Iowa Fiscal Partnership / Areas of Research / Budget / Tax Policy Kit — Myth-Buster

Tax Policy Kit — Myth-Buster

Iowa is average or below-average by any reasonable comparison of state-governed taxes

•  Rule 1: Iowa state and local taxes already are competitive vs. other states

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Iowa’s standing vs. other states on taxes is routinely mischaracterized for political purposes. “Competitiveness” of taxation indeed is a tax principle recognized as one legitimate measuring stick for tax policy. Unfortunately, it is misused and misinterpreted in these debates.

State tax policy governs not only Iowa’s state income and sales and excise taxes, but also local property and sales taxes and local income surtaxes.

Business Taxes

Leading business consultants agree: Iowa is in the middle, actually below the middle, of a very large pack of states ranked from highest to lowest on state and local taxes on business. Below are two reliable, straight-up analyses of state and local business taxes across the country, the top one by Ernst & Young,[1] ranking Iowa 29th highest in business taxes as a share of the economy, and the other by Anderson Economic Group,[2] ranking Iowa 28th highest as a share of pre-tax profit. Iowa is also in the middle regionally; the red bars in the second graph highlight the ranking of the states surrounding Iowa.



Individual Taxes

Likewise, individual taxes in Iowa have often been portrayed as high by politicians and lobbyists seeking tax cuts, but Census data[3] show them to be — again — as part of the middle of a very large pack.  


Rule 2: “Competitiveness” is often misrepresented

As the figures above suggest, there is not a great deal of difference among the vast majority of states on state and local taxes — contrary to the common political spin about the impact of tax levels on decisions to locate or expand in a state.

As a tax principle, the Iowa Fiscal Partnership has accepted the definition of competitiveness as: “A state’s overall tax system should not be significantly out of line when compared to other states.” (emphasis added) This reflects an understanding that states have varying mixes of taxes:

• One tax, such as the income tax, might appear higher than that of another state based on rates alone. But the rates, and how they apply at different levels of income, and how they apply after exemptions, deductions and credits, can mask their true effect. (Iowa’s unusual “federal deductibility” is one example of this.) This is why it is important to view “effective” tax rates, not the nominal rates.

• The combination of taxes — reflected by both the Ernst & Young and Anderson Economic Group examples above — is understood by companies and individuals as the relevant factor in evaluating that as one of many factors used in decisions on where to locate. But even then, Census data have long shown little or no effect of taxes on migration patterns of either businesses or individuals.[4]

Rule 3: Beware “Garbage in, garbage out.”

Some politicians have run down Iowa’s standing on taxes by exaggerating Iowa’s tax levels, focusing on nominal, top marginal rates rather than effective tax rates as they attempt to get new tax cuts. Some ideologically based tax analyses have given them fodder for their talking points.

The website,[5] created by the Iowa Policy Project and IPP Research Director Peter Fisher for use by people across the country, breaks down the faults in widely cited but unreliable estimates of “business tax climates.”

Rankings to avoid include the Tax Foundation’s “State Business Tax Climate Index”[6] and the American Legislative Exchange Council’s “Rich States, Poor States.”[7] Neither offers a clear understanding of effective taxes or economic growth potential, and both organizations fail to defend their methodology. also offers a look at policies that make sense in encouraging economic growth.[8]

[1] Ernst & Young LLP, Total state and local business taxes, August 2017 . Table 4. Business taxes as a share of state, local and total taxes and private sector GSP, FY2016, page 12.$File/ey-total-state-and-local-business-taxes-2016.pdf
[2] Anderson Economic Group LLC, April 2017. 2017 State Business Tax Burden Rankings, Exhibit III table, page 19. Tax Burden Study_2017_FINAL.pdf.
[3] U.S. Census Bureau, State and Local Finances
[4], “Taxes Have Little to do with People’s Decisions to Move to or From a State,”
[5] Grading the States, This research has been supported through the years by national nonpartisan research organizations: the Center on Budget and Policy Priorities, the Economic Policy Institute, and Good Jobs First.
[8], “The Real Path to State Prosperity,”