The Iowa General Assembly has kicked off with a primary focus on tax reform, with Governor Kim Reynolds’ proposed plan up for consideration. While the proposal does include some desirable reforms, such as modernizing the sales tax and increasing the standard deduction, it has been met with criticism for its lack of real reforms to enhance fairness in the individual income tax system. The plan also fails to rein in tax credits or plug tax loopholes, and in fact, creates a new loophole. Furthermore, the plan would provide far greater benefits to the wealthy than to moderate- or low-income Iowans.
Fairness is one of the key principles that tax policies should be evaluated against, but the overall state-local tax system in Iowa is regressive. The bottom 80% of taxpayers pay around 10% of their income in state and local taxes, while the top 1% pays only about 6%. Although Iowa’s individual income tax is the only revenue source that is progressive, the Governor’s proposal affects the individual income tax in several ways, with some components being progressive and others regressive.
The plan’s reduction in tax rates for all brackets primarily benefits those at the top income levels, while the increase in the standard deduction primarily benefits lower- and middle-income taxpayers who are not homeowners. Iowa’s standard deductions are much lower than federal standard deductions, leaving essential, minimum living expenses free of tax. However, the Reynolds plan eliminates the ability to deduct federal income taxes on the Iowa return, which will substantially increase Iowa taxes for those with high incomes.
Revenue adequacy should be a central focus of tax reform because the current system does not generate enough revenue to meet the needs set by the current Legislature and administration in the budget they approved a year ago. The Reynolds plan would produce annual reductions to the state General Fund, which would further reduce Iowa’s ability to maintain quality public education, affordable community colleges and universities, or to begin to address water quality problems or mental health issues.
In conclusion, while the Governor’s tax plan includes some desirable reforms, it has many shortcomings, with no real reforms to enhance fairness in the individual income tax system and no efforts to rein in tax credits or plug tax loopholes. The plan’s benefits primarily go to wealthy Iowans, while essential public services will be cut in the face of revenue losses. The plan would reduce Iowa’s ability to meet the needs of its citizens and maintain important services. To achieve a fairer and sustainable system, the Governor and legislative leadership need to focus on revenue adequacy, competitiveness, simplicity, and especially fairness.