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December 2013 Policy Study, Number 13-9


Iowa Needs Income-Tax Reform!


Executive Summary



After years of discussions and debates, the Iowa Legislature finally adopted a property tax reform bill that Governor Terry Branstad signed into law earlier this year. Perhaps now our elected officials can turn their attention toward reforming the state’s income-tax system.


A study by economists Dr. Arthur Laffer and Stephen Moore demonstrates that lower tax rates are important to economic growth. In Taxes Really Do Matter: Look at the States, Laffer and Moore have reviewed economic data from 1960 to the present and have found that the nine states without an income tax have experienced greater growth rates in population, gross state product, non-farm payroll employment, and state and local tax revenue than the nine states with the highest personal income-tax rates.


Some states are adopting tax reform and lowering tax rates, if not completely moving to an income-tax-free system. The most recent state to adopt significant tax reform is North Carolina, where the new tax law adopted in July will lower the personal income tax to a single-rate flat tax, among other reforms. Our neighboring state, Kansas, has reformed state income taxes over a two-year period, making adjustments this year in the reforms adopted last year. Indiana adopted tax reforms this year to build on cuts adopted two years ago. Rhode Island officials were able to implement income-tax reform with a divided state government.


States, including Iowa, should consider reforms to lower the income-tax rates and decrease the complexity by reducing the number of tax brackets, as was done in North Carolina, Kansas, and Rhode Island. However, here in Iowa, any income-tax reforms must take care to maintain federal deductibility. Ultimately, one of the most important reasons to maintain the federal income-tax deduction on state tax returns is fairness. If the deduction were eliminated, Iowans would be forced to pay tax on money that has already been taken by the federal government. It is simply not fair to ask Iowans to pay a tax on a tax.


Iowa elected officials should follow the examples of North Carolina, Kansas, Indiana, Rhode Island, and other states that have adopted income-tax reforms.




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