Iowa Can Transform Income Tax Without Eliminating It


Senator Dan Dawson, chairman of the Iowa Senate Ways and Means Committee, said his tax policy goal for the 2022 legislature is to create a “21st model of the century ”which will create the best fiscal climate in the country.

“We have the opportunity to do a tax reform moonshot here in Iowa,” said Senator Dawson, speaking to the Iowa Taxpayers Association (ITA).

He is right that Iowa has a historic opportunity to pass major growth-friendly tax reform that will allow more taxpayers to keep their money and make the state more competitive.

The reason for this historic opportunity is Iowa’s strong tax base. The budget shows a surplus of $ 1.24 billion, which also means there is over $ 1 billion left in the Taxpayer Relief Fund. In addition, the Cash Reserve Fund and Economic Emergency Fund (sometimes collectively referred to as the Iowa “Rainy Day Fund”) are replenished to their statutory limits with a combined amount of $ 800 million. dollars.

The debate is already taking shape on how to use the huge surplus. Some argue that policymakers should only make targeted tax cuts while expanding support for the earned income tax credit and other property tax credits. Other suggestions include returning the surplus to taxpayers in the form of refund checks, which would be similar to a one-time stimulus payment.

However, Senator Dawson argues that the historic surplus must be used to create a five-year tax reform plan that continues to reduce high tax rates. During the ITA legislative panel, Senator Dawson argued that it would be a “lost opportunity” if the legislature only made general rate cuts or a one-time tax refund.

Based on the Taxpayer Relief Fund, the legislature is responsible for returning that money to taxpayers, and Senator Dawson is right that policymakers cannot waste this opportunity. Lawmakers have the option of building on the Comprehensive Tax Reform Law that was passed in 2018, which began lowering personal and corporate tax rates.

Gov. Kim Reynolds also said tax reform will be a top priority for her in the 2022 legislative session. Gov. Reynolds understands that not only is Iowa competing with other states, but many states are cutting back their tax rates and that Iowa can’t afford to get complacent.

Senator Dawson’s approach of crafting comprehensive tax reform to provide tax relief, lower rates and create a more competitive tax code is the right approach.

Senator Dawson even signaled that Iowa’s high corporate tax rate needs to be lowered. He also understands that any tax relief must be paired with prudent budgeting. Senator Dawson told ITA members that while he supports lowering the corporate tax rate, he rightly believes that tax credits and incentives need to be evaluated.

“I have no interest in lowering current corporate rates without substantially reforming some of our incentives and credits,” Dawson said. When developing a comprehensive tax reform plan, there should not be any “golden calves” allowed to sit on the table.

Iowa can learn from other states, like North Carolina, which is the gold standard for state tax reform. For several years now, North Carolina has lowered its personal and corporate tax rates, while reforming its tax code to make it more competitive.

Recently, the North Carolina legislature approved a measure that will lower the personal income tax rate from 5.25% to 4.99% and continue to be gradually reduced until it reaches 3 , 99% by January 2027. Likewise, the corporation tax, which is the lowest in the nation at 2.5%, will be phased out by 2023.

Since 2013, North Carolina’s rulers have passed comprehensive tax reforms conducive to growth. A crucial reason for their success has been to balance tax reform with prudent budgeting.

“Reasonable tax cuts and honest, conservative budgets” were the foundations of North Carolina’s successful tax reform. This was also Kansas’ main lesson. A state cannot lower tax rates and increase spending.

“The effects of fiscal policy on supply are real, but they do not negate the need for spending discipline,” wrote John Hood, president of the John Locke Foundation in North Carolina.

Navigating tax reform is never easy, but Senator Dawson is on the right track by working on a comprehensive tax reform plan rather than simply cutting rates or sending out refund checks. The Taxpayer Relief Fund will allow policymakers to deliver substantial tax cuts, and tools, such as well-designed income triggers, can work to ensure that rates continue to be lowered.

A North Carolina lawmaker correctly described tax reform as an “evolution, not a revolution.” Governor Reynolds and Republican legislative leaders have said their ultimate goal will be to eliminate income tax. It is a noble political goal, but it will take time. More than 50% of the income for fiscal year 2022 is generated by income tax. Iowa is heavily dependent on income tax, which will make tax elimination much more difficult

Nonetheless, Iowa can learn from states such as North Carolina, Utah, Indiana, and others, which all have income taxes, that pro-growth tax reform can take place without. eliminate income tax.

Iowa has the opportunity to pass landmark tax reform and deliver lasting tax relief to taxpayers while making our state more economically competitive.

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