Tax Relief

Hendrickson: Iowa Tax Break

Governor Kim Reynolds is growing Iowa’s economy by making tax laws more competitive and ensuring hardworking taxpayers keep more of their money. During her speech on the state of the state, the governor stated that not only do we “need to continue talking about tax cuts”, but we also called for the removal of “the unnecessary triggers introduced in 2018”.

As lawmakers worked to end this term, yesterday they passed a major bipartisan tax break package that is estimated to bring Iowans an estimated $ 1 billion in tax savings. This tax relief package is a victory for the taxpayer, but the tax reform is far from over.

Tax reform is never an easy process as expenses must be taken into account. Tax reforms can be revenue neutral, but the most growth-enhancing tax rate cut requires spending caps. This legislative period was particularly difficult for the tax reform.

Governor Reynolds and Senate Republicans made tax reform a priority, while the House Republicans were more cautious. Part of the reason the House Republicans took this cautious approach was concerns that the COVID-19 pandemic could continue to threaten Iowa’s economy and revenue. However, that fear has been displaced by the recovery in the economy.

Even en route to the pandemic, Iowa’s finance house was in good shape. At the start of the legislature, Iowa was in surplus and reserves were full. Iowa was prepared for the pandemic emergency thanks to the careful budgeting of Governor Reynolds and the Republican-led legislature. Both the governor and the legislature deserve credit for pursuing policies of fiscal conservatism.

At the beginning of the session, Senate Republicans pushed for tax breaks that would remove the 2018 revenue triggers and end the outdated inheritance tax. To reduce property taxes, Senate Republicans also proposed removing the county mental health property tax and phasing out backfilling. The backfill resulted from an earlier law to reform the property tax, which helped the city and district administrations to compensate for lost business tax revenues.

The comprehensive tax break met the tax break goals advocated by the governor and Senate Republicans. Some of the most important provisions include:

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  • Eliminates 2018 Revenue Triggers: The 2018 Tax Reform Act envisaged two tough revenue triggers for the 2023 income tax rate cut. On the one hand, the state revenue should exceed 8.3 billion US dollars, and on the other hand, the revenue had to be increased by at least four percent for the fiscal year. Eliminating both triggers removes an unnecessary barrier to rate reduction.
  • Eliminated Death Tax: Iowa is one of six states that still have inheritance tax. It will now expire over a period of five years.
  • District Mental Health Tax: This property tax will expire within two years and the general fund will take over mental health funding.
  • Backfill expiry: Property tax backfill will expire over a period of four to seven years depending on the city and county, giving you time to prepare for the backfill to be removed.
  • Paycheck Protection Program (PPP): Grants from the federal COVID-19 program are exempt from state taxation.
  • Bonus Amortization: The Iowa Tax Code will now be pegged to the Federal Tax Code for purchases of equipment and other investments.

The measure also includes numerous other provisions, including several tax credits. The expansion of Iowa tax credits is a growing problem as it makes tax laws more complex and complicates future tax reform. Policy makers need to monitor tax credits more closely and eliminate those that are ineffective.

Although Iowa revenue is growing and it would appear that both revenue triggers would have been met, eliminating the revenue triggers will add more security to taxpayers. In 2023 the maximum rate will fall to 6.5 percent and the individual income tax brackets will be reduced from nine to four categories with a low rate of 4.4 percent. In addition to the interest rate cut in 2023, the federal deductibility will be eliminated.

While this tax break bill is a victory for the taxpayer, Iowa cannot afford to be complacent. Iowa’s individual and corporate tax rates are still high and further property tax reform is needed. The American Legislative Exchange Council (ALEC) recently published the 14th annual Rich States, Poor States: The ALEC-Laffer State Economic Competitiveness Index, and Iowa’s ranking for economic prospects fell from 27 in 2020 to 33 in 2021. One reason for Iowa Decline in Year Ranking is that other states are working to cut their tax rates. Iowa can’t afford to be complacent as it competes with 49 other states for both jobs and people. The latest census data show that states with no income tax or states with low income tax rates are gaining in population.

Future tax reforms must depend on following a path of fiscal conservatism by keeping spending levels low. Iowa has shown that tax rates can be lowered while respecting government priorities. Other states like North Carolina, Indiana, and Utah have also proven that limited government policies work.

When preparing for future tax reform, policy makers should consider the following ideas:

  • Tax reform takes time: caution is vital to any tax reform. A North Carolina legislature correctly described tax reform as “evolution, not revolution”. An Indiana lawmaker advised other state policymakers to “act boldly and act slowly.” Both North Carolina and Indiana have different but successful tax reform and relief measures that can serve as models for other states.
  • Spending Matters: Government spending is at the heart of tax policy. Most states need a balanced budget, so policy makers need to be aware of major economic trends. It is a reality that cannot be ignored. Over 75 percent of Iowa’s budget is spent on education and Medicaid expenses. This spending leaves little room for other spending priorities and makes it difficult to reduce tax rates. Tax reform needs to prioritize spending and hopefully budget reforms will develop in the process. This includes evaluating and eliminating wasteful tax credits and other exemptions.
  • Revenue triggers can be a useful tool: Many countries have demonstrated that revenue triggers can be an effective tool for lowering tax rates and helping to protect their budgets. However, they shouldn’t be too restrictive as to impede the tax cut.
  • Truth-in-Taxation: Lowering income tax rates for individuals and businesses is important, but Iowa also needs to address property tax reform. A Utah-style truth-in-taxation law would provide real estate taxpayers with greater accountability and transparency. At the heart of truth-in-taxation is direct notification, whereby local governments must inform taxpayers how much their property tax would increase and make it difficult for local officials to collect windfalls from increased assessments.

Governor Reynolds and the Republican-led legislature continue to fight for Iowa taxpayers. If policymakers continue to pursue fiscal conservatism, Iowa could become a growth leader in the Midwest.

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