Iowa Fiscal Partnership / Areas of Research / Budget / Senate: Rising inequity, less revenue
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Senate: Rising inequity, less revenue

IFP BACKGROUNDER — 

Official estimates of Senate plan:

Wealthy individuals, corporations gain most at big costs 

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Overall, Iowa’s income and corporate income taxes are average in comparison with other states. These taxes could be made more equitable to Iowans by eliminating tax preferences and loopholes and better recognizing living costs for moderate and middle-income families. Achieving this does not require tax cuts; it could come with lowering top nominal individual and corporate income tax rates and eliminating federal deductibility.

A tax proposal needs to be judged against how well the resulting system provides revenue for critical responsibilities governed by state policy. Already, the present system provides less than is necessary since the Legislature has yet to resolve the shortfall expected for last year’s budget.

Senate File 2383 cuts taxes and state revenue well below what is required to maintain Iowa’s current budget for education, health, public safety, and other services — and its phase-in sets out large structural deficits for the years ahead. While Governor Kim Reynolds stated in her Condition of the State Address in January that the state could not afford corporate tax cuts this year, corporate cuts are a significant piece of the Senate plan.[1]

The legislation, passed one day after its introduction by a subcommittee and the full Senate Ways & Means Committee, may be debated in the Senate this week. Not until late Tuesday was a fiscal note provided by the nonpartisan Legislative Services Agency. In addition to this standard review, analysis comes from a 34-page letter from the Department of Revenue to LSA.

■           Overall, SF2383 reduces state revenue by $208 million in FY2019, climbing to about $1.16 billion by FY2023.[2]

■           For tax year 2019, individual income tax is reduced by 17 percent. By FY2023, this revenue loss grows to 23 percent.[3] Currently the Iowa personal income tax contributes over half of state general fund revenue, with sales tax and, to a lesser degree, corporate income taxes paying much of the rest. Other revenue sources are about 6 percent of the general fund.[4]

■           While filers with incomes over $250,000 represent only 4 percent of filers, they receive over 17 percent of the tax reductions in tax year 2019, about $120 million. By tax year 2023, 22 percent of the tax reductions, $227 million is taken by these wealthy tax filers.3 The big benefits at the top in part are the result of providing additional preferential state tax treatment of so-called “pass through” income and come on top of major tax cuts these filers receive through the recently passed federal tax cut.

Basic RGB■           For FY2019 13 percent of revenues disappear from the corporate income tax. This accelerates to 53 percent in FY2022.[5] (See bar graph.) Still, in FY2022 nearly half of all corporations with income under $250,000 will pay more, while only a third will pay less.[6] The gains are highly skewed to the largest and most profitable corporations. (See table.)

■           Like the Governor’s legislation, SF2383 makes changes in sales tax collections that will provide some revenue increase, but these are small in comparison with the revenue loss from income tax. Further, these sales tax increases are largely borne by middle-income consumers and, with the income tax cuts, redistribute tax costs away from the wealthy and to the middle class.

■           Similarly, there are some changes to tax expenditures, which have been one of the fastest growing parts of the budget in terms of lost revenues, but these only serve to slow the growth in these expenditures and also are small in their revenue impact, compared with the other tax cuts. Further, the legislation adds new tax preferences, such as the pass-through income provision on the individual income tax, that can exacerbate and not reduce tax loopholes. 

Iowa has yet to fully rebound in providing basic education, health, and other services from the across-the-board cuts as a result of the recession years from 2001-2003 and 2007-2009. While SF2383 would take small steps toward curbing a few costly tax expenditures, overall it would erode revenues, create structural budget deficits for years to come, and force cuts certain to imperil Iowa’s basic infrastructure and traditionally accepted responsibilities for its residents.



[1] Governor Kim Reynolds, Condition of the State, January 2018: “It’s no secret we are working through difficult times with our state budget. So we have to focus on what we can afford. While I want to reduce our uncompetitive corporate taxes, this is not the year.” https://governor.iowa.gov/2018/01/gov-reynolds-delivers-condition-of-the-state-address

[2] Iowa Legislative Services Agency, Fiscal Note SF2383. https://www.legis.iowa.gov/docs/publications/FN/925227.pdf

See also Iowa Department of Revenue, letter to Jeff Robinson, Legislative Services Agency, Feb. 26, 2018, Table 18, page 34.

[3] Iowa Department of Revenue, letter to Jeff Robinson, Legislative Services Agency, Feb. 26, 2018, Tables 5 and 9.

[4] Governor’s FY2019 budget.

[5] Iowa Department of Revenue, letter to Jeff Robinson, Legislative Services Agency, Feb. 26, 2018, Table 13, page 29.

[6] Ibid, Table 14, page 30.