Co-written with Paul Bachman
Economic growth is a top priority for Iowa. As a nation, we are seeing economic growth because of the impact of the Tax Cuts and Jobs Act and President Donald Trump’s historic efforts of unshackling the economy from excessive regulations. As a result of these policies, the economy is growing over 4 percent and the National Federation of Independent Business (NFIB) reports record small business optimism. Iowa is also experiencing economic growth and is benefiting from pro-growth economic policies. The tax reform law passed by the legislature will only help to continue the momentum of economic growth in Iowa.
According to the Tax Foundation, Iowa ranks as the 11th worst state for its overall business climate. Over the last decade, states have turned to reform their tax systems to make themselves more attractive to business. With federal tax reform and other states working to improve their tax competitiveness, Iowa needed to act in order to compete with other states for jobs and investment. Tax policies matter significantly in determining a state’s ability to provide an environment conducive to economic growth.
A recent study by the Beacon Hill Institute for Public Policy Research has analyzed the growth impact of Iowa’s tax reform using the Iowa STAMP (State Tax Analysis Modeling Program). Iowa STAMP (IA-STAMP) is a state-of-the-art computer methodology that permits its users to evaluate the economic impact of various tax changes. IA-STAMP allows us to provide estimates of the effects of changes in state tax law on job creation, investment, real disposable income, and state tax revenues.
The tax reform law will provide a boost to the state economy in 2019. The measure will generate an additional 4,840 private sector jobs. Iowa households will see their incomes increase by $351 million as measured by inflation-adjusted, or real disposable income.
Initially, the changes to the corporate income tax increase the effective tax rate and will provide a disincentive for firms to invest. However, if all growth targets are met and all the subsequent tax changes are implemented in the first year of eligibility, full implementation of the tax reform law will provide an additional economic boost to the Iowa economy in 2024.
The law will create a total of 8,270 private sector jobs. Iowa households will enjoy a real disposable income increase of $673 million. Full implementation of corporate income tax rate cut will provide an increase to the return on investment and increase investment by $100 million.
Iowa’s tax reform will result in further economic growth, but more work is needed. Tax rates matter, and Iowa will still have high rates even when the tax reform is fully implemented. For example, in 2021 Iowa’s corporate tax rate of 9.8 percent will still be one of the highest in the nation and even if revenues meet the 4 percent trigger our top income tax rate would fall to 6.5 percent. It is imperative that the legislature work to continue lowering Iowa’s tax rates to create opportunities, economic growth, and make our state more competitive.
Paul Bachman is Director of Research at the Beacon Hill Institute, Medway, Massachusetts and John Hendrickson is a Policy Analyst with Iowans for Tax Relief, West Des Moines, Iowa