CEDAR RAPIDS — As head of the new statewide think tank Engage Iowa, Mayor Ron Corbett on Monday launched the group’s first policy paper, saying Iowa needs to stop the flow of wealth and “dirty water” from the state.
To do that, Corbett proposes:
• Creating a flat income tax that would simplify the state’s income tax code, getting rid of deductions and credits and flattening tax rates into one lower bracket for all but the lowest income earners, who don’t pay state income tax.
•Raising the state’s sales tax by 1 cent on the dollar to 7 cents, with a portion of the revenue going to help clean up Iowa’s waterways and another portion helping drive down Iowa’s income tax rate.
Corbett outlined the ideas in a luncheon speech to Downtown Rotary Club.
Corbett said the Engage Iowa policy paper, which is authored by Dermot Hayes, Pioneer chairman of agribusiness and professor of economics and finance at Iowa State University, found that Iowa has the fourth highest income tax rate among states of 8.98 percent.
The actual income tax rate is typically well below 8.98 percent after deductions and credits, but the perception is that Iowa is a high tax state because of that published tax rate, Corbett said.
A simplified state income tax system, with a one-page return and one income tax bracket for most, would allow Iowa to lower its tax rate to 3.27 percent. The rate could drop to 2.86 percent if a portion of the sales tax increase is used to replace the loss of revenue from income taxes, he said.
Corbett, whose Engage Iowa think tank is seen by some as a Republican toe-dip into the 2018 gubernatorial race, said people and wealth leave Iowa less because of cold winters and more because of a higher income tax rate than in other states.
According to Engage Iowa data, Iowa’s top published income tax rate of 8.98 percent is higher than four of five states to which Iowa loses the most wealth: Florida, Texas and South Dakota, which have no state income tax; Arizona, where the top rate is 4.54 percent; and Minnesota, where the top rate is 9.85 percent.
The flat-tax idea also envisions a possible “dynamic” component, in which a lower income tax rate would keep and attract more wealth in the state and so replace income tax revenue lost by lowering tax rates.
Corbett said businesses are deterred from investing in Iowa because of its high published income tax rate, causing a loss of $3.89 billion, or 3 percent a year, in total income in the state.
The flat-tax idea, popular among some Republican presidential candidates in this election cycle, has gotten backing in the Republican-led Iowa House of Representatives in recent years.
On the other hand
Peter Fisher, research director for the left-leaning Iowa Policy Project in Iowa City, on Monday said he applauded Engage Iowa for pointing out that Iowa’s current income tax system is less progressive than it might seem after deductions and credits are factored in. He said the Engage Iowa policy suggestions also might help eliminate “the perception problem” that Iowa has as a higher top income tax rate than it does in practice.
However, Fisher said the Engage Iowa flat tax seems like others of its kind: It lowers taxes for the wealthier and makes up for it with taxes on the lower end of the income earners.
Sales tax hike
On a second tax front, Corbett said raising the state’s 6 percent state sales tax to 7 percent would trigger the implementation of the constitutional amendment approved by Iowa voters in 2010, which requires that the first 3/8s of a 1-cent increase in the state sales tax go to the state’s natural resources trust fund.
Corbett said the 3/8s of 1 percent sales-tax increase will generate $80 million a year for the trust fund to clean up Iowa’s waterways. The remaining 5/8s of 1 percent can go to further lower Iowa’ s flat-tax income tax rate.
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Corbett also said the state should raise $40 million from private companies, to go with the natural resources trust fund, to clean up Iowa’s waterways.
Corbett, who also heads the Iowa Partnership for Clean Water, said Iowa needs to invest more or risk having the federal government or a court step in and order improvements, farm field by farm field.