Real Tax Reform: What Elements?

The Iowa Legislature is currently debating tax reform, but it is crucial that the conversation focuses on actual issues rather than made-up ones. Business tax credits in the state are growing at a faster pace than other forms of state spending and are significant contributors to budget shortfalls. Many of these credits have been questioned for their effectiveness by both the Iowa Department of Revenue and academic research. While a bill has been introduced to end the refundability of these credits, the business lobby is fighting to preserve them.

Income tax credits for businesses in Iowa total over $285 million this year, and there are more tax credits of $125 million for both this year and next as part of the massive commercial property tax cuts of 2013. The 2013 cuts are now costing the state treasury an additional $300 million each year, leaving less funding for critical public services. However, there is a real danger that any savings from capping or reducing business tax credits would not be directed towards improving education, reducing student debt, cleaning water, or restoring cuts to public safety and the courts. Instead, some lawmakers appear to want to spend it on a manufactured problem, claiming that Iowa’s taxes are driving businesses and individuals out of the state.

This is a flawed notion for three reasons. First, Iowa’s taxes are typically average or below average among the 50 states. Second, taxes have little to no impact on people’s decisions to relocate. Finally, decades of research have demonstrated that state and local taxes on businesses are insufficient to have a significant influence on business investment and location decisions. Businesses are more concerned about the basics that account for the other 98% of their cost structure.

Rather than relying on credible academic research or reports from accounting firms that indicate that business taxes in Iowa are below average, proponents of business tax cuts point to Iowa’s allegedly low “business tax climate” ranking by the Tax Foundation. However, this ranking has been thoroughly debunked. The argument from the right for years has been that Iowa’s taxes are making the state uncompetitive, and that tax cuts will promote economic growth and prosperity. However, the Kansas debacle demonstrates that these claims are flawed. In 2012, national organizations pushing for regressive tax changes in Iowa, such as ALEC and AFP, persuaded the Kansas governor and legislature that individual and business tax cuts would act like a shot of adrenaline to the state’s economy. However, tax cuts have left Kansas with significant budget shortfalls, credit downgrades, and cuts to schools.

In conclusion, genuine tax reform is required to eliminate wasteful spending on tax breaks that offer little or no economic benefit and ensure a reliable revenue stream to finance education and other public services that are important to regular Iowans. The use of phony “research” to justify further tax breaks for those who need them least should be opposed. Instead, the focus should be on capping or reducing business tax credits, which would go a long way in resolving the state’s recurrent budget issues.

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