Many of you may remember that the old think tank of iowpolicyproject.org updated itself into commongoodiowa.org. As before, they are the gold standard in Iowa for budget and tax policy analysis. With the legislature going full throttle and our news media blasting out 3 or 4 sentence blurbs on what is going on in the legislature, this seems to be a time to go to some experts for in depth analysis:
Big new tax cuts are too expensive. The current budget surplus, which is driving arguments for new tax cuts, was largely due to a one-time boost from federal pandemic aid. Looking ahead to next year, FY 2023, the state’s Revenue Estimating Conference estimates a net revenue increase of only 1.7 percent — insufficient even to keep up with current obligations.
More income tax cuts would likely make Iowa’s already unfair tax system even more unfair. Income taxes are Iowa’s only taxes based on ability to pay, so general cuts in income tax disproportionately benefit the highest-income Iowans. Iowa already has a state and local tax system that takes a far greater share of income from low-income Iowans than the wealthiest ones (chart, left). Unless specifically targeted to low-income households, proposed income tax cuts would make inequality worse.
Big new tax cuts would decimate critical services for Iowans. The personal income tax generates half of Iowa’s general fund, which pays for the services supporting Iowa families, workers and their communities (chart, right). Making large new cuts to the income tax, let alone eliminating it, would force draconian cuts or even elimination of entire service areas. If lawmakers wanted to hold revenues even, they would need to approve an offsetting tax increase — and the sales tax is the only existing option. State and local sales taxes, now 7 percent in most of Iowa, would spike to 15 percent to fully replace the income tax.2
Iowa already is underfunding critical services, including education, child care, workplace protections and environmental quality. For example, per-pupil spending growth has been held down in Iowa over the last decade. It grew an average of only 1.9 percent from 2012 to 2022, down from an average of 3.1 percent from 2002 to 2011.
Tax cuts are not a recipe for growth. Business tax cuts have very little to do with economic growth, and force service cuts that can harm the economy. In Kansas, drastic tax cuts were followed by slower, not faster, economic growth. Iowa taxes, in any case, are not out of line with those of other states.
A big thank you to commongoodiowa.org for their spot on analysis – and a thank you to them for explaining this in a very understandable manner.