moines.