During the last legislative session, the legislature passed a tax reform measure that begins the process of lowering rates, improving coupling with the federal tax code, and modernizes the state sales and use tax. This was the first major tax legislation passed by the legislature in 20 years. This tax reform will not only provide relief for taxpayers but make Iowa more economically competitive. During the last legislative session, the legislature began the process of lowering Iowa’s high tax rates, but the work is far from complete.
The tax reform measure calls for numerous changes in Iowa’s tax code. This includes the modernization of the sales and use tax to include online sales and services, which Iowa is estimated to lose over $100 million in revenue because of uncollected taxes. The measure also reforms Section 179, expands 529 education savings plans, permits a 25 percent deduction of federal business income (QBI), among other reforms. Regarding Iowa’s numerous and complex tax credits the legislation calls for an extensive review.
Iowa’s individual income tax rate will see some minor rate changes in 2019, but more significant rate changes will not occur until 2023. For tax rates to be lowered in 2023 a 4 percent revenue trigger must be met. This means that Iowa will need to grow the state budget by 4 percent a year for your years in a row. This will be difficult to meet and since 1996 only 11 times have net receipts equaled or surpassed 4 percent growth.
If the revenue target is met the top rate would fall to 6.5 percent, which is far better than our current top rate of 8.98 percent. If the revenue target is not met, then rate reduction will not occur. This will not only be harmful to taxpayers, but also to economic growth. It also opens the possibility of a future legislature undermining tax reform by eliminating the revenue trigger and perhaps the tax cut.
Therefore, the legislature should consider revising and lowering the revenue trigger. A tax rate of 6.5 percent is better than 8.98 percent, but it is still high. It would be far better for Iowa to have a top income tax rate of 5 percent and future tax reform should work in this direction.
On the corporate side, Iowa suffers from one of the highest corporate tax rates in the nation at 12 percent. This deters businesses and is harmful to economic growth. In 2021, under the tax reform plan, the corporate tax rate will be lowered with a top rate of 9.8 percent, which is still high. Iowa’s corporate tax rate should be lowered to at least 5 percent. A high corporate tax rate deters economic growth.
Economic growth is important for Iowa’s economy and the recent tax reform will continue the positive trends in Iowa’s economy. Iowa’s economy is also being helped by the tax reductions that have occurred because of the Tax Cuts and Jobs Act and President Donald Trump’s efforts to unshackle the economy from excessive regulations.
It is vital that Iowa’s policymakers continue the work to lower tax rates, which also means revising and lowering the 4 percent revenue trigger. With lower tax rates Iowa can be more competitive, create an atmosphere that is beneficial to entrepreneurs, and at the same time allow taxpayers to keep more of their hard-earned income and expand economic liberty in Iowa.