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TAX-O-METER

 

$6,870,600,000

 

Based on state of Iowa's estimated revenue of $6,870,600,000

for the current fiscal year (2014), which ends June 30, 2014.
Amount is calculated according to the date and time of your computer.
 

 

A Review of Iowa's Taxes

by John R. Hendrickson

The non-partisan Tax Foundation recently released, Iowa Illustrated: a Visual Guide to Taxes & the Economy, which is a good resource reviewing Iowa’s economy and current tax structures.[1]  In national rankings Iowa is usually ranked in the middle in comparison to the other states of the Union when it comes to taxation. Nevertheless, Iowa does need to move in the direction of further tax reform, especially as recent data demonstrate that low-tax states continually out-perform high-tax states in regard to economic growth. The Tax Foundation summarized Iowa’s tax structure:

First, individual income taxes in Iowa suffer from two problems: the rates are high and the structure is graduated, meaning different income levels are taxed at different rates. Business taxes, which include taxes on corporate income, are also comparatively high and poorly structured. However, when compared to other states, Iowa’s state-level sales tax rate falls in the middle, and the average local rate is low. The state rate has increased over time as the base has become narrower. Gasoline excise taxes in Iowa, similar to the rest of the country, aren’t adjusted for inflation. Finally, property taxes in Iowa have increased only slightly over time, while total tax collections (excluding property) have risen at a faster pace.[2] 

As the Tax Foundation states, Iowa has a progressive tax structure, and it is also high, which hurts economic growth. The Iowa corporate-tax rate — with the top rate at 12 percent — is the highest in the nation. Opponents to corporate-tax reform in Iowa argue that most businesses do not pay the 12 percent rate, but they also fail to acknowledge that having such a high rate not only punishes the success of the business, but it deters business from moving or establishing themselves in Iowa.

Iowa Taxes at a Glance

“When measured against other states, Iowa has comparatively high tax rates in several categories.”[3] This is not just in regard to the corporate-tax rate, but also the “top individual-tax rate is the fifth highest,” at 8.98 percent.[4]  In addition:

Similarly, Iowa’s property taxes rank in the top half of the fifty states. The Hawkeye State wisely doesn’t levy taxes on gross receipts or capital stock, but it does have an inheritance tax. Sales and excise tax rates in Iowa tend to fall in the middle.[5]

The American Legislative Exchange Council (ALEC) publishes on an annual basis Rich States, Poor States, which measures the economic competiveness of the states. Rich States, Poor States evaluates each state based on “15 policy variables” and provides a rating to each individual state.[6] The 15 policy variables include tax rate, tax burdens, and debt levels, number of public employees, minimum wage laws, labor laws, and tax and expenditure limitations, among others.[7] Iowa ranks 25 in terms of economic performance and 25 in terms of economic outlook in comparison to the other states.[8] Rich States, Poor States, ranks Iowa highly in being a Right to Work state as well as on debt service as a share of tax revenue, but our state ranks in the middle to lower-middle in regard to taxation.[9]

Although Iowa ranks 25th in Rich States, Poor States, the Tax Foundation’s “State Business Tax Climate Index” ranks Iowa 40th  “best” in the nation, which means “Iowa has the 11th worst business-tax climate when compared to other states.”[10] In the Midwest, “Iowa has one of the worst business-tax climates,” and although Minnesota and Wisconsin are considered worse than Iowa, Missouri, Indiana, and South Dakota “have far better tax codes.”[11] The Tax Foundation also ranks Iowa as the 29th highest state in their “Annual State-Local Tax Burdens” index and we have the 32nd latest “Tax Freedom Day,” which “is the day when taxpayers have earned enough to pay their total federal, state, and local tax bill for the year.”[12]

Iowa Business Tax Climate

Overall, Iowa collects most of its tax revenues from property taxes (35 percent), while income taxes and general sales tax are equal at 23 percent of collected taxes.[13] Iowa, just as with most states, relies on “federal funding for one-third of its budget.”[14] The Tax Foundation states that “Iowa relied on federal funding for 34.8 percent of general revenues in 2012, compared to the national average of 32.8 percent.”[15]

The reason for this is the vast expansion of the federal government over the 20th century and into the 21st century. The federal government, through “cooperative federalism”, has involved itself in numerous activities that were supposed to be left for the states. These include “public welfare, health, education, and transportation.”[16] The states are coerced to follow mandates from the federal government in order to receive federal funds to pay for these and many other programs, and the states become administrative districts/dependents of the federal government — something that is contrary to the Constitution and the principles of the American Founding. 

Iowa's Tax Burden

“Iowa’s economy leans most heavily on manufacturing, finance and insurance, and professional services,” while agriculture remains a vital part of the state’s economy.[17] Iowa faces many problems that can be addressed by implementing a sound tax system that will create economic growth and improve the overall quality of life in Iowa. Although national policy influences the fifty states, Iowa’s Legislature can move in a more free-market direction by lowering tax rates, implementing taxpayer protections such as a Taxpayer Bill of Rights (TABOR), and keeping tight control on debt and spending levels. These reforms will allow the Hawkeye State to grow and flourish. The Tax Foundation’s Iowa Illustrated is a reminder that Iowa can do much better to improve its economic outlook.

 John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Iowa Illustrated: A Visual Guide to Taxes & the Economy, edited by Liz Malm, Tax Foundation, Washington, D.C., 2014 <http://taxfoundation.org/slideshow/iowa-illustrated> accessed on August 18, 2014.

[2] Joseph D. Henchman, “Introduction,” in Iowa Illustrated: A Visual Guide to Taxes & the Economy, edited by Liz Malm, Tax Foundation, Washington, D.C., 2014 <http://taxfoundation.org/slideshow/iowa-illustrated> accessed on August 18, 2014, p. v.  

[3] Iowa Illustrated, p. 8.

[4] Ibid.

[5] Ibid.

[6] Arthur B. Laffer, Stephen Moore, and Jonathan Williams, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sixth edition, American Legislative Exchange Council, Washington, D.C.,  2013, p. x. 

[7] Ibid.

[8] Ibid., p. 72.

[9] Ibid.

[10] Iowa Illustrated, p. 9.  

[11] Ibid., p. 14.

[12] Ibid., 9.

[13] Ibid., p. 11.

[14] Ibid., p. 13.

[15] Ibid.

[16] Ibid.

[17] Ibid., p. 4.