HENDERSON: Iowa Leads the Way on Tax Cuts

David R. Henderson
 
AUSTIN, Texas (Texas Insider Report) — In the old days before the web, I used to go through the Reader’s Digest almanac to find interesting facts. One thing that always grabbed my attention was the tax tables for various states. Hey, I’m a nerd, spelled e-c-o-n-o-m-i-s-t. I remember being surprised at how heavily Iowa’s government taxed income.
 
In 1987, Iowa’s top state income tax rate was 9.98 percent, and that rate kicked in at an income of $45,000. That put Iowa into California territory. In California that same year, the top tax rate was 11 percent. But California Governor George Deukmejian and the legislature dropped the top rate to 9.3 percent in 1988, and that rate kicked in at $47,000. I don’t know which part of the previous sentence is more surprising: that California’s government dropped the tax rate or that California once had a Republican governor. The two facts are connected.
 
Back to Iowa. Since 1996, when the government indexed the tax rates to inflation, Iowa has been moving in the right direction on taxes. In 1998, all tax rates were cut by 10 percent, making the top rate 8.98 percent. Then all rates were cut in 2019, making the top rate 8.53 percent.
 
But current Republican Governor Kim Reynolds is not done. She and the legislature dropped the top rate to 6 percent in 2022. Tax rates are scheduled to go to a flat 3.9 percent by 2026.
 
Reynolds also understands that corporate income tax rates matter too. Iowa has a graduated corporate income tax system that punishes success. Before she was governor, the top corporate rate was a whopping 12 percent, and kicked in at a relatively modest income level of $250,000. In 2018, Reynolds signed a bill that dropped the top rate in 2021 to a still substantial 9.8 percent, starting at an income of $250,000. This year, the top rate is 8.4 percent, and in 2024 it will fall to 7.1 percent, still starting at an income of $250,000.
 
Reynolds has vowed to end the individual income tax by 2027.
 
How has she delivered these cuts? By reining in the growth of state government spending.

During her time in office, from 2017 to 2024, state government general fund spending has risen by an annual average of 2.3 percent, and state government spending per capita has risen annually by an average of 2.0 percent.  
 
The message is clear: If you want your government to cut tax rates, push it to reduce the growth rate of spending.

Today's TaxByte was written by David R. Henderson, a research fellow with the Hoover Institution at Stanford University.