Cementing Inequity: Richest Iowans Pay Lower Tax Rate
• New Study Confirms Long-Term Trend — Low- and Middle-Income Iowans Pay Largest Shares of Income
• New Cuts Would Compound Unfairness
The latest “Who Pays” report by the Washington-based Institute on Taxation and Economic Policy (ITEP), again shows the effect of sales taxes and property taxes on lower-income households tilts Iowa’s overall tax system so the poorest pay the highest percentage in taxes.
“Iowa lawmakers for years have compounded inequities in Iowa’s overall tax system with their choices on which taxes to cut and which taxes to raise,” said Peter Fisher, research director of the nonpartisan Iowa Policy Project, part of the Iowa Fiscal Partnership (IFP).
“Not a year goes by when we do not see new proposals from members of the General Assembly pushing for income-tax cuts for the wealthy or corporations, and new pressures for sales-tax increases that inordinately affect low-income families.”
According to the ITEP report, the average effective overall tax rate for nonelderly taxpayers in the bottom 20 percent (making below $22,000 per year) is 10.4 percent. In the middle 20 percent, with an average income of $50,500, the rate is 9.7 percent. But the rate drops to a 6 percent level for the top 1 percent of taxpayers, who make $376,000 or more.
“In round numbers, those earning below $94,000 a year — about 4 out of 5 families — are paying about 10 percent of their income in state and local taxes in Iowa. That figure drops steadily for the top income levels,” Fisher said.
The report — available at www.whopays.org and www.iowafiscal.org — separately examines the share of income paid at various income levels for sales and excise taxes, personal income tax and property tax. It also calculates the reduction, a tax offset going mainly for higher-income families, caused by the ability to deduct state and local taxes from federal income tax. In addition, Iowa state income-tax payers may deduct their federal income taxes paid, again a device that disproportionately benefits higher-income earners.
“As Iowa legislators consider new proposals — including a gas tax increase — we need find ways to offset costs for lower-income earners, especially when our minimum wage is so low and funding of work supports is severely lacking,” said Charles Bruner, executive director of the Child & Family Policy Center, also part of IFP. The costs of a gas tax are disproportionately borne by those with average to lower incomes.
For low-income families (earning below $22,000 per year), sales and excise taxes take a 6.3 percent share of family income, compared with 0.9 percent in the top 1 percent (income of $376,000 and higher).
“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matthew Gardner, executive director of ITEP. “Upside-down tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax-reform policies that will make their tax systems fairer.”
The report finds that the Iowa situation is part of a nationwide trend in which middle- and low-income people nationwide pay substantially more of their income in state and local taxes than wealthy individuals and families.
ITEP noted the disparity is most stark between the lowest-income households and the top 1 percent of households, with the poorest 20 percent of taxpayers paying more than double the effective tax rate paid by the richest 1 percent. The national average disparity of 10.9 percent vs. 5.4 percent is slightly greater than the Iowa disparity of 10.4 percent to 6 percent.
Three nearby states are among ITEP’s so-called “Terrible 10” — South Dakota, Illinois and Kansas. On the other end of the scale, neighboring Minnesota is among the states with the least unfair systems.
ITEP noted that many states see advocacy for reduced tax rates for the wealthy and business that not only make taxes more regressive — borne more heavily as a share of income by lower-income families — but can make it difficult for states to fund basic services.
The report is available online at www.whopays.org.
# # # # #
The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit Iowa-based organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines. Reports are at www.iowafiscal.org.
The Institute on Taxation and Economic Policy (ITEP) is a 501 (c) (3) nonprofit, nonpartisan research organization that works on federal, state, and local tax policy issues. ITEP’s mission is to ensure that elected officials, the media, and the general public have access to accurate, timely, and straightforward information that allows them to understand the effects of current and proposed tax policies. www.itep.org.
Related Areas of Research