The More You Tax Something, The Less You Will Get

Iowa’s economy is doing well. The state unemployment rate of 2.4 percent is the lowest in the nation. Although there is much to be optimistic about regarding the economy problems remain that could threaten future growth. A pressing challenge for Iowa is slow population growth. In fact, a bipartisan consensus exists that the need for labor is a top priority for both business and policymakers in Iowa. Policymakers do have some tools that they can use to make the state more competitive and attractive. Perhaps the best way to make Iowa a more attractive state is to lower tax rates.  Iowa’s tax rates are some of the highest in the nation. The Tax Foundation ranks Iowa (45 out of 50) in the top ten worst states for business climate. 

The tax climate of a state is a significant factor in whether a state will gain or lose population. Tax rates also matter for a healthy and competitive workforce. The United States Census data proves this point by the migration trends of people and businesses moving to states that have lower tax and regulatory climates. A recent analysis of population trends by the Cato Institute found that “of the 25 highest-tax states, 24 of them had net outmigration in 2016. Of the 25 lowest-tax states, 17 had net in-migration.” States such as Texas, Florida, North Carolina are seeing population gains. Even rural states such as South Dakota and New Hampshire are growing. 

Chris Edwards, Director of Tax Policy Studies at the Cato Institute, recently wrote that “data from both the Census Bureau and Internal Revenue Service have long shown that Americans are, on net, moving from higher-tax states such as New York to lower-tax states such as Florida.” “Tax the rich. Tax the rich. Tax the rich. We did that. God forbid the rich leave,” stated a frustrated New York Governor Andrew Cuomo in response to wealthier residents fleeing the state and lower than expected income tax revenue. The same can be said for other high tax states such as Illinois and Connecticut. Many of these state policymakers have forgotten the economic rule that the more you tax something, the less you will get.  

“The citizens of New York should be asking: Why they are required to pay such high state and local income tax rates while the citizens of Florida get by perfectly well without any state income tax; Why they have three times more per capita debt than Floridians, and infrastructure that is in far worse shape,” wrote economist Richard W. Rahn in The Washington Times. 

Iowa’s population grew by 0.4 percent in 2018. The slow population growth combined with almost full employment is creating a difficult situation for Iowa businesses in their search for workers. The solution to this problem is not to grow population through subsidies or tax incentives, but rather through lowering the state tax burden. 

Tax rates do matter. A recent study on taxation and innovation found that individual and corporate income taxes do have an impact on innovation. Tax rates can impact the “amount of innovation, the quality of innovation, and location of inventive activity” within a state. A state with low tax rates and low level of regulations allows for greater economic freedom, entrepreneurship, and opportunities. 

During the last legislative session, the legislature began the process of lowering Iowa’s high tax rates, but we will still need further rate reduction. Lowering tax rates and unshackling Iowa’s economy from excessive regulations will allow the state to become more competitive. 

Iowa has many attractive qualities in making it a great place to live, but if policymakers want to grow our population the best way to encourage growth is by lowering tax rates so our state is more competitive.