Iowa’s Revenue Surplus
is an Opportunity
By Jonathan Miltimore   

In fiscal year (FY) 2006 Iowa brought in $5.77 billion in state revenues — 3.6% more than in FY 2005, an increase of roughly $200 million.  This figure exceeded expected revenues by approximately $86 million.  The Des Moines Register noted that this increase was largely attributable to the 24% increase in corporate income tax revenues, which easily outpaced the more modest revenue increases in personal income tax and sales tax, which rose, respectively, 2.6% and 3.8%.[1]   

Since the Iowa corporate income tax has remained constant for many years, this increase, one must assume, is attributable to an increase in corporate profits.  Before one becomes too excited about such corporate windfalls, however, it should be noted that Iowa has the highest corporate tax rate (12%) of any state in the United States.  This is a rather notorious distinction for a state trying to attract businesses to help broaden and diversify its economy.   

A recent policy brief[2] by the Public Interest Institute analyzed the impact of tax and regulatory climates on job and population growth.  The report reveals, not surprisingly, that states with harsh tax and regulatory climates tend to have slower job and population growth than states with more accommodating tax and regulatory climates.   

Businesses are institutions vital to the state and its citizens; they provide tax revenues, jobs, and numerous benefits to employees which often include health insurance and retirement packages.  In short, businesses should be treated with the same respect as citizens, rather than as sheep for fleecing.   

It seems that Iowa politicians are beginning to recognize this.  Unfortunately, instead of making its business climate more alluring to all entrepreneurs, politicians have misguidedly opted to create the Iowa Values Fund.   

Essentially, the Values Fund is a large pool of tax dollars — $700 million — that politicians can wave under the nose of businesses in hopes of disguising its oppressive tax and regulatory climate.[3]  If you can’t attract businesses, as the theory goes, you can always bribe them.  While this may succeed, temporarily, in luring a few of the politically well-connected businesses to our state, it does nothing for the established Iowa business men and women that continue to pay the most exorbitant corporate income taxes in the country.  Moreover, it is a poor long term strategy for growing a robust commercial economy. 

States around the nation are closing massive budget gaps, largely due to the 2003 supply side federal tax cuts.  The Iowa Legislature should use this revenue surplus to reexamine the structure of Iowa’s tax policies and make it a state friendly to business investment and expansion.  A good place to start would be the draconian corporate income tax rate.  Until Iowa becomes a business friendly state that is competitive with its neighbors, its job growth will continue to lag behind the rest of the nation.