Time for Iowa to talk about tax reform

Everyone has an opinion about taxes, particularly when they come due. When we think about tax policy, we tend to think in terms of whether taxes are too high or too low. This is an important question, but it misses something significant: the role of tax structure in enabling (or thwarting) economic growth.

Over the past six months, the Tax Foundation has pored over Iowa's tax code with an eye for making recommendations for improvement. We dusted off old tax studies, examined successful reforms implemented elsewhere, but first and foremost, we talked to Iowans-government officials, business owners, farmers, and everyday taxpayers alike-for real-life takes on Iowa's tax system.

We learned that Iowa's tax structure is needlessly complex. The state's high top marginal individual and corporate income tax rates scare some people off before they've even heard of 'federal deductibility.” Property tax liability is uneven and unpredictable. For businesses, ascertaining which purchases are subject to sales tax can be a full time job.

We learned that the playing field is uneven. High commercial and industrial property taxes are reduced for some businesses through tax increment financing deals, while others pay full freight. The state's high corporate income tax hits some businesses hard, while others eliminate their liability through unusually generous corporate tax credits. Some businesses see most of their business inputs exempted from the sales tax, as public finance experts recommend, but others experience 'tax pyramiding” as the sales tax is improperly imposed at each stage of the production process.

We learned that some Iowa taxes carry high administrative and compliance costs. The corporate alternative minimum tax (AMT) raises a mere $6 million a year, yet businesses must calculate their tax liability twice to comply with it. The individual AMT raises little more, while also complicating compliance.

And we learned that there's an appetite for reform. Many Iowans know that a nine-bracket individual income tax that tops out at 8.98 percent creates 'sticker shock.” They recognize that for businesses unable to take advantage of the state's generous credits and deductions, the corporate income tax, which tops out at 12 percent, is highly uncompetitive. We heard warranted anxieties that the inheritance tax can break up small businesses.

Iowans deserve a tax structure that grows with Iowa's economy and is designed for the diversified, vibrant economy of the future. Most states build their tax code around their existing industry mix, or policymakers' economic visions. While select industries benefit, new industries experience less competitive tax rates, with the tax code forming a barrier to economic growth. The best tax codes are neutral, simple, and transparent. Rather than picking winners and losers, they provide a competitive environment to all comers.

The result of our time in the state is a book, Iowa Tax Reform Options: Building a Tax System for the 21st Century (available at www.taxfoundation.org), produced in partnership with the Future of Iowa Foundation (sister organization of the Iowa Taxpayers Association), which outlines a range of options for reforming Iowa's tax code. We hope that it will begin an important conversation about making Iowa's tax code more competitive-and we hope that all Iowans will join in.

' Jared Walczak is a policy Analyst for the Tax Foundation. Comments: jmw@taxfoundation.org; (202) 464-5101.