Iowa has the highest corporate income tax rate in the country at 12 percent. That rate, combined with the federal corporate tax, totals 29.5 percent. As part of the 2018 comprehensive tax reform law, the legislature lowered the rate. In 2021, the top corporate tax rate will still have four brackets, but the top rate will fall from 12 percent to 9.8 percent and the lowest rate will be 5.5 percent. Even at 9.8 percent, Iowa will still have a high corporate tax rate and our rate will be tied with Minnesota.
Numerous states, especially in the aftermath of the federal Tax Cuts and Jobs Act, are lowering corporate tax rates. The reason for this is states are in economic competition and high tax rates discourage economic growth. The corporate tax, just as with the individual income tax, is also considered one of the more harmful taxes because it punishes productivity and economic growth.
The corporate tax is a tax on capital and high rates can “discourage business productivity by reducing the benefits of hiring workers or investing in infrastructure.” High corporate tax rates can also “syphon resources away from productive investments and increase the cost of doing business.” A state’s corporate tax rate can also impact business activity, whether that is an existing business or a potential business looking to locate within a state. A recent study found that “on average, a 1 percent increase in corporate tax rates prompted companies to reduce their employment in the state by 0.4 percent.”
The use of tax credits and incentives can also disguise high corporate tax rates. The Mercatus Center estimates that Iowa could lower the corporate tax rate by 36 percent if credits and incentives were eliminated. Too often states utilize credits and incentives to lure businesses to either expand or locate in order to create more jobs, but the evidence is clear that this “economic development” strategy fails to deliver. Iowa would be better to lower the corporate tax rate then to depend on credits and incentives in order to create economic growth. A lower corporate tax rate would also be more beneficial to all businesses rather than the state picking winners and losers and deciding who should receive a credit or incentive.
Iowa’s high corporate tax is a deterrent on economic growth. For Iowa to become more economically competitive it must work to lower the corporate tax rate. It’s time to accelerate Iowa’s economy by lowering tax rates.