March 2017

Is Iowa a Business Friendly State?

By John Hendrickson

The Tax Foundation and the Small Business and Entrepreneurship Council (SBE) have both published studies comparing how the fifty states rank in regard to their business climate. Both studies compare the states using a variety of tax comparisons. Some of the major tax areas examined include corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes.[1] The SBE Small Business Policy Index 2017 measures not only taxes but other factors such as regulations and other policies that impact business.[2] Iowa is ranked 40th in the Tax Foundation’s 2017 State Business Tax Climate Index and 42nd in the SBE’s Small Business Policy Index.[3] Iowa’s low ranking demonstrates the need for tax reductions for the benefit of all taxpayers and to create opportunities for economic growth.

Top ten states in the Tax Foundation index:   Top ten states in the SBE index:
1. Wyoming 1. Nevada
2. South Dakota 2. Texas
3. Alaska 3. South Dakota
4. Florida 4. Wyoming
5. Nevada 5. Florida
6. Montana 6. Washington
7. New Hampshire 7. Indiana
8. Indiana 8. Arizona
9. Utah 9. Alabama
10. Oregon[4] 10. Ohio[5]

As noted, the SBE index measures more factors, but there are similarities in regard to the findings of both indexes when measuring how business friendly the various states are in regard to taxation and other economic policies.

The Tax Foundation’s rating of Iowa at 40 out of 50 (rank is based on 1 is the best and 50 is the worst) is based on the high tax structure that impacts businesses. Specifically, the Tax Foundation ranked Iowa:

  • Corporate tax rank: 47
  • Individual Income Tax rank: 33
  • Sales tax rank: 21
  • Unemployment Insurance Tax rank: 34
  • Property tax rank: 40[6]

Iowa’s corporate tax rate is one of the highest in the nation with the top rate at 12 percent. The top individual income tax rate is 8.98 percent. Iowa’s sales tax is also 6 percent and when other taxes are factored in Iowa’s tax burden is heavy.

us-chart-business-tax

In the SBE index Iowa is actually rated worse than in the Tax Foundation index, but the SBE index factors in more government policies and regulations. Iowa is listed in “the most anti-entrepreneur” friendly states.[7] The reason for Iowa’s 42nd ranking in the SBE index (rank is based on 1 is the best and 50 is the worst) is based upon high tax rates especially in regard to the corporate income tax, individual capital gains tax, unemployment taxes, and a high number of public employees.[8] SBE was also critical of the “recent rapid rise in state and local government spending” in Iowa.[9]

Because Republican Governor Terry Branstad has faced a divided Legislature (until now) which has made it difficult to implement sound spending and tax reductions — state spending has increased. Governor Branstad has even eliminated “nearly 2,100 full-time state government jobs,” but this is only one step in reducing the size and scope of state government.[10]

Since 2011 state government spending has increased in Iowa:

  • $5.899 billion (FY 2011)
  • $6.311 billion (FY 2012)
  • $6.768 billion (FY 2013)
  • $6.488 billion (FY 2014)
  • $6.819 billion (FY 2015)
  • $6.921 billion (FY 2016)[11]

For fiscal year 2018, Governor Branstad has proposed a budget of $7.46 billion.

The Cato Institute, which measures the performance of all 50 state Governors, concurred with the SBE criticism of increased spending by Governor Branstad. Governor Branstad earned a “D” grade from Cato’s Fiscal Policy Report Card on America’s Governors 2016.[12] Governor Branstad was given credit by Cato for some of his tax reform measures such as in the case of property taxes, but he also agreed to a gasoline tax increase.[13] Chris Edwards, Director of tax policy studies at Cato argued that in regard spending, Governor Branstad “has performed poorly.”[14]

Iowa in comparison to other states usually ranks in the middle in regard to tax structure, but as more states move toward reforming and lowering their tax rates it will become increasingly difficult to achieve significant economic growth. “Taxes, regulations, and excessive red tape and fees are all business and job killers —  and often have a disproportionate effect on small and new businesses,” noted economist Richard W. Rahn.[15]

States are not only competing in a globalized economy, but often face significant competition with each other for businesses and entrepreneurs.  The tax and regulatory climate of a state has a tremendous impact on the economy:

·       Taxes matter to businesses. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value), or some combination of the above. Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience economic growth.

