It’s the missing half of the discussion regarding the major features of the proposed package of changes to the Iowa state income tax structure. While many focus on the repeal of federal deductibility, those looking at the total package also see the major companion change: reducing all income-tax rates.

Critics of Iowa’s income tax have long complained that the rates are too high. They compare those rates to other states’ rates. Due to many deductions and credits, Iowa’s effective income-tax rates are much lower than advertised, and inaccurately presented by anti-tax organizations in comparing Iowa with other states. Those rankings frequently give the artificially inflated rates, rather than their actual effects.

To allow better comparisons, the tax-reform package offers the lower rates, but enables them by repealing federal deductibility — which is one of the reasons the rates have been held at current levels. Facing revenue shortfalls in a declining economy, the state would not be able to keep up services without holding the rate cuts as revenue-neutral as possible.

Under the proposed legislation, income at every level would be taxed at a lower rate

The table below shows how income-tax brackets and rates would change in Iowa under the proposed legislation, HF807, with the major committee amendment, H1484. Most taxpayers would see a 10 to 20 percent cut in the tax rate. So while a taxpayer who now deducts federal income taxes could no longer do so, the new, lower rates apply to all taxable income. That’s why most taxpayers come out ahead.