116 3rd St SE
Cedar Rapids, Iowa 52401
Our Statehouse Santas are talking about eliminating the state’s personal and corporate income taxes. Ho, ho, ho, how will that go?
“There’s no reason we should settle for mediocrity,” Sen. Dan Dawson, R-Council Bluffs, and chairman of the Ways and Means Committee, told the Iowa Taxpayers association last week. “Simplicity, transparency, competitiveness — that’s our defining marker that we’re putting ahead of us. That’s what we want to do when we reform our tax system, so the ultimate goal is to eliminate the income tax.”
As tall orders go, this is like asking Santa for a Lexus with a big, red bow. Personal and corporate income taxes are expected to bring in more than $4.5 billion in Fiscal Year 2022, or more than half of the revenue bankrolling our $8 billion general fund budget, according to the nonpartisan Legislative Services Agency. Sales and use taxes are estimated at $2.7 billion, or one third of general fund revenue.
So if the idea is to replace income taxes with sales taxes, that’s going to require a big sales tax hike. That’s one of those small details Republicans have yet to discuss.
The state did end Fiscal Year 2021 in June with a $1 billion surplus, fueled, in part, by federal pandemic aid. There’s also $1 billion in a taxpayer relief fund.
But these resources are finite. Federal aid and surpluses will go away. But tax cuts, as we’ve learned, last forever. We’ve cut billions of dollars in taxes and yet we’re still not “competitive.”
GOP lawmakers often have argued South Dakota is an example we should emulate. South Dakota has no state corporate or personal income tax. It’s considered a tax paradise by Iowa Republicans.
But would South Dakota’s model really be a good fit?
South Dakota’s 2021 general fund budget was $1.7 billion, with 60 percent of revenues coming from sales taxes. South Dakota’s sales tax is more burdensome. Groceries, for example, are subject to sales tax, unlike in Iowa.
South Dakota’s overall tax burden per capita is among the nation’s lowest, but it’s also among the most regressive. According to the Institute of Taxation and Economic Policy, the poorest 20 percent of South Dakotans pay more than 11 percent of their income in taxes. Compare that to the top 1 percent, which pays less than 2 percent of its income.
To build its economy, South Dakota gutted financial regulations, such as limiting interest rates, to attract credit card companies and financial services firms. So now lax South Dakota rules apply to tens of millions of credit card customers across the nation. It’s also become a tax haven, sort of like a flat, frozen Cayman Islands.
South Dakota has less than 900,000 residents. Its K-12 public school districts educate 140,000 students, compared to Iowa’s 470,000. Its state universities have an enrollment of 33,000 students, compared to 70,000 in Iowa’s public universities.
Can Iowa fund education, let alone other priorities, by shedding $4.5 billion in revenue?
Although this may be the GOP’s “ultimate goal,” it’s unlikely to happen quickly. There will be more tax cuts next year. But eliminating income taxes is affordable only as a talking point.
Unless, like Santa, Republicans pick magic over math.
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