116 3rd St SE
Cedar Rapids, Iowa 52401
Phasing out the state income tax would be a huge win for Iowa. It would allow individuals and families to keep more of their hard-earned money while also attracting new jobs and opportunities to the Hawkeye State.
For years, people and jobs have been fleeing high tax states and moving into states that do not impose income taxes. U-Haul's 2020 report on state migration corroborates this trend.
Based on more than 2 million one-way truck customer transactions, U-Haul found Tennessee, Texas and Florida - all of which appear on the list of the eight no income tax states - experienced the greatest in-migration last year. On net, these three states had the most one-way U-Haul trucks enter their borders.
Iowa unfortunately did not come anywhere close to these states when it comes to attracting residents and businesses. In fact, U-Haul did not even find it to have among the 20 highest in-migration rates. But that is not very surprising.
Today, Iowa's income tax scares away investment and jobs. Iowa's top marginal individual income tax rate is 8.53 percent - placing Iowa among the 10 highest state income tax rates in the nation. The good news is that could soon change.
Thanks to a law enacted by Gov. Kim Reynolds in 2018 - which already reduced the rate of each of Iowa's nine income tax brackets - Iowa could have a simpler four-bracket income tax with a top rate of 6.5 percent as soon as 2023. Once fully implemented, that tax reform package will provide Iowans with
$2.1 billion in tax relief, the largest tax cut in Iowa history.
The catch here is that this component of the law is contingent upon revenue collections and certain metrics of growth. Understandably, those triggers were utilized to ensure the state's continued financial stability. But the future is here, and Iowa's financial picture is promising.
Thanks to conservative budgeting practices, Iowa's reserve accounts are full and the state ended the most recent fiscal year with a more than $300 million surplus. That is great news, and official projections have Iowa coming very close to reaching the triggers. However, if tax collections continue to grow, but miss this growth target by a just small fraction, the tax cuts will be unnecessarily delayed.
Fortunately for Iowans, Reynolds does not want to take that risk. '[W]e need to continue the conversation about cutting taxes, and we can start by getting rid of the unnecessary triggers that were put in place in 2018,” said Gov. Reynolds in her Condition of the State address. 'Let's make Iowa more competitive and guarantee our taxpayers that they can keep more of their hard-earned money.”
To guarantee that much-needed tax relief is delivered on time, Reynolds introduced legislation this year that would remove the triggers from the 2018 law. That alone would be a victory for Iowa taxpayers, but lawmakers should not stop there. Even with a top rate of 6.5 percent, Iowa would still have a very long way to go if it wants to compete with the likes of Florida, Tennessee and Texas. In addition to the nine states that do not tax wage income, there still would be 23 more states with top rates lower than Iowa's reduced new rate.
As people and jobs continue to move into states without income taxes, more and more states - including Arkansas, Mississippi and West Virginia - are looking to put their income taxes on the path to zero. Unless Iowa wants to become even less attractive relative to competing states, it needs to begin this journey now.
Reducing and phasing out the state income tax would be a huge win for Iowans. Such pro-growth tax relief would make Iowa more attractive to businesses that are looking to expand, investors who are looking for growing economies with hospitable tax climates, and families who are looking for greater prosperity. This would ultimately bring new jobs and opportunities to current Iowa residents.
It also would allow small businesses, which file their taxes under the individual code, to invest more resources in their employees and business operations. And most importantly, it would allow the hardworking people of Iowa to keep more of their paychecks.
Chris Ingstad is president of Iowans for Tax Relief and Grover Norquist is president of Americans for Tax Reform.