Analysis of the Iowa Tax Proposals from the Iowa Common Good

Many of you may recall that the former think tank of iowpolicyproject.org updated in commongoodiowa.org. As before, they are the gold standard in Iowa for budget and tax policy analysis. With the Legislature in full swing and our news media running 3-4 sentence blurbs about what’s going on in the Legislature, now seems like the time to consult the experts for in-depth analysis:

Big new tax cuts cost too much. The current budget surplus, which drives arguments for further tax cuts, was largely due to a one-time increase in federal pandemic assistance. Looking ahead to next year, fiscal year 2023, the State Revenue Estimating Conference estimates a net revenue increase of only 1.7%, which is insufficient even to meet current obligations.

More income tax cuts would likely make Iowa’s already unfair tax system even more unfair. Income taxes are the only taxes in Iowa based on ability to pay, so general income tax reductions disproportionately benefit Iowans with the highest incomes. Iowa already has a state and local tax system that takes a much larger share of income from lower-income Iowans than from wealthier ones (chart, left). Unless specifically targeted at low-income households, the proposed income tax cuts would worsen inequality.

this table with article on commongoodiowa.org

Deep new tax cuts would decimate essential services for Iowans. Personal income tax generates half of Iowa’s general fund, which pays for services supporting Iowa families, workers and their communities (graph, right). Making further significant income tax cuts, let alone eliminating it, would force draconian cuts or even the elimination of entire service areas. If lawmakers wanted to maintain revenue, they would have to approve a compensatory tax increase — and sales tax is the only option. State and local sales taxes, which currently stand at 7% in most of Iowa, would increase to 15% to fully replace income tax.2

Iowa is already underfunding essential services, including education, childcare, workplace protection and environmental quality. For example, growth in spending per student has been contained in Iowa over the past decade. It has increased on average by only 1.9% from 2012 to 2022, compared to an average of 3.1% from 2002 to 2011.

Tax cuts are not a recipe for growth. Corporate tax cuts have very little to do with economic growth and impose service cuts that can hurt the economy. In Kansas, drastic tax cuts were followed by slower, not faster, economic growth. Iowa’s taxes, in any case, are not out of step with those of other states.

More on the link

A big thank you to commongoodiowa.org for their spot on the analysis – and a thanks to them for explaining this in a very understandable way.