In the Governor’s Condition of the State address, she touted a program she is calling the Invest in Iowa Act. The Invest in Iowa Act is a very ambitious plan that reduces property and income taxes, funds mental health initiatives, gives childcare tax credits, repeals the water service tax, and provides new sales tax exemptions with a one-cent sales tax increase. That one-cent sales tax increase would trigger a constitutionally protected fund that was approved by Iowa voters in 2010 called the Natural Resources & Outdoor Recreation Trust Fund (IWILL) to be funded. This is a huge bill that will make sweeping changes in the state. Because of its scope and complexity, I will try to cover different parts of the act over several newsletters throughout the session.
As many of you know, one of the roles I take most seriously as a legislator is examining taxing and spending policies in the state. As a result, the first thing I must talk about concerning the Invest in Iowa Act is how it includes a more effective form of taxation. Therefore, let me discuss why I support the “shift” in taxes from property and income taxes to a more consumption-based tax like sales tax.
I am going to boil this down to some rules that I utilize when thinking about effective tax policy. I have pulled many of these principles from an annual publication called “Rich States, Poor States,” by Arthur B. Laffer, Stephen Moore, and Jonathan Williams. This report has a 45-year history of examining and evaluating the tax policies of different states.
I firmly believe that when you tax something more, you will see less revenue, and conversely, when you tax something less, you will see more revenue. Tax policy is about reward and punishment, and most people know that when something is taxed, the activity being taxed should be reduced. If that were not true, then why tax cigarettes as a policy to end smoking?
People work hard and produce goods and services in their job or in their business to earn money for present or future consumption, not so they can pay taxes. I think that is the last thing we are thinking of after putting in a hard day’s work.
Taxes create a wedge between the cost of working and the rewards from working. Income and other payroll taxes, as well as regulations, restrictions, and government requirements such as specific licensures separate the wages employers pay from the wages employees receive. Economically if a person earned $50,000 and is taxed 25% in federal income taxes and 5% in state income taxes, that person’s $50,000 wage is reduced to roughly $35,000 after taxes, and the lost $15,000 of income is the tax wedge. Remember, these are just two types of taxes, and there are several others like property, fuel, sales, excise, and an assortment of other fees that are paid to a government entity for the services that we utilize.
An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates will lead to less than a dollar-for-dollar reduction in tax revenues. To understand this, look to the first rule that I stated above: when you tax something more, you get less and when you tax something less, you get more. An economically efficient tax system has a sensible, broad tax base, and a low tax rate. High tax rates alter economic behavior.
If two states are equal in every way, except tax rates are lower in one state than the other, producers and manufacturers have a greater incentive to move from the higher-tax states to the lower tax states.
When looking at these principles, Iowa’s tax policy is not good. Our income tax is the 44th highest in the nation, property tax is 40th in the nation, and our corporate tax rate is in the upper 40th percentile. The Governor’s proposal effectively starts to reduce our income and property taxes while at the same time providing adequate funding to operate the government and the services on which Iowans rely. With our current oppressive tax base, we can’t expect a net domestic migration because people and companies simply will not move to states where taxes are higher. The bottom line is that I believe the policy that the Governor is looking toward is in line with effective tax policy and produces more benefits for the state than our current tax policy.
In future weeks, I will discuss parts of the Governor’s proposal on the Invest in Iowa Act and why I believe this is the right direction for our state to begin to bring us closer to where we need to be and more in line with the principles outlined above. I appreciate your feedback and thoughts as we move forward and am grateful for the opportunity to represent you and bring our Northwest Iowa values to Des Moines.