Is Iowa's Tax System Fair?
Iowa Policy Project
By Elaine Ditsler
It’s
income tax season and we will surely hear calls for great reforms –
such as the idea that everyone should pay the same percentage of their
income in taxes.
Taxpayers
beware! Before buying into tax reform ideas, examine them closely to
see if the “reform” actually achieves what it claims. Case in point:
the “flat” income tax.
In Iowa,
when you look at all taxes (sales tax, income tax, property tax,
gasoline and other excise taxes), you see that the lowest-paid Iowans
actually pay a larger percentage of their income in state and local
taxes than do the highest-paid Iowans.
The
wealthiest 1 percent of Iowans pay less than 6 percent of their income
in taxes, while the poorest 20 percent of Iowans pay above 10 percent.
Put another way, the wealthiest Iowans work only three weeks to pay off
their taxes, while the poorest Iowans have to work almost twice as long.
Let’s go
over that again. Iowa’s tax policy says that a family making $300,000 a
year must devote only about three weeks’ work to fulfill their
responsibility to the public good whereas the low-income family earning
$14,000 a year has to work almost twice as long to do the same.
How could this be?
The cost of basic needs — transportation, decent housing, and other
items — simply do not vary nearly as dramatically as income. Low-wage
earners have to spend almost all of their income on these needs,
thereby paying a much larger share of their income in sales and other
taxes.
Iowa’s
income tax is the only part of our tax system that is based on ability
to pay. Individuals with higher incomes and smaller families pay at a
higher rate than persons with lower incomes and larger families. The
problem is that the state and local tax system as a whole takes more
from those at the low end of the pay scale than those at the top.
Thus, to
have a flat tax system, which actually achieves the principle that
everyone pays the same percentage of their income in taxes, the income
tax would actually have to be raised for the wealthiest Iowans, lowered
for middle and low-income Iowans, or some combination of both.
Recent
federal tax “reform” efforts have actually been in the opposite
direction. Successful businessman Warren Buffet disparaged federal
income tax cuts that will cause his secretary to pay a larger portion
of her earnings in taxes than he pays of his.
We all
benefit from our state and local government services and we all have a
responsibility to support them financially. A tax system aligned more
closely with the ability to pay would boost the take-home pay of most
Iowans and improve our overall economic and social security.
Elaine
Ditsler is a research associate for the Iowa Policy Project, a
nonpartisan, nonprofit research organization based in Mount Vernon.
Iowa Policy Project reports on tax policy and other issues are
available to the public, free of charge, on the web at www.iowapolicyproject.org.
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