CGI News: Iowa’s Tax System Exacerbates Inequality, National Study Finds

Eliminating State and Local Income Taxes Would Dramatically Worsen Fairness

DES MOINES, Iowa — Iowa’s upside-down tax system, with the wealthy paying a far lesser share of their income to tax than low- and middle-income families, is about to get worse.

The scheduled reduction in personal and corporate income taxes in the next three years will widen this disparity, while proposals to eliminate state and local income taxes would be significantly worse for tax equity. That’s according to the latest edition of the Institute on Taxation and Economic Policy’s Who Pays?, the only distributional analysis of tax systems in all 50 states and the District of Columbia.

Iowa’s tax code — like many states’ systems — is regressive, meaning it takes a greater percentage of income of low- and moderate-income households than of high-income households. In the past, Iowa’s income tax did a better job of lessening regressive impacts, but income-tax cuts passed since 2018 have set the state on a path of greater tax inequity.

The “Who Pays” report from ITEP illustrates not only that tax equity remains a problem in Iowa, but that it is certain to get worse — even if lawmakers pass no new cuts in 2024. However, Governor Kim Reynolds and legislative leaders have indicated more cuts are coming.

“This analysis is important to help Iowans see the baseline of where we are in 2024 vs. what’s to come — first, already-passed tax cuts scheduled to take effect through 2026, and then further proposals to eliminate the state income tax,” said Anne Discher, executive director of Common Good Iowa.

The report’s key findings for Iowa:

• The lowest-income 20% of taxpayers face a state and local tax rate of 11.6%, compared to 10.5% for the middle 20%, and 7.2% for the top 1%.

• Iowa now has the 23rd most regressive tax system in the nation.

• Cuts to the personal and corporate income taxes that have been approved but not yet phased in will worsen this regressivity. If in effect in 2024, these planned cuts would move Iowa from the 23rd to the 16th most regressive. And. if in effect in 2024, fully eliminating state and local income taxes would make Iowa the 6th most regressive. Under the latter scenario, the lowest-income 20% of taxpayers would face a state and local tax rate that is 323% higher than the top 1% of households.

• Iowa is one of 41 states that tax the top 1% less than every other income group, and one of 34 states that tax their poorest residents at a higher rate than any other group.

“We know Iowa’s tax system was already bad in terms of fairness. Now we can see just how much worse it will get if lawmakers eliminate the income tax,” Discher said. “And the unfairness will be compounded by the resulting revenue losses that will gut education, health care, public safety and environmental protection.”

Nationally, tax systems in 44 states exacerbate inequality by making incomes more unequal after collecting state and local taxes, while systems in six states plus D.C. reduce inequality, the report finds. On average across the country, the lowest-income 20 percent of taxpayers face a state and local tax rate nearly 60 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate is 11.3 percent for the lowest-income 20 percent of individuals and families, 10.5 percent for the middle 20 percent, and 7.2 percent for the top 1 percent.

“When you ask people what they think a fair tax code looks like, almost nobody says we should have the richest pay the least. And yet when we look around the country, the vast majority of states have tax systems that do just that,” says Carl Davis, ITEP’s Research Director. “There’s an alarming gap here between what the public wants and what state lawmakers have delivered.”

Recent policy changes have exacerbated or lessened regressivity in state tax systems, depending on the choices made by lawmakers.

“We’ve seen a lot of states shift their tax systems to become even more regressive in recent years by enacting deep tax cuts for the wealthiest. But we know it doesn’t have to be like this. There is a clear path forward for flipping upside-down tax systems and we’ve seen a handful of states come pretty close to pulling it off,” said Aidan Davis, ITEP’s State Policy Director. “The regressive state tax laws we see today are a policy choice, and it’s clear there are better choices available to lawmakers.”

About the report:

Who Pays? is the only distributional analysis of tax systems in all 50 states and the District of Columbia. The comprehensive 7th edition of the report assesses the progressivity and regressivity of state tax systems by measuring effective state and local tax rates paid by all income groups. No two state tax systems are the same; this report provides detailed analyses of the features of every state tax code. It includes state-by-state profiles that provide baseline data to help lawmakers and the public understand how current tax policies affect taxpayers at all income levels. Over 99 percent of all state and local taxes, measured by their revenue contribution, are included in the analysis.

ITEP is a nonprofit, nonpartisan tax policy organization. ITEP conducts rigorous analyses of tax and economic proposals and provide data-driven recommendations on how to shape equitable and sustainable tax systems. ITEP’s expertise and data uniquely enhance federal, state, and local policy debates by revealing how taxes affect people at various levels of income and wealth, and people of different races and ethnicities.

Common Good Iowa is a nonprofit, nonpartisan statewide organization headquartered in Des Moines. CGI provides research, analysis and outreach to promote policies that expand opportunity for every Iowan and make our state a great place to live, work and raise a family.

For More Information:

Mike Owen, deputy director, Common Good Iowa, mowen@commongoodiowa.org

Jon Whiten, deputy director, Institute on Taxation and Economic Policy, jon@itep.org