The Tax Foundation in their recent report, “2011 State Business Tax Climate Index,” noted that “states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth.” In Rich States, Poor States, a study by the American Legislative Exchange Council evaluating economic conditions and outlooks of the states, Iowa was ranked as 28 out of 50 in economic outlook and 41 out of 50 in terms of economic performance. Iowa, which tends to rank in the middle in regard to its tax rates in comparison to other states, needs to pursue further tax reform, which will lead to economic growth. The Legislature is currently considering a 20 percent across-the-board reduction in income taxes and Governor Terry Branstad is pushing for both property tax reform and a reduction in the state corporate income tax to a flat six percent. These tax reductions, along with spending reductions and budget reform, will result in economic growth for Iowa.
Iowa’s top personal income tax bracket is 8.98 percent and the top corporate income tax bracket is 12 percent. Having a low tax rate is important at both the national and state level. The United States is not only competing in a globalized economy, but Iowa is also in competition with other states. States that have low tax rates and have a healthy budget are more attractive to businesses and individuals rather than states with high tax rates and reckless spending. For example, the state of Illinois recently raised their tax rates, which has made many businesses nervous, including successful companies such as Caterpillar.
Historically, cutting marginal tax rates has been successful for economic growth. The last major across-the-board income tax cut in Iowa occurred in 1997 when rates were cut by ten percent. The result was more revenue for the state, because low tax rates not only provide a stimulus for business expansion, entrepreneurship, and employment, but also in the process create more taxpayers. The 20 percent income tax cut would provide similar results in creating private sector growth.
The proposal to cut the state corporate tax to a flat six percent rate would also allow Iowa to be more competitive and business friendly. The top rate of 12 percent is not only too high, but is combined with a 35 percent top federal corporate tax rate, which is one of the highest in the world. Another benefit to lowering the state corporate tax would be to not only provide a better business climate, but in the process eliminate the many tax loopholes. Whether it is the state or federal tax code, it must be made more simple and business-friendly.
Many Governors across the nation are pursuing policies that are rooted in tax and spending reductions. Governor Chris Christie in New Jersey, Governor Scott Walker in Wisconsin, and Governor John Kasich in Ohio are all pushing for an economic agenda that centers on tax and spending reductions. If Iowa moves in a supply-side direction by reducing their tax rates it will alleviate some of the uncertainty that businesses are struggling with in today’s economy. Charles Kadlec, a noted business and economics writer, recently wrote in Forbes that “the path to jobs and prosperity lies in increasing the liberty of the American people by reducing the burden of government spending, taxes, borrowing and regulations on individuals and businesses, big and small.” Hopefully, Iowa will pursue such an economic agenda.
John Hendrickson is a research analyst at the Public Interest Institute in Mount Pleasant.