An Emphasis Upon Sound Tax Principles
The Democratic party in Iowa has presented a proposal to reform the state’s income tax system. The proposal is designed to be revenue neutral, meaning it won’t raise additional revenue for the state. The plan aims to modify various aspects of the tax system such as rates, exemptions, and deductions. The proposed changes would result in reduced taxes for Iowans with incomes below $125,000 while increasing taxes for those earning above that level.
The proposal has three main provisions that target different groups of taxpayers. The first provision is eliminating federal deductibility. Currently, taxpayers can deduct the amount they pay in federal taxes from their income when filing a state income tax return, which mainly benefits higher-income taxpayers. The second provision would reduce tax rates for all taxpayers while increasing various tax credits for low- and middle-income taxpayers such as the child and dependent care credit, the Earned Income Tax Credit, and the elderly and blind personal credits. These changes would lower average taxes for Iowans with incomes below $125,000. The third provision involves an overall reduction in income tax rates.
The proposal is grounded in recognized tax principles, such as fairness, competitiveness, public benefit, economic efficiency, revenue adequacy, stability, predictability, simplicity, and accountability. However, the proposal represents only one step in the process, and further measures should be taken. For instance, the report suggests adopting federal personal exemptions and standard deductions, requiring married couples to file as they do federally, eliminating the preferential treatment of capital gains, eliminating the deduction for 529 plans for tax-filers with incomes over $75,000 for single filers and $150,000 for married filers, and raising the state Earned Income Tax Credit to 30% of the federal level.
The proposal would generally reduce the taxes paid by low- and middle-income families, but it wouldn’t eliminate them altogether. Therefore, long-term reform of Iowa’s income tax should critically review the issues raised to ensure that Iowa taxes on working families don’t begin until they have sufficient income to meet basic needs.
In conclusion, the Democratic party in Iowa has put forth a revenue-neutral proposal to reform the state’s income tax system. The proposal aligns with recognized tax principles, and it seeks to lower average taxes for Iowans with incomes below $125,000 while increasing taxes for higher-income taxpayers. Nevertheless, additional measures should be taken to make the personal income tax system in Iowa more straightforward, fairer, and more accountable.