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December 2013 Brief: Volume 20, Number 36

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Iowa Needs Income-Tax Reform!

 

by Amy K. Frantz

 

 

After years of discussions and debates, the Iowa Legislature finally adopted a property tax reform bill that Governor Terry Branstad signed into law earlier this year. Perhaps now our elected officials can turn their attention toward reforming the state’s income-tax system.

 

A study by economists Dr. Arthur Laffer and Stephen Moore demonstrates that lower tax rates are important to economic growth. In Taxes Really Do Matter: Look at the States, Laffer and Moore have reviewed economic data from 1960 to the present and have found “that in any 10-year period you look at, the no-income-tax states consistently outperform the equivalent number of the highest-income-tax states.”1 The nine states without an income tax have experienced greater growth rates in population, gross state product, non-farm payroll employment, and state and local tax revenue than the nine states with the highest personal income-tax rates.

 

Some states are adopting tax reform and lowering tax rates, if not completely moving to an income-tax free system. The most recent state to adopt significant tax reform is North Carolina, where the new tax law adopted in July will lower the personal income tax to a single-rate flat tax, “eliminate the personal income exemption, but increase the standard deduction,” and cap the mortgage interest and property tax deductions, among other provisions.2 The tax reform also reduces the corporate-income-tax rate.

 

Kansas adopted tax-reduction legislation in 2012, and again passed a package this year to make improvements on last year’s tax bill. The 2012 law lowered income-tax rates, took the system from three tax brackets to two, and increased the standard deduction. The 2013 law lowered income-tax rates even further, to 2.3 percent and 3.9 percent. Additionally, the Rural Opportunity Zones created in 2012 were expanded from the original 50 counties to cover 73 counties in Kansas.3

 

In May of this year Indiana Governor Mike Pence (R) signed a two-year budget bill into law that reduces the individual income-tax rate from the current 3.4 percent to 3.3 percent in 2015 and 3.23 percent in 2017.4 The budget bill also repealed the state’s inheritance tax retroactive to January 1, 2013. Additionally, the budget bill let stand a reduction in the state’s corporate-income tax that was adopted in 2011.

 

Just a few years ago, Rhode Island had one of the highest top personal income-tax rates in the country, at 9.9 percent. In 2006 Rhode Island taxpayers were given the choice between the ongoing tax system with rates and brackets and deductions or the flat tax without the exemptions and deductions―whichever system would give them the lowest tax bill. In 2010, the dual tax system was repealed, but the top income-tax rate was lowered from 9.9 percent to 5.99 percent, and a number of other reforms were made to the tax system.5

 

States, including Iowa, should consider reforms to lower the income-tax rates and decrease the complexity by reducing the number of tax brackets, as was done in North Carolina, Kansas, and Rhode Island. However, here in Iowa, any income-tax reforms must take care to maintain federal deductibility. Ultimately, one of the most important reasons to maintain the federal income-tax deduction on state tax returns is fairness. If the deduction were eliminated, Iowans would be forced to pay tax on money that has already been taken by the federal government. It is simply not fair to ask Iowans to pay a tax on a tax.

 

Iowa elected officials should follow the examples of North Carolina, Kansas, Indiana, Rhode Island, and other states that have adopted income-tax reforms.

 

Public Interest Institute’s POLICY STUDY, Iowa Needs Income-Tax Reform!, can be viewed at http://www.LimitedGovernment.org/ps-13-9.html.


Endnotes:

[1] Arthur B. Laffer, Ph.D. & Stephen Moore, Taxes Really Do Matter: Look at the States, The Laffer Center for Supply-Side Economics, September 2012, p. 3, <http://www.laffercenter.com/2012/09/taxes-matter-states/> accessed October 26, 2012.
[2] Barry Smith, “N.C. Tax Reform Plan ‘Blew Other States Away,’ Analyst Says,” Carolina Journal Online, July 17, 2013, <http://www.carolinajournal.com/exclusives/display_exclusive.html?id=10340> accessed September 19, 2013.
[3] “Gov. Brownback signs Pro-Growth Tax Reform,” Media Release, June 13, 2013, <http://governor.ks.gov/media-room/media-releases/2013/06/13/gov.-brownback-signs-pro-growth-tax-reform> accessed October 17, 2013.
[4] Katrina Trinko, “Governor Pence’s Indiana-Tax Win,” National Review Online, May 7, 2013, <http://www.nationalreview.com/article/347500/governor-pence%E2%80%99s-indiana-tax-win#!> accessed November 7, 2013.
[5] Joseph Henchman, “Trend #2: Income Tax Reform,” Tax Foundation, Fiscal Fact, No. 312, June 14, 2012, <http://taxfoundation.org/article/trend-2-income-tax-reform#_edn2> accessed July 17, 2013.

 

Amy K. Frantz is Research Vice-President with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.

 

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