Iowa Fiscal Partnership / Areas of Research / Budget / Tax inequity: Iowa’s continuing story
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Tax inequity: Iowa’s continuing story

  • Iowa stacks taxes against middle, low-income Iowans
  • Study: New state tax law reinforces long-term trend of regressive taxes
  • Iowa summary sheet (PDF)

IOWA CITY, Iowa (Oct. 17, 2018) — Iowa taxes its middle- and low-income families more as a share of income than it does wealthy families, a long-term trend worsened by the 2018 tax overhaul.

The latest “Who Paysreport 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.

With that already a problem in Iowa, the Legislature passed and the Governor signed a massive income-tax-cut plan that targets its benefits to the wealthy, doing little for middle- and low-income taxpayers.

“Iowa lawmakers had a chance to get it right this year, and took the opposite path. This latest report by ITEP shows how Iowa lawmakers have become satisfied with a tax system that benefits the wealthiest and penalizes those at low incomes,” said Peter Fisher, research director of the nonpartisan Iowa Policy Project, part of the Iowa Fiscal Partnership (IFP).

“In fact, families making less than $22,500 a year pay, on average, about 60 percent more as a share of their meager incomes than do families making over $438,000.”

The new ITEP report shows the average effective overall tax rate for nonelderly taxpayers in the bottom 20 percent (making below $22,500 per year) is 12.4 percent. In the middle 20 percent, with an average income of $50,800, the rate is 10.7 percent. But the rate drops to a 7.7 percent level for the top 1 percent of taxpayers, who make $438,600 or more (on average, $960,000).

The ITEP analysis takes into account all of the Iowa tax law changes scheduled through 2021. Iowa Department of Revenue analysis has shown three-fourths of the tax cut in 2021 will go to families making over $100,000 (adjusted gross income), and almost half of the tax cut will go to families making more than $250,000.

“The new analysis confirms that middle-income Iowans are among the last to benefit, and when they do, it will be by small amounts,” Fisher said. “Meanwhile, the tax-cutting is reducing revenue for services that are critical to all Iowans, especially those struggling to make ends meet and move up the economic ladder.”

The report, “Who Pays? A Distributional Analysis of the Tax System in All 50 States,” is available at www.whopays.org and www.iowafiscal.org. It looks not only at total state and local taxes as a share of income, but at income taxes, sales and excise taxes and property taxes. As a share of income, sales and property taxes make up the most of the taxes for low-income Iowans, ITEP showed.

“If not for Iowa’s state Earned Income Tax Credit, which benefits low- and moderate-income working families, the situation would be even more unfair,” said Anne Discher, executive director of the Child and Family Policy Center, also part of IFP.

Among ITEP’s findings nationally was that all but five states increase income inequality through their tax systems — lower-income people have an even smaller share of total income after taxes than before.

“State tax systems almost uniformly ask more of their lowest-income taxpayers than the very rich,” said Meg Wiehe, deputy director of ITEP and an author of the study. “Inequitable state tax systems don’t have to be a foregone conclusion. State and local lawmakers can and should take steps to ensure that their highest income earners pay their fair share. Tax policy should be used as a tool to help mitigate income disparities rather than to drive a wider divide.”

South Dakota and Illinois are Iowa neighbors that ITEP included in its “Terrible 10” — states with the most unfair systems. These states feature low or no state income tax, or a flat rate, while relying heavily on more regressive taxes on sales or property.

Iowa is 21st in ITEP’s ranking of the least to most equitable systems. Iowa’s trends have been to cut income taxes while raising sales taxes. ITEP also noted Iowa plans to cut personal income tax further if revenue targets are met in the future, while failing to plug corporate tax loopholes and allowing a new “pass-through” deduction for business income.

Positive features of Iowa’s tax system noted by ITEP include a graduated personal income tax, refundable tax credits for earned income and child and dependent care, excluding groceries from sales tax, and a state inheritance tax.

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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.