By John Hendrickson & Andrew J. Kidd
Iowa begrudgingly endures some of the nation’s highest personal and corporate income taxes. Those high taxes hamper economic growth and make our state less affordable for families and less competitive for businesses. Even after recent improvements, tax reform remains a high priority for the Hawkeye State.
So we applaud Governor Reynolds for proposing the Invest in Iowa Act and pursuing the sorts of meaningful, cost-effective solutions that we proposed in our economic study A Better Path Forward for Iowa Tax Reform. If adopted, the Governor’s proposals would provide much-needed taxpayer relief and spur economic growth across the state.
Invest in Iowa calls for a 10 percent income tax reduction in 2021, followed by more across-the-board income tax cuts that will lower the top income tax rate to 5.5 percent in 2023. To pay for the income tax cuts, the Act would increase the state sales tax by one cent—a sensible tax reform combination that yields stronger economic activity and growth.
Our research shows, for example, that even with a one-cent sales tax increase, reducing income taxes to a top rate of 5.59 percent would produce $250 million in additional economic activity and save the average taxpayer at least $132 annually. The additional growth would boost household consumption and business investment by $60 million and $160 million, respectively; and Des Moines would receive approximately $50 million more revenue during the first year. Governor Reynolds is wise to pursue this strategic, pro-growth combination.
Understandably, some may worry that raising the sales tax will disproportionately harm lower-income households, but the sales tax increase will be offset by income tax rate reductions. And to further reduce any lingering regressive effects, we would suggest broadening the sales tax base by removing tax exemptions from specialty services—such as accounting and marina boat-docking—more commonly bought by upper-income households.
Tax reform requires patience and prudence. As one North Carolina legislator once quipped, tax reform is an “evolution, not a revolution.” And part of that evolutionary process requires disciplined government spending. Reducing tax rates and spurring economic growth and activity must coincide with smart, priority-driven spending to avoid undermining the state’s economy with budget deficits and debt loads. North Carolina is considered the gold standard for state tax reform because it has proven that spending restraint along with tax rate reductions work to create a stronger economy.
The Invest in Iowa Act takes a solid stride on a better path forward, but it is not the final word on tax reform. Much work remains to be done. Even lower income tax rates and fewer special interest carve-outs and credits, for example, would help Iowa get off the “least tax-friendly states in the nation” list. But with a strong national economy and a healthy state budget, Governor Reynolds’ proposal offers a good start for making Iowa more competitive and more affordable.
John Hendrickson is the policy director for Iowa’s Tax Education Foundation and Andrew J. Kidd, Ph.D., is an economist with The Buckeye Institute’s Economic Research Institute based in Columbus, Ohio.