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February 2012 Policy Study, Number 12-2

   

TABOR: A Pro-Growth Solution for Iowa

by John Hendrickson

   

 

Pro-Growth Ideas

   

 

Iowa is currently working its way out of a budget crisis and is looking at ways to reform the budget, rein in spending, and create a pro-growth tax system. Unfortunately, Iowa ranks number 41, or in the ten lowest states, in the 2012 State Business Tax Climate Index.[65] In individual tax categories Iowa is ranked low:

 

•corporate tax rank: 48
•individual income tax rank: 32
•sales tax rank: 25
•unemployment insurance tax rank: 35
•property tax rank: 36[66]

 

Iowa also ranks fairly low in the Rich States, Poor States index with 23 out of 50 for economic outlook and 28 out of 50 for economic performance, but the state still ranks high with the right to work provision.[67] If Iowa policymakers seriously considered a TABOR provision, implementing priority-based budgeting and reducing spending, tax reform such as the 20 percent across-the-board income tax cut, and cutting the 12 percent corporate tax in half, this would create a strong signal for economic growth.

 

For example, nine states have repealed their state income taxes and “those states have far outperformed high-
income tax states on every measure of economic success.”[68] In a recent National Review Online article, Phil Kerpen, Vice President for Policy at Americans for Prosperity, and Stuart Jolly, Oklahoma State Director for Americans for Prosperity, wrote:

 

The record is clear. Over the past decade, non-income tax states have seen 59 percent economic growth, versus just 38 percent for high-income tax states. Job growth has been 4.7 percent in the non-income tax states, while high-income tax states actually lost 2.9 percent of their jobs. Population growth is the same story, up 12.3 percent in the non-income tax states and just 3.8 percent in the high-income tax states. Perhaps most interestingly, non-income tax states are seeing more rapid growth in state and local tax revenue, as the high-income tax states are undermining economic performance and, as a consequence, depressing revenues.[69]

 

Both Oklahoma and Kansas are considering implementing serious tax-reform measures such as repealing the state income tax and Kansas Governor Sam Brownback has proposed lowering the “personal income-tax rate from 6.45 percent to 4.9 percent,” while eliminating the “tax altogether on small business entities.”[70] The Wall Street Journal reported that Oklahoma’s Governor Mary Fallin is proposing “lowering the state income-tax rate to 3.5 percent next year from 5.25 percent, and an ambition to phase out the income tax over ten years.”[71] Other states that are considering major tax reform proposals include Missouri, Indiana, South Carolina, Idaho, Maine, Nebraska, New Jersey, and Ohio.[72] In Missouri, “a voter initiative that is expected to qualify for the November ballot would abolish the income tax and shift toward greater reliance on sales taxes.”[73] It appears that a supply-side economic revolution may be taking place within several states of our Union, which will lead to economic growth and better public policies.

 

A recent study by the Texas Public Policy Foundation compared the economic growth of Texas, a non-income tax state, with California, which is deeply entrenched with high tax rates and a severe budget crisis. In describing the Texas’ versus California’s economy, economists Donna Arduin, Arthur Laffer, Steve Moore, and Wayne Winegarden wrote:

 

Texas’ most significant competitive advantage over California is that Texas has no income tax where California has a steeply progressive income tax. Texas’ appropriate level of government spending relative to the income of Texans’ income is another competitive advantage that keeps its economy strong. Finally, the lighter regulatory burden in Texas also helps its economy flourish in comparison to California…Texas policies of relatively low taxes, low spending, and less regulation have helped the Lone Star State weather the Great Recession better than California and the nation as a whole.[74]

 

North Dakota is another state that is improving its economic climate by implementing pro-growth tax reform. Recently, North Dakota cut both the individual and corporate income tax rates: “the top individual rate fell from 4.86 percent to 3.99 percent, while the top corporate tax rate fell from 6.5 percent to 5.15 percent.”[75]

 

“States that implement pro-growth tax, spending, and regulatory policies experience robust economic growth during strong economic times and are more resilient to adverse economic trends during weak economic times,” stated Arduin, Laffer, Moore, and Winegarden.[76] In addition, Arduin, Laffer, Moore, and Winegarden recommend that Texas, and Iowa as well, should implement the following reforms:

 

•balance the budget without raising taxes;
•reduce its reliance on federal funds that ultimately result in Texas spending more than it can afford;
•establish stricter tax and expenditure limitations, including limits on property tax growth, that restrict growth in government spending to inflation plus population growth;
•reduce taxes on capital;
•continue to rely on its vibrant private sector to grow its economy by maintaining its relatively sound tax, land use, and environmental policies.[77]

 

These reforms can be initiated by other states in bringing about economic growth. Policies that are rooted in traditional, limited-government policies of less spending, low rates of taxation, and limited regulation promote economic growth. The evidence is clear in looking at the current policies of states such as California, Illinois, and even President Barack Obama’s failed national policies, in comparison to states that have pro-growth policies. As the authors of Rich States, Poor States noted: “the conclusion is getting to be nearly inescapable that states with high and rising tax burdens are more likely to suffer in an economic decline while those with lower and falling tax burdens are more likely to enjoy robust economic growth.”[78]

 

The Wall Street Journal argued that not only do states without an income tax achieve economic growth, but these “states still fund more than adequate public services and their schools are generally no worse than in high-income tax states like California, New Jersey, and New York.”[79] As The Wall Street Journal noted:

 

They have also recorded faster revenue growth to pay for government services over the past two decades than states with income taxes. That’s because growth in the economy from attracting jobs and capital has meant greater tax collections. The tax burden isn’t the only factor that determines investment flows and growth. But it is a major signal about how a state treats businesses, investment and risk-taking. States like New York, California, Illinois, and Maryland that have high and rising tax rates also tend to be those that have growing welfare states, heavy regulation, dominant public unions, and budgets that are subject to boom and bust because they rely so heavily on a relatively few rich taxpayers.[80]

 

Iowa’s fiscal future can be greatly enhanced by pursuing pro-growth policies such as adding a TABOR Amendment to our Constitution, pursuing across-the board-tax reform, cutting spending through priority-based budgeting, and reforming regulations. These policies will be a true stimulus to Iowa’s economy as well as protecting the interests of taxpayers. If Iowa wants to remain competitive economically, it must pursue these policies, which will not be easy as demonstrated by the battle over TABOR in Colorado and what is going on across the nation in state capitols and in Congress. Special interests, especially those on the progressive end of the political spectrum, have fought free-market reforms on both the state and national levels. If Iowa wants to continue to compete economically as well as create a sound fiscal health within the state, policymakers will have to seriously consider implementing free-market economic solutions. In the end this is a battle of political philosophy between those who believe in constitutional limited government versus the progressive statist model as symbolized by the policies of President Barack Obama. As the authors of Rich States, Poor States note,

 

the principles for prosperity are simple and timeless: promote economic freedom. Do this by keeping taxes low, operating based on a lean and efficient budget that neither wastes money nor provides unwarranted subsidies, and minimizing regulation. States focused on these principles will benefit from economic growth and prosperity.[81]


   

 

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