New policy group proposes bold Iowa tax reform. In the wake of another Tax Foundation report showing that Iowa’s business tax policy stinks, there is a new proposal to do something about it. Tax Analysts reports ($link):
Iowa’s nine-bracket personal income tax would be flattened to a single rate of about 3 percent under a proposal from a recently formed Iowa policy group.
Engage Iowa, founded in August by Cedar Rapids Mayor Ron Corbett, is calling for changes to the state’s income tax code that it says would improve the state’s business climate and reduce the outflow of high-income taxpayers to states such as Texas and South Dakota.
Like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan, the Engage Iowa paper does not advocate a tax cut. It attempts to come up with a rate and tax structure that raises the same amount of tax as the current Iowa tax system. The paper presents several proposals, including one that uses a 1 percentage point increase in the state sales tax rate to reduce the income tax rate.
The plan has a lot going for it. Its one glaring weakness is its omission of any corporation tax reform. Iowa has the highest corporation tax rate in the country, but one so full of loopholes and corporate welfare tax credits that it generates a relatively paltry amount of revenue for the state. Iowa’s 49th place corporation tax rating in the Tax Foundation State Business Tax Climate Index is a big reason for Iowa’s perennially poor ranking.
Naturally the high-tax, high-complexity lobby is unimpressed by the plan. From TheGazette.com:
Peter Fisher, research director for the left-leaning Iowa Policy Project in Iowa City, on Monday said he applauded Engage Iowa for pointing out that Iowa’s current income tax system is less progressive than it might seem after deductions and credits are factored in. He said the Engage Iowa policy suggestions also might help eliminate “the perception problem” that Iowa has as a higher top income tax rate than it does in practice.
However, Fisher said the Engage Iowa flat tax seems like others of its kind: It lowers taxes for the wealthier and makes up for it with taxes on the lower end of the income earners.
The tax law is a poor vehicle for income redistribution in general, but the state income tax is an awful vehicle in particular, given the ability of high income earners to leave the state. The focus on “the rich” also skates by the reality of who “the rich” are: primarily employers who run their businesses through pass-through entities and pay their business taxes on their 1040s. Bashing “the rich” bashes employment, especially with zero-tax South Dakota right next door.
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