The snake oil salesmen who peddle tax cuts for corporations and the rich as the key to prosperity are at it again. In Sunday’s Gazette, John Hendrickson and Jonathan Williams repeated their annual mantra about Iowa tax policy. Let’s set the record straight.
Iowa is an average-tax state. Even before expensive tax cuts passed in 2018 to benefit the wealthiest, Iowans paid about 2.5 percent of their income toward income taxes, 2.34 percent for sales taxes, which earns us a rank of 20th and 21st, respectively, among the 50 states.
Business taxes in Iowa are also about average, according to recent studies by two accounting firms: one placed Iowa 20th, the other 36th. Where Hendrickson and Williams cherry-pick the tax feature that makes Iowa look the worst, these accounting firms measure the overall effect of the state and local tax system on a firm’s bottom line.
Iowa’s tax system is upside down. It takes a larger share of the income of those at the bottom than of those at the top. If it weren’t for the state income tax, the overall system would be even more skewed in favor of the rich.
Yet for the past 30 years, it is the income tax that has been the chief target for cuts, making our tax system more regressive and shifting more of the responsibility for financing education, health care and other services onto those who can least afford it.
In the process, our tax system not only fails to compensate for the historical disadvantages that have left Iowa’s Black population with a disproportionate incidence of poverty, it reinforces those inequities.
The tax-cut advocates counter the charge that they are just interested in redistributing income to the rich by exhorting us to have faith in trickle-down economics. But additional income tax cuts are more likely to hurt the Iowa economy than to help it. The tax cutting experiment in Kansas was a failure, harming the state economy rather than helping it.
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An economy’s success should be measured by how well it improves the well-being of residents. A common overall summary measure is real per capita income — the total income generated in the state, corrected for inflation and divided by the population.
If we look at how Iowa and the surrounding states have performed over the past five years, we find that Iowa has been right in the middle, real per capita income growing by 10.3 percent. The top two states are Illinois and Wisconsin, both with growth at close to 13 percent or higher. The lowest performing states are Kansas, South Dakota and Nebraska, all with growth below 9 percent.
What if we compare the states’ economic performance with a measure of state and local tax levels? It turns out there no clear relation between the two. Nor would we expect to find one; economic growth in the short run depends mostly on the state’s industrial mix — which industries are most important, and how have those industries fared on the national level.
But one thing is clear: Higher levels of taxes did not impede income growth over this period, and low taxes could not guarantee prosperity. Illinois had the second highest tax level and the highest growth rate. South Dakota had the lowest level of taxes and the second lowest growth in income.
In the long run, the single best predictor of a state’s prosperity is the level of education of its citizens. Tax cuts have consequences; state budget cuts will follow, and education accounts for about half of the budget. The single-minded pursuit of tax cuts will inevitably reduce the state’s investments in the education of our children and our workforce, to the long-run detriment of our economy and our prosperity.
Peter Fisher is research director for Common Good Iowa, a nonpartisan public policy research and advocacy organization with offices in Des Moines and Iowa City. email@example.com