Hendrickson and Ginn: Iowa Should Watch out for Complacency in Tax Charges Opinion

Toyota Financial Services recently announced that the Cedar Rapids, Iowa facility will be closing and shedding 600 jobs due to consolidation of customer service centers, in part because the private sector employs 5% fewer people than a year ago.

The consolidation of customer service centers is a loss to Iowa and a gain to other states like Texas. Companies are responding to both the economic climate and the new work environment created by the COVID-19 pandemic.

High tax states are witnessing an exodus of people and businesses, while lower tax states are seeing them arrive in droves. This is another example of people voting with their feet when the government's burden becomes excessive.

Iowa has made strides in lowering income tax rates for individuals and businesses in recent years. However, policymakers should be careful not to become overly complacent and they should work to further cut spending and lower tax rates.

Iowa tax rates are important because we are in direct competition with 49 other states.

For example, South Dakota, Iowa's neighbor, does not tax any income from individuals or corporations, making it far more economically competitive.

Another tax nation with no personal income, Texas is the national leader in economic growth and attracts both people and businesses. Iowa could also learn from the recent Texas property tax reform, which restricted property tax growth to 3.5% for local governments and 2.5% for school districts without voter approval. Texas is even considering improving its tax system by abolishing nearly half of its property taxes.

In 2018, Iowa Governor Kim Reynolds and Republican-led lawmakers passed growth-enhancing tax reform that lowered income tax rates. Lowering tax rates and practicing responsible spending make Iowa more competitive and economically stronger.

As a result of the 2018 law, Iowa's corporate tax rate dropped that year from 12%, the highest in the nation, to 9.8% – the same as Minnesota's. Even at 9.8%, Iowa still has the third highest corporate tax rate in the nation.

In 2023, income tax is expected to be reduced to 6.5%, which will increase competitiveness in the region. The caveat is that there are two strict revenue triggers that must be met for rate reduction.

First, government revenues must exceed $ 8.3 billion. Second, sales growth this fiscal year must be at least 4%. Using revenue triggers in government tax policy can be a good idea, but creating a high threshold can unnecessarily delay the reduction in tax rates and reduce the necessary constraint on government spending – the driver of higher tax burdens.

Income tax cuts shouldn't be hindered by the 4% growth trigger. A repeal would therefore give taxpayers more security.

Governor Reynolds has made removing revenue triggers a priority. The Iowa Senate has passed laws that both remove revenue triggers and expire obsolete inheritance taxes. Both measures would put taxpayers first and make state tax laws more competitive.

Iowa can focus on states such as Texas, Indiana and North Carolina, which create growth-promoting tax codes and practice fiscal restraint. Iowa can't afford to get complacent about being a business leader in the Midwest – and making people thrive.

Hendrickson is the Policy Director at the Tax Education Foundation in Iowa. Ginn, Ph.D., is the chief economist with the Texas Public Policy Foundation in Austin, Texas, and he was the former chief economist of the White House's Office of Management and Budget during the Trump administration.

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