The Iowa Legislature is working overtime to deliver tax reform before wrapping up the 2018 session. While negotiations continue on a number of issues — from the size of tax cuts to the deductibility of federal taxes — lawmakers should strive to be bold.
Iowa families and businesses are suffering from some of the highest taxes in the nation, including the fifth highest individual income tax rate and the highest corporate rate.
Unsurprisingly, the Tax Foundation ranks our overall business environment 40th in the country. When it comes to cutting taxes, legislators should be reaching for the cleaver, not the scalpel.
With a tax environment this bad, it’s no wonder leaders in both parties have relied heavily on tax credits and giveaways to stimulate economic growth, but the results still aren’t there. As lawmakers work to make our tax code more competitive, they also should strive to level the playing field by eliminating these tax credits, which have grown to a staggering $427 million.
The wave of economic growth and optimism that has followed in the aftermath of federal tax reform offers a taste of what tax reform at the state level could bring.
Since Congress slashed individual and corporate tax rates last December, hundreds of companies have announced employee bonuses, pay raises and even lower utility rates for consumers.
Here in Iowa, businesses big and small are sharing their tax reform savings with their workers and the community. Bank Midwest in Spirit Lake announced $500 bonuses for full-time employees. Anfinson Farm Store, a family establishment in Cushing, awarded $1,000 bonuses and raised wages by 5 percent for those working full time. And five Iowa utility companies will use their tax reform savings to lower customers’ utility bills by up to $147 million altogether.
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While the passage of tax reform on the national level offers great opportunity for Iowa, it also comes with risks. If legislators do not act soon, Iowans could see their state tax burden shoot up at the same time their federal burden falls.
That is because Iowa is one of the few states where residents can deduct their federal income taxes from their state income taxes. This feature of the tax code, called “federal deductibility,” means that when federal tax rates fall, Iowa taxpayers are able to deduct less from their state burden.
As a consequence, Iowans soon could find much of their federal tax reform savings gobbled up by increased state taxes.
The state should do away with the deduction and instead focus on lowering rates for taxpayers across the board. Doing so would make our state tax code simpler and more predictable from year to year.
We also should be creative about putting ourselves on a pathway to even greater tax relief in the future by the use of economic “triggers.”
Legislation under consideration in the Senate would automatically trigger additional tax cuts if Iowa experiences significant economic growth. This approach, which has been implemented in 11 states, helps to phase in tax cuts while keeping state revenues stable. It also helps control the growth of government, as it prevents future legislatures from squandering revenue surpluses on wasteful spending.
With state lawmakers hard at work delivering tax cuts, Iowa is poised to ride the wave of economic growth created by federal tax reform. Lawmakers must be bold: Without meaningful individual and business tax cuts and big changes to simplify our tax code and level the playing field, we will not ride this economic wave, but be swept under.
• Drew Klein is state director of Americans for Prosperity.