March 2016

How Iowa Compares

By Amy K. Frantz

Some have already filed state income taxes while others are still collecting receipts and calculating deductions in anticipation of next month’s deadline. We are all familiar with Iowa’s income tax system, with its nine income brackets, federal deductibility, standard deduction, and personal exemption.  But how does Iowa’s income tax system compare with the other 49 states in the nation?[1]

Iowa is one of 43 states that require citizens to pay an income tax. Two of those states, New Hampshire and Tennessee, tax only interest and dividend income, not wage and salary income.  The remaining seven states – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming – do not have a state income tax.

Of the 41 states that tax wage and salary income, eight have a single tax rate, or “flat tax” – Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. The remaining states’ tax rates vary depending upon which tax bracket the taxpayer falls into.  The number of tax brackets in each state varies as well, ranging from two brackets in Kansas up to ten brackets in California and Missouri.  Iowa’s income tax code has nine brackets, ranging from 0.36 percent to 8.98 percent.

In addition to Iowa, five other states allow taxpayers a deduction for the amount of federal income taxes paid – Alabama, Louisiana, Missouri, Montana, and Oregon. In Alabama, Iowa, and Louisiana 100 percent of federal income taxes paid are deductible.  In the other three states only a portion may be deducted.  “The primary rationale for federal deductibility is fairness.  Proponents of the policy argue that citizens should not be required to pay taxes on the federal government’s takings.  This portion of earnings is not the workers’; they never saw these dollars or possessed them in any tangible sense.  Hence, proponents ask, why should they be required to pay taxes on them?”[2]

Tax Foundation reports that several states made key changes in their state income taxes for 2016, including:

  • Arkansas lowered its top marginal rate from 7 percent to 6.9 percent on income over $35,100. Also, it adopted a new tax schedule for individuals earning between $21,000 and $75,000 in income. The state now has three tax schedules, with differing rates, depending on income.
  • Temporary tax increases expired in Hawaii. The three top rate brackets were eliminated, and the top marginal rate fell from 11 percent to 8.25 percent.
  • Maine lowered tax rates and added a third tax bracket. Rates were cut from 6.5 and 7.95 percent to 5.8, 6.75, and 7.15 percent.
  • Massachusetts’s rate fell from 5.15 percent to 5.1 percent.
  • Ohio’s tax rates decreased with the top marginal rate falling from 5.333 to 4.997 percent.[3]

Iowa’s most recent major reform to the state income tax code was adopted in 1997. Beginning in the 1998 tax year, Iowa’s personal income tax rates were reduced by 10 percent.  Iowa should consider simplifying our tax code and reducing our tax rates, so that we can make the list of states with key changes for next year!

Amy K. Frantz is Vice President of 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] Tax system and 2016 tax bracket information in this article is from Nicole Kaeding’s “State Individual Income Tax Rates and Brackets for 2016,” Tax Foundation, Fiscal Fact, Feb. 2016, No. 500, <http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation-FF500.pdf> accessed February 11, 2016.

[2] Jonathan Miltimore, “Federal Tax Deductibility in Iowa: Who Benefits and Why it Should Continue,” Tax Education Foundation Current Issues, <http://www.taxeducationfoundation.org/current-hot-issues/federal-deductibility/ > accessed February 23, 2016.

[3] Kaeding.