The Tax Cuts and Jobs Act brought the corporate income tax rate down from 35 percent to 21 percent, relieving the U.S. of the long-held distinction as home to one of the world’s highest corporate income tax rates. Now, CEOs and investors are bullish on the U.S. relative to other potential destinations for their capital.
However, once the decision is made to bring new capital to the U.S., either by relocating or expanding operations stateside, business owners and investors then must decide among the 50 states.
Last year, Governor Kim Reynolds and legislators in Des Moines made significant strides with SF 2417, which returned the excess revenue Iowa would have otherwise collected as an unintended consequence of conforming to the new federal tax code back to taxpayers in the form of pro-growth tax reform.
This new tax law in Iowa will reduce the corporate tax rate to 9.8 percent from 12.0 percent by 2021, and the top individual income tax rate to 6.5 percent from 8.98 percent by 2023 if revenue triggers are met. While this was an excellent start, there are still plenty of opportunities to improve, as Iowa’s personal and corporate tax rates will still be among the highest in the country and its neighbors will continue to enjoy a competitive advantage. South Dakota, for example, has no state income tax. Zero.
In addition to continuing to lower individual and corporate income tax rates, lawmakers in Iowa should also do everything in their power to keep local tax bills in check, as high local taxes are also a deterrent to businesses and investment. One way to accomplish this is to implement local spending limits that require spending growth to be no more than population growth and inflation. While that reasonable growth limit would have equated to property tax growth of 56% since 2000, Iowans have instead seen the amount of property taxes collected grow by over 100% over that same time period.
Under the status quo in Iowa, the state legislature is limited to spending 99% of the revenue they collect each year. Even better, a 2019 constitutional amendment has been proposed to “limit the annual increase in [state] spending from year to year to the lesser of 99 percent of the estimated revenue for that fiscal year, or 4 percent above the prior year’s revenue.”
It is said that if enacted in 2017, this proposal could have saved taxpayers in Iowa nearly $500 million between 2012 and 2017. Imagine how much money could be saved if similar restrictions were enacted at the local level.
Unfortunately, many state legislators are afraid to tackle this important issues because there exists this myth that “local control” is a Constitutional or conservative principle. Nonsense. States created both the federal government, granting them only so many powers, and local governments as well. In many cases, state laws are, and by extension, state control is, the most appropriate way to protect the rights of individuals.
The argument for local control is often misunderstood to mean that local government should never be subjected to oversight or limited by state government. When local government spending grows faster than it should, it leads to higher taxes and more debt—and they should not be immune from spending limits.
As such, in addition to providing additional tax relief at the state level this year, lawmakers should also consider reining in local government spending. Iowans believe that changes should be made. In a scientific poll commissioned by Iowans for Tax Relief just last month, over two-thirds of the 800 Iowans polled agreed that the legislature should review the issue of property taxes during the 2019 session.
Local spending limits would significantly reduce the “need” for local tax increases, and thus help make Iowa a more attractive place to live, invest, and do businesses. And more importantly, allow the hardworking people of Iowa to keep more of their hard-earned money.
