Tax reform will be one of the headline-grabbing issues that the Iowa legislature will consider when the 2018 session begins in January. Iowa’s tax code is outdated, complex, and it is not taxpayer friendly for the individual or business. Part of the complexity of Iowa’s tax code is the numerous tax credits and incentives that are offered to individuals and businesses in our state. Iowa’s tax credits are utilized for a variety of purposes from helping households with lower incomes to offering incentives for job creation. This spring The Des Moines Register reported that the “value of tax credits in Iowa has ballooned by 180 percent since 2005, from $153 million to an expected $427 million in 2018.”
One concern with the hundreds of millions of dollars of tax credits is that the Iowa Department of Revenue cannot definitively conclude if each of the credits is helping Iowa compete. Nor can the state determine if each credit is having the impact it is intended to. A review of all existing tax credits, including the relevance, duration, intent, and effectiveness is needed to ensure that they are serving the taxpayers of Iowa well. Ineffective credits should be reigned-in and offset by lower rates for all.
Tax credits and incentives help alleviate the burdens of taxes that Iowans bear under the highest corporate tax rate in the country and the second highest personal tax rate in the Midwest. Tax credits and incentives are also used as tools for economic development. As Debi Durham, who works to recruit new employers to Iowa in her role as Director of Iowa Economic Development Authority, said of our state’s high tax rates during the Iowa Taxpayers Association Annual Tax Symposium, “We need to not be an outlier.”
Iowa’s Department of Revenue reports on tax credits to the legislature’s Tax Expenditure Committee. This legislative committee is tasked with reviewing and evaluating Iowa’s various tax credit programs based upon the Department of Revenue reports. Although these credits are reviewed on a rotating five-year basis, there is substantial concern that more accountability and evaluation is needed to make sure that these credits and incentives are actually worth the cost. In the non-partisan Tax Foundation’s study Iowa Tax Reform Options: Building a Tax System for the 21st Century, they observed that the Department of Revenue “in its rolling studies of tax credit efficacy, casts doubt on the ability of many of Iowa’s tax incentives to yield the intended economic results.”
Pew Charitable Trusts, a non-partisan research organization, evaluated Iowa’s tax credit system and found that Iowa is “leading” other states in terms of evaluating tax credits, but there is room for improvement. Pew’s evaluation found “that for all their analytical rigor, [Iowa Department of] Revenue’s studies do not typically include clear conclusions on how to improve incentive programs; like other state tax-collecting agencies around the country, Revenue’s staff does not typically make policy recommendations.”
Beneficiaries of Iowa’s tax credits fiercely defend them as necessary, especially regarding business growth and economic development. Nevertheless, Iowa’s tight budget situation caused by lower than expected revenues has resulted in a bi-partisan call for a review of all of Iowa’s credits and incentives. Regardless of state revenues, Iowa’s taxpayers always deserve clarity on a $400 million issue.
This reliance on tax credits reflects the need to reform the Iowa tax code. Rather than depending solely on tax credits and incentives for economic growth, business expansion, and balancing household budgets, the Iowa tax code should be reformed to allow for across-the-board lower rates that would provide actual tax relief for all. The Tax Foundation noted that “a well-structured tax code with a broad base and lower rates would be far superior in inducing job creation and economic growth.”
Indiana, Michigan, and Wisconsin are some of Iowa’s major competitors in the Midwest and all three states have made significant progress in reforming their respective tax code by lowering taxes and as a result they are seeing economic growth. Every state, including Iowa, will likely continue to utilize tax credits and incentives, but taxpayers deserve greater accountability. If the legislature works to make the tax code friendlier to individuals and businesses by lowering rates, it will result in not only better incentives for economic growth, but it will be protecting the interests of the taxpayer.
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