·       States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its region, and even globally. Ultimately, it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.[16]

Based on the results from the Tax Foundation and the SBE business climate indexes it is clear that Iowa needs to fundamentally reform the tax structure. The recent passage of collective bargaining reform will provide an opening for the Iowa Legislature to address tax reductions, because it will save the taxpayers from spending more on public employees.

Iowa policymakers should examine what states such as North Carolina, Utah, Texas, and Wisconsin are doing in terms of lowering their tax rates. In fact, the Tax Foundation noted that Utah and Indiana, both of whom scored in the top 10, “levy all major tax types, but do so with low rates.”[17] Iowa could also examine states such as South Dakota, which ranked second in the Tax Foundation index and third in the SBE index, which does not have corporate and individual income taxes.

States that follow limited government policies in the form of low tax rates, less regulations, and reasonable levels of government spending are not only attracting businesses and fostering an environment for entrepreneurship, but also seeing population growth.  As Richard Rahn noted:

Population growth is an indicator of prosperity. People move to where good jobs are. The 25 most business-friendly states had a population growth of more than double the 25 least friendly states.[18]

Iowa can no longer afford to be frozen in a proverbial “no-man’s-land” when it comes to taxes and spending. If Iowa wants to be an economic competitor it needs a better tax climate for all taxpayers.

John Hendrickson is a Research Analyst with 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]Jared Walczak, Scott Drenkard, and Joseph Henchman, 2017 State Business Tax Climate Index, Tax Foundation, Washington, D.C., 2017, <https://files.taxfoundation.org/20170131113536/TF-SBTCI-2017-Final.pdf> accessed on February 21, 2017.

[2]Raymond J. Keating, Small Business Policy Index 2017: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship, 21st Annual Edition, Small Business & Entrepreneurship Council, February 2017, <http://sbecouncil.org/wp-content/uploads/2017/02/SBPI2017-21stEdition.pdf> accessed on February 21, 2017.

[3]Walczak, Drenkard, and Henchman.,  Keating.

[4]Walczack, Drenkard, and Henchman.

[5] Keating.

[6]Walczak, Drenkard, and Henchman.

[7]Keating, p. 33.

[8]Small Business Policy Index 2017, “Iowa,” Small Business & Entrepreneurship Council, <http://sbecouncil.org/resources/publications/small-business-policy-index-2017/> accessed on February 21, 2017.

[9]Ibid.

[10]Jason Clayworth, “A point of pride or dismay? Branstad cuts 2,100 state jobs in 6 years,” The Des Moines Register, February 20, 2017, <http://www.desmoinesregister.com/story/news/investigations/2017/02/20/point-pride-dismay-branstad-cuts-2100-state-jobs-6-years/96969832/> accessed on February 23, 2017.

[11]“Iowa General Fund Receipts,” Iowa Legislative Services Agency, <https://www.legis.iowa.gov/docs/publications/FCTA/798675.pdf> accessed on February 23, 2017.

[12]Chris Edwards, Fiscal Policy Report Card on Governors 2016, Cato Institute, October 5, 2016, <https://www.cato.org/publications/white-paper/fiscal-policy-report-card-americas-governors-2016> accessed on February 21, 2017.

[13]Ibid.

[14]Ibid.

[15]Richard W. Rahn, “States that work for business,” The Washington Times, February 13, 2017, <http://www.washingtontimes.com/news/2017/feb/13/pro-business-states-draw-in-industry/> accessed on February 16, 2017.

[16]Walczak, Drenkard, and Henchman.

[17]Ibid.

[18] Rahn.