STATE SPOTLIGHT: Iowa is Moving in the Right Direction on Taxes

By at 27 January, 2020, 11:35 am

by Raymond J. Keating-

Small Business Policy Index 2019: Iowa ranked 42nd among the 50 states.

SBE Council’s “Small Business Policy Index 2019” ranks the 50 states according to 62 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2019: Iowa ranked 46th among the 50 states.

SBE Council’s “Small Business Tax Index 2019” is a subset of the “Small Business Policy Index” report, which ranks the states according to a wide array of tax measures, including income, capital gains, property, death, unemployment, and various consumption-based taxes like state gas and diesel levies.

Iowa has long been a mess when it comes to taxes, but the state has taken some positive steps in recent years, and Governor Kim Reynolds is trying to continue that movement in a positive direction.

SBE Council’s “Small Business Policy Index 2019: Ranking the States on Policy Measures and Costs Impacting Entrepreneurship and Small Business Growth” ranks the 50 states according to 62 different policy measures, including assorted tax, regulatory and government spending measures. Iowa ranked 42nd, or ninth worst, among the 50 states. The state also came in even worse – at 46th or fifth most costly – on the “Small Business Tax Index 2019,” which is a subset of the larger Policy Index, whereby the states are ranked just on tax measures.

Among the key negatives, Iowa has very high corporate income and capital gains taxes; a death tax; and a high individual capital gains tax.

Recent Tax Reduction and Action

However, 2018 legislation slightly reduced the state’s personal income and individual capital gains tax rate (from 8.98 percent to 8.53 percent) in 2019. However, the actual rates are lower because Iowa has a unique deduction for federal income taxes from Iowa taxable income.

The next step under the 2018 law would come in 2023, if revenue triggers are met. It would see a consolidation of tax brackets and reduction in rates, with the top personal income and individual capital gains tax rate declining to 6.5 percent. Also, the quirky deduction for federal taxes would be eliminated.

On the corporate side, the 2018 law reduces the corporate income tax rate from 12 percent to 9.8 percent in 2021, while eliminating the federal taxes deduction.

In addition, Iowa’s individual and corporate alternative minimum taxes would be eliminated.

Reducing rates, repealing AMTs, and eliminating the Iowa deductibility for federal taxes are steps in the right direction, particularly in terms of simplification and providing Iowa lawmakers with full control over the state’s own tax rates. At the same time, in terms of effective tax rate changes when considering all factors, the reductions turn out to be positive, but relatively small moves.

The proposals Governor Reynolds has proposed would make additional progress. She has proposed reducing the individual income tax rate to 5.5 percent in 2023 (down from the current plan of 6.5 percent), and eliminating the revenue triggers requirement.

That would be a welcome change for Iowa taxpayers – including entrepreneurs and small businesses – and continue the work of trying to better align Iowa’s tax system with sound economics and policy. As we’ve noted time and again, investment, people and entrepreneurs are moving to policy-friendly states, and the tax policy trend in Iowa could help to retain and attract all three while making the state more competitive in general.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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