As a result of the federal Tax Cuts and Jobs Act and elimination of numerous job killing regulations, the national economy is growing and states have benefited tremendously from this growth. In 2018 the legislature passed the first major comprehensive tax reform legislation in a decade. Governor Kim Reynolds, in her Condition of the State Address, called for further tax relief. Governor Reynolds and many legislators understand that Iowa needs a pro-growth tax structure that allows Iowans to keep more of their hard-earned income and makes the state more competitive. Iowa’s economy is doing well and the budget is stable with an estimated $470 million budget surplus, which makes this a golden opportunity for policymakers to make Iowa even more economically competitive through bold tax reform..
The 2018 tax reform law lowered the top individual income tax rate to 8.53 percent in 2019 and the top corporate tax rate is scheduled to be lowered from 12 percent (the nation’s highest) to 9.8 percent by 2021. In 2023, the top personal income tax rate is scheduled to fall to 6.5 percent if a revenue triggers are met. Governor Reynolds has proposed the Invest in Iowa Act, which calls for further personal income tax relief, among other tax reforms. Part of the Governor’s plan calls for a 10 percent income tax cut in 2021 and lowering the top rate to 5.5 percent in 2023.
The Invest in Iowa Act also calls for a one cent sales tax increase, which 3/8ths of the proposed increase would be dedicated to the Natural Resources and Outdoor Recreation trust fund, which Iowa voters approved in 2010. Both Governor Reynolds and free market legislative leaders are arguing that any sales tax increase must be offset by actual tax rate reductions. “I have no interest in raising taxes, so any increase from a sales tax must be more than offset by additional tax cuts, stated Governor Reynolds.” The one cent sales tax increase is projected to raise an additional $540 million in revenue.
Taxes and spending are opposite sides of the same fiscal coin. Iowa’s budget surplus and the potential of a sales tax increase has numerous special interests advocating for either new or additional spending. North Carolina, which is considered the gold standard, for recent state tax reform efforts demonstrates that spending discipline is essential for lowering tax rates. To ensure that any additional revenue gained from a sales tax increase goes directly to offset income tax rates, prioritizing spending to core functions of government will be key.
Tax policy has the power to make or break a state’s economic competitiveness. Iowa is in economic competition with 49 other “laboratories of democracy.” The Tax Foundation’s State Business Tax Climate index ranks Iowa in the 10 worst states for business tax climates (42 out of 50). The American Legislative Exchange Council’s Rich States, Poor States, ALEC-Laffer State Economic Competitiveness Index ranks Iowa 29 out of 50. Both indices tell a similar story. Recent tax reforms are moving the state in the right direction, but additional smart tax relief can help Iowa reach its full economic potential.
The strong national economy provides a golden opportunity for Iowa policymakers to continue to advance bold, pro-growth tax policy. Lower tax rates will make Iowa more competitive, create an atmosphere beneficial to entrepreneurs, allow taxpayers to keep more of their hard-earned income, and expand economic freedom.