Iowa’s taxes are among the nation’s worst, on paper, at least.
Iowa has the highest corporate tax rate and among the highest top income tax rates in the country. But in practice, the state’s federal tax deductibility and a generous set of tax breaks mean Iowa businesses and taxpayers aren’t faring quite so bad.
Exactly how much are those tax credits worth these days? Nobody can say for certain.
The tax policy goals announced by Gov. Kim Reynolds and legislative Republicans this past week would eliminate federal deductibility and cut rates to correspond, and then cut some more.
The plan calls to cut and simplify individual and corporate taxes over the next five years, according to details released by Reynolds’s office.
Some of the tax cuts would include a trigger in hopes of ensuring the state reaches revenue bench marks. Republicans promise to repay the state’s cash reserves and keep their word on backfill payments to local governments, stemming from the 2013 statewide property tax cuts.
Democrats make a strong case Republicans are being overly optimistic about revenue, especially given the state’s recent budget history. Less than two weeks ago, Reynolds signed a bill to fill a $35 million midyear budget gap.
Don’t be surprised if a future legislature cuts the cuts, but keeps the nixing of federal deductibility and other federal tax coupling measures.
Republicans keep calling their planned tax cuts historic, and I suspect they will be proven right.
But whether that’s an historic failure or historic victory depends on the results of the “comprehensive review of tax credits,” which is expected to be part of the tax bill but is not necessarily a promise to tame the multibillion-dollar beast.
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The most recent detailed study on what the government calls tax expenditures was about the 2010 budget and released by the Iowa Department of Revenue in 2014. It counted 373 such credits, deductions, exemptions and exclusions throughout state and local government valued at more than $12 billion, except for the 81 provisions where the dollar amount couldn’t be determined.
If it takes years to count the tax cutouts and analysts still can’t come up with the total figure, that’s a good sign the system is too complicated.
In some cases, the state government actually pays corporations money through refundable tax credits. In 2017, the state paid $42 million in research credits to companies owing no other state taxes.
That is textbook corporate welfare.
I support every tax cut, but we have to recognize some tax cuts are better than others. All those exemptions have ardent supporters and some are worthwhile, but simple arithmetic dictates targeted tax cuts lead to higher taxes for everyone else.
A comprehensive review is a good way to delay politically painful decisions, such as capping or eliminating lucrative tax breaks. It remains to be seen whether some future legislature will have the courage to follow through.
Even under the Republican tax proposal, Iowa still would be on the high end among all states’ tax rates. To go lower, lawmakers will have to make much harder choices than cutting everyone’s taxes.
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