Iowa legislators say that tax reform will be a top priority in 2018 — welcome news for a state that is suffering from some of the lowest income growth in the nation and a budget gap of as much as $90 million.
Simplifying our tax code and lowering rates would provide families the relief they need, while the resulting economic growth would improve state finances over the long term. That’s common sense to most Iowans. But not everyone is interested in easing the tax burden, and in the coming months we are sure to hear about how tax cuts supposedly failed when enacted in Kansas five years ago.
It’s a misleading narrative that shouldn’t stop reformers in Iowa.
Iowa’s 12 percent corporate tax rate is the highest in the country, killing jobs and hamstringing businesses. The state’s individual income tax isn’t much better; the top rate of nearly 9 percent exceeds that of high-tax states like New York, New Jersey and Hawaii.
On top of featuring some of the highest tax rates in the country, Iowa’s tax laws are deeply unfair. Millions in tax credits are doled out each year to well-connected corporations at the expense of taxpayers and competing businesses. The magnitude of these tax credits has soared from about $153 million in 2005 to an estimated $427 million in 2018.
The carve-outs are becoming harder to defend as the state budget remains in the red and the economy sputters. The American Legislative Exchange Council (ALEC) ranks Iowa in the bottom half in terms of economic outlook in Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. An equitable tax code with lower rates would do far more to promote economic growth than the current system of high taxes and arbitrary loopholes.
To those who prefer bigger government and bigger tax bills, any talk of reform is anathema. These partisans are spreading myths about tax cuts in Kansas in an effort to spook reformers in Iowa and other states.
Starting in 2012, Kansas embarked on a series of tax cuts that helped spur growth in the private sector. Unfortunately, lawmakers there made the mistake of allowing government expenditures to grow even when revenues took a dip. The state has consequently been plagued by self-inflicted budget crises.
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Tax reform’s detractors naturally blame low taxes for wrecking the budget. They’ve tried to rewrite history by claiming Kansas lawmakers coupled tax reform with deep cuts to government spending.
But the truth is that total state spending increased almost every year after the tax cuts were enacted. You don’t have to take our word for it: Anyone can download the state expenditure reports and see for themselves.
All the talk about Kansas serves to distract attention from tax reform success stories like North Carolina. Since 2013, North Carolina lawmakers have lowered the personal income tax rate from 8 percent to 5.5 percent and slashed the corporate rate from 6.9 percent to 3 percent. As a result, the economy boomed and the unemployment rate was cut nearly in half. ALEC ranks North Carolina’s economic outlook as No. 3 in the nation, up from No. 22 just four years ago.
Unlike their counterparts in Kansas, lawmakers in North Carolina were careful to restrain spending growth at the same time they cut taxes. So while Kansas was scrambling to cover multimillion-dollar budget holes, the Tar Heel State enjoyed increasing revenue and budget surpluses, and its rainy day fund recently hit a record $1.8 billion.
There’s no reason Iowa can’t enjoy that same success if legislators take on the special interests, lower taxes, and keep a lid on state spending. They just might have to dispel some myths about Kansas along the way.
• Drew Klein is state director of Americans for Prosperity. Jonathan Williams is chief economist of the American Legislative Exchange Council and vice president of the Center for State Fiscal Reform.