That year, the highest Iowa corporate tax rate fell from 12 percent, the highest in the country, to 9.8 percent. Even Iowa’s corporate tax rate is high at 9.8 percent. Many states have or are in the process of gradually lowering their corporate tax rates. Nebraska recently passed law to cut corporate tax from 7.81 percent to 6.84 percent. In order for Iowa to remain economically competitive, it needs to keep cutting tax rates.
Corporate tax cuts are often viewed negatively as they are believed to only benefit large companies. This is rarely the case, and a consequence of the high corporate tax rates is that the costs are passed on to consumers. Income taxes, including those of individuals and companies, are considered to be the most damaging of taxes.
“Taxing corporate income has always been a complicated, unfair, and inefficient way to increase government revenues. Don’t let the label fool you. A “company” is simply a bundle of contracts between individuals – investors, lenders, executives, employees, sellers, and consumers. Only people pay taxes. Legal abstractions cannot, ”wrote John Hood, chairman of the John Locke Foundation.
Economists at the Buckeye Institute in Ohio argue that corporate taxes are detrimental to the economy because they “discourage corporate productivity by reducing the benefits of hiring workers or investing in infrastructure.” In addition, corporate taxes “suck resources away from productive investments and increase business costs”. Both businesses and workers are vital to economic growth, and a high corporate tax rate is a deterrent to both.
“Compared to other major taxes, corporation tax is one of the most economically damaging taxes governments levy because while corporations are legally responsible for paying the tax, the economic impact of corporation tax on shareholders, workers and consumers comes in the form of lower investment returns , lower wages and higher prices, ”Katherine wrote Loughead, Senior Analyst at the Tax Foundation. Loughead noted that high corporate tax rates create a “sticker shock” that can discourage economic growth and investment.
North Carolina is a leader in state tax reform and is considered the “gold standard” example for states to follow. North Carolina has the lowest corporate tax rate in the country at 2.5 percent. North Carolina lawmakers are currently considering a tax reform plan that would phase out the corporate tax rate.
“North Carolina has been steadily lowering its corporate tax rate for nearly a decade. At 2.5%, it has the lowest tax rate of any state that tax corporate income. A complete exit in the next few years will lead to economic benefits that far exceed the apparent fiscal costs. We will attract more investment and create more jobs at higher wages. And yes, consumers will pay lower prices, ”Hood wrote.
Governor Kim Reynolds recently signed a tax reform that was passed by Iowa lawmakers. One provision of this new law repealed the 2018 income tax triggers, which ensure that the top tax rate for individual income tax now drops to 6.5 percent. It should be noted that this year’s reduction in the corporate tax rate results from the Tax Reform Act 2018.
At the signing of the Tax Reform Act, Governor Reynolds stated that Iowa tax reform is far from complete. Iowa’s economy continues to recover and sales growth remains positive. Iowa’s fiscal house is in good shape with full reserves and a projected surplus of $ 500 million. Policy makers should continue to work to drive both lower corporate and individual tax rates.
What must politicians consider when lowering tax rates? The following factors are not an exhaustive list, but are perhaps the most important to consider:
- Taxes and spending are on the same side of the coin: as states have to balance their budgets, any tax reform, including income-neutral, must take into account the effects on revenues. If lower interest rates are the goal, policymakers need to be prepared to prioritize spending. Controlling spending is an essential part of tax reform. “We can be confident that growth-enhancing tax breaks will make states more competitive, but their development takes time and needs to be balanced through appropriate spending reforms,” said Jonathan Williams. It’s also important to remember that growth-friendly tax reform will lead to economic growth, which will lead to more revenue, but growth cannot happen instantly. This also depends on the design of the tax reform.
- Revenue triggers can be a powerful policy tool: Several countries have used revenue triggers as a tool to lower tax rates. When properly designed, revenue triggers can help states lower tax rates while protecting national budgets. North Carolina is an example of a state using incentives effectively to lower tax rates. In 2018, Iowa took advantage of an income trigger to lower individual income tax rates. One mistake, however, was tying the triggers to a specific year and requiring a high growth target of four percent, while North Carolina set a sales target but not a specific year. States can also use a gradual approach to lowering rates. Indiana is an example of a state that has slowly reduced individual and corporate income taxes by a percentage each year or when certain sales targets are met.
- Evaluate Tax Credits, Incentives, Exemptions, and Deductions: Any tax reform, especially a reform to lower the growth rate, requires “paying” for those cuts. This means that policy makers should consider reforming tax credits, incentives, exemptions and deductions. North Carolina’s historic tax reform made numerous changes to lower tax rates and broaden the tax base. Arkansas has suspended the InvestArk tax credit program to lower tax rates. Tax exemptions also lead to distortions in tax law.
- Broadening the VAT base: By broadening the VAT base, additional revenue can be generated which could then be used to lower tax rates or to replace lost revenue due to income tax rate cuts. If Iowa broadened its sales tax base and eliminated some of the largest tax exemptions, it could generate $ 1.4 billion in additional revenue.
A political priority for Governor Reynolds is to make the Iowa economy more competitive and create more economic growth and opportunity. Iowa competes with 49 other states for both jobs and people. A state’s tax climate is important, and many states are working to lower tax rates or even abolish their respective state income taxes.
This is the goal of several governors across the country. Governor Reynolds argued that “taxpayers win when governors compete to create an environment that will not only help Iowans and Iowa families keep more of their money, but also create an environment for businesses to invest and grow and really promote the quality of life that we should make possible for all Iowers. “
Iowa doesn’t want to lose ground as other states cut tax rates and create more competitive tax laws.
Iowa tax reform is far from complete, and we can’t afford to be complacent. The Tax Reform Act 2021 offers an opportunity for further reductions in the income tax rate. Lowering tax rates will not only allow taxpayers to keep more of their hard-earned income, but it will also benefit consumers and make Iowa’s economy more competitive by creating opportunity and growth.