Iowa Fiscal Partnership / Areas of Research / Taxes / IFP News: Who Pays Taxes in Iowa?
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IFP News: Who Pays Taxes in Iowa?

Making Wealth Pay: Richest Iowans Pay Lower Tax Rate

Study Shows Poorest or Middle-Income Families Pay Larger Share of Income;
New Report ‘Illustrates Unfairness’ of Proposed $750 Income Tax Credit

Download this news release — 2-page PDF and Iowa fact sheet 2-page PDF

IOWA CITY, Iowa (Jan. 30, 2013) — A new national report shows Iowa taxes — like those in most states — are much greater as a share of income from middle- and low-income families than from wealthy families.

The report, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, by the Washington-based Institute on Taxation and Economic Policy (ITEP), 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.

“The latest findings confirm a nagging problem of inequity in Iowa’s overall tax system,” said David Osterberg, executive director of the nonpartisan Iowa Policy Project, part of the Iowa Fiscal Partnership (IFP).

“In fact, the ITEP report illustrates the unfairness of a new proposal at the State Capitol to give away Iowa’s surplus in $750 chunks through income-tax credits. Many Iowans who pay most of their taxes on sales and property would not benefit from the proposed income-tax credit.”

According to the ITEP report, the average effective overall tax rate for the non-elderly taxpayers in the bottom 20 percent is 10.9 percent. The rate drops steadily to a 6 percent level for the top 1 percent of taxpayers. In the middle 20 percent, the level is 10.1 percent.

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.

 “The state’s present surplus is a poor excuse to give one more break to the wealthiest — at the expense of fairness for lower-income earners, and at the expense of critical public services that need to be funded,” said Charles Bruner, executive director of the Child & Family Policy Center, also part of IFP.

For low-income families (earning below $21,000 per year), sales and excise taxes take a 6.4 percent share of family income, compared with 0.9 percent in the top 1 percent (income of $312,000 and higher).

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” said Matthew Gardner, executive director of ITEP and an author of the study. “There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10 or more percent, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers.”

State consumption taxes (mainly sales taxes) are particularly regressive — meaning they take a greater share of income from people at low incomes than people at high incomes. Overall, those rates average 7 percent for the poor, 4.6 percent for middle incomes and a 0.9 percent for the wealthiest taxpayers nationwide.

Gardner noted that in some states, there are efforts to cut or eliminate the income tax, and that of the 10 most regressive tax states, four do not have any taxes on personal income and one applies it only to interest and dividends. The other five have a personal income tax that is flat or virtually flat across all income groups. 

“Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” Gardner stated.

The data in Who Pays? also demonstrates that states commended as “low tax” are often high-tax states for low- and middle- income families. 

“When you hear people brag about their low tax state, you have to ask them, low tax for whom?” Gardner said.

The fourth edition of Who Pays? measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia.  The report is available online at www.whopays.org.

Low-Income Iowans Pay Greater Share of Income in State/Local Tax Than Higher Income Iowans

who pays graph

who pays table

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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.