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December 2013 Policy Study, Number 13-9

   

Iowa Needs Income-Tax Reform!

   

Conclusion

   

 

Research shows that states with no income tax outperform the states with the highest personal-income-tax rates, with greater growth rates in population, gross state product, non-farm payroll employment, and state and local tax revenue. While the last state to completely eliminate the income tax was Alaska in 1980,[36] several states are working their way towards that goal with incremental income-tax-reform plans, including North Carolina, Kansas, and Indiana. Additionally, Rhode Island tried a unique tax reform, before deciding to lower rates for the entire tax system.

 

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. Reformers should consider “the deep-seated fundamentals of a solid tax system – one that is simple and transparent, with broad-based taxes that provide a balanced revenue stream, spread the tax burden fairly, and heighten the chance of compliance.”[37]

 

However, here in Iowa, any income-tax reforms must take care to maintain federal deductibility. Iowa taxpayers are currently able to deduct their federal income-tax payments from their net income when filing an Iowa income-tax return. 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’s elected officials should consider income-tax reform for the 2014 legislative session. The property-tax reforms adopted last year, as well as the income-tax reforms in Rhode Island, demonstrate that progress can be made even with divided government. Iowa should follow the examples of North Carolina, Kansas, and Indiana and adopt income-tax reform.

 

   

 

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