U.S. News & World Report recently ranked Iowa “best state in the nation when it comes to infrastructure, healthcare, opportunity, and education.” Although this ranking is something Iowa can be proud of it does not mean that improvements cannot be made, especially regarding our state’s high and complex tax code. Iowa has some of the highest individual and corporate income tax rates in the nation. These high rates are disguised by numerous tax credits and federal deductibility, which distorts the actual rates. By enacting meaningful tax reform and relief, Iowa could lower rates and unleash further opportunity and economic growth for individuals and businesses.
High individual and corporate income tax rates are some of the most harmful policies affecting economic growth and opportunity. Several states, including North Carolina, Indiana, and Wisconsin, are excellent examples that lower tax rates and lower levels of spending will lead to economic growth and more than provide funding for the vital services of state government.
North Carolina is the gold standard for states to follow. They are successfully demonstrating lowering tax rates and controlling spending is crucial for economic growth. In 2010 North Carolina was confronted with a $3 billion budget shortfall. In response to the shortfall, the legislature began to lower both individual and corporate tax rates across-the-board. The Tar Heel state used a prudent protection known as triggers, to ensure state revenue increase sufficiently to “buy down” rates.
Since 2013 North Carolina’s individual income tax rate has fallen from 7.75 to 5.5 percent and the corporate tax rate has fallen from 6.9 percent to 3 percent. The lower tax rates have been a shot of adrenaline for economic growth. Perhaps the most important lesson from tax reform in North Carolina is to understand that tax relief and spending cannot be separated. North Carolina is demonstrating states can lower rates and keep spending levels low without creating a budget crisis. Today North Carolina is actually seeing over $500 million budget surplus.
“The supply-side effects of fiscal policy are real, but they don’t negate the need for spending discipline,” noted John Hood of the John Locke Foundation. If tax rates are lowered, then spending or at least the rate of growth in spending, must be lowered as well. This is a lesson Congress has failed to learn and a lesson that Iowa policymakers must learn.
The purpose of tax relief is not to gut or eliminate government, but rather create further opportunities by encouraging private sector growth. The objective of controlling government spending, as John Hood argues, “is to keep government from encroaching too much on the private investment that is the primary driver of economic progress.”
Indiana successfully reduced tax rates using a similar approach to North Carolina by phasing-in tax rate reductions. Both states have not only lowered tax rates but also broadened their tax base.
In Wisconsin, Governor Scott Walker has provided $8 billion in tax relief during his time in office, and the state is not only seeing a budget surplus of $385 million, but the priorities of government are sufficiently funded. Governor Walker’s budget and tax reforms have created much economic growth in Wisconsin.
If North Carolina, Indiana, and Wisconsin are examples of states that are successfully enacting tax reform, then Kansas is the example not to follow. Kansas initiated a series of tax reforms in 2012 which lowered state taxes, but the legislature failed to control spending. This resulted in a deficit situation and the incorrect accusation Kansas represents a supply-side economic failure. The problem with the Kansas tax cuts is not the rate reductions, but rather the spending increases which caused the deficit.
Iowa is at a fiscal crossroads. Progressives and liberals argue numerous programs do not have enough money and need to be “fully-funded,” that is, that the state needs to increase their “investment.” Some programs may need additional funding, but the truth is that terms such as “fully-funded” or “investment” mean more government spending, which in turns means higher taxes. Progressives and liberals who constantly complain that government needs more taxpayer’s dollars should have to answer where they will get the money and whose taxes will be increased to finance an increase in government spending. Unfortunately, whether it is at the federal or state levels, governments cannot tax and spend their way to prosperity.
Iowa policymakers should take note of states that have enacted meaningful tax reform successfully. By lowering rates and keeping spending levels low, Iowa can deliver tax relief to the benefit of all Iowans by creating economic growth and opportunity.