How big is this year’s tax reform package? It's a game-changer.
Don’t just take our word for it: Iowa will leapfrog 31 states in the Tax Foundation's Business Tax Climate rankings when the tax cuts are fully implemented. This jump will propel Iowa from one of the worst tax systems to one of the best.
"When Iowa Gov. Kim Reynolds delivered the Republican response to the State of the Union Address on March 1, she touted a state tax reform package on which the ink was barely dry: 'Today, I signed legislation that eliminates Iowa's tax on retirement income and sets our tax rate at 3.9 percent. That's less than half of what it was just four years ago,' " wrote Tax Foundation's Jared Walczak.
Walczak continued, "The ongoing transformation of Iowa's tax code is certainly remarkable. In 2018, Iowa had a nine-bracket individual income tax with a top marginal rate of 8.98 percent and a graduated-rate corporate income tax with a top rate of 12 percent, both with alternative minimum taxes; an inheritance tax; and a well-intentioned but distortive policy of federal deductibility.
Once current reforms have phased in, Iowa will be able to boast a 3.9 percent single-rate individual income tax, a 5.5 percent flat corporate income tax, and no inheritance tax or alternative minimum taxes. Improvements have been made to the state sales tax base, and several tax credits have been reformed. Additionally—a more mixed bag economically—the state will exempt retirement income and certain farm rental income from taxation."
While there are many ways to show how much is collected in taxes by state governments, the Index shows how well states structure their tax systems.
Iowa's improvement of 31 places ties the record for the largest improvement in Index history.
However, the chart also reveals that there is still work to be done. Iowans don't need to be told how broken our property tax system is. We are currently just outside the bottom ten at 39th.
These rankings don't measure how much money will be kept in your pocket (it's significant), but they do clearly show that Iowa will become more competitive.
Governor Reynolds explained this very well at our recent ITR Tax Day Lunch:
"There is nothing more vital than seizing the opportunity to return taxpayer dollars back to Iowans. If we pass the reforms that we are talking about, our income tax rate will go from one of the highest in the county to fifth-lowest, and maybe even better, making Iowa one of the most tax-competitive states in the nation. And I believe, a destination for business."
Have you heard of Topgolf? It’s essentially a driving range on steroids. You hit a golf ball from a climate-controlled bay that is serviced by a bar and restaurant. It’s great fun, but the Des Moines metro doesn’t yet have one or a facility like it. But it soon will have two.
This sounds great—until you hear what is behind the second one and that some of your tax dollars will pay for it.
One will be developed without government funding, and one with an incentive package that includes $14 million in tax increment financing (TIF) rebates to build their facility across the street from an Audi dealership.
It’s not just the local taxpayers who are on the hook here. All Iowa taxpayers foot the bill because the state general fund has to “backfill” tax revenue that local school districts miss out on because of TIF.
Over time, TIF has become much less about developing blighted communities and more about affluent communities competing with each other so they can boast about lavish shopping malls, new hotels, bigger office buildings, and (soon) golf entertainment centers.
The fact that a similar facility is being planned within the same metropolitan areas suggests that this type of venue doesn’t need millions of dollars of TIF subsidy to come to Des Moines.
What Should be Done?
Iowa’s legislature has an opportunity to add commonsense guardrails around TIF. The best place to start would be requiring a stringent “but for” test for TIF projects, forcing a local government to prove a proposed development truly wouldn’t occur without the TIF subsidy. This requirement would need to have teeth behind it and not simply allow local governments to merely claim that TIF was necessary.
Reforms to Iowa’s TIF system would go a long way to leveling the playing field for private businesses while also protecting the taxpayer’s best interests.
Income Tax Reform WIN: HF 2317 Passed Senate 32-16 February 24
Passed House 61-34 February 24
Signed by the governor on March 1
Property Tax Reform HSB 726 Passed House Ways and Means Subcommittee March 7
Certificate of Need Reform HF 2248 Passed Senate Human Resources Committee March 15
Occupational Licensing Reform SF 487 Passed House State Government Committee March 16
Passed Senate 30-17 March 17, 2021
Unemployment Insurance Reform SF 2275 Passed Senate Commerce Committee February 15 HF 2279 Passed House Labor Committee February 4
Public Assistance Program Integrity HF 2438 Passed House Human Resources Committee February 15;
Passed House Appropriations Subcommittee March 9
Home-Based Business Protections HF 2431 Passed House floor 66-25 March 10
Passed Senate Commerce Committee March 16
TIF Reform HF 2082 Passed House Education Committee January 20;
Passed House Ways and Means Subcommittee February 2
School Choice SF 2369 Passed Senate Appropriations Committee March 1 SF 2349 Passed Senate Education Committee February 17;
Passed Senate Appropriations Committee February 21 HSB 672 Passed House Appropriations Subcommittee March 8 HF 2223 Assigned to House Education Committee
Supermajority Requirement to Raise Income and Sales Tax
Constitutional Amendment SSB 3064 Assigned to Senate Ways and Means Subcommittee
