Tax Reform

Iowa Governor’s Condition of the State Address Promises Bold Tax Reform

Iowa Governor Kim Reynolds delivered her first Condition of the State address last week in Des Moines. Reynolds served as Lieutenant Governor under former Governor Terry Branstad. Branstad was appointed to serve as U.S. Ambassador to China last year, and Reynolds immediately advanced to the governorship.

Governor Reynolds covered a wide variety of topics in her speech, including accomplishments from the 2017 legislative session, which was the first time Republicans controlled both state chambers and the governorship since 1998. Some of the accomplishments she touted include balancing the state budget while protecting taxpayers, preparing students for the changing economy, and reforming collective bargaining. Reynolds also laid out her major priorities for the 2018 session, which incorporate improving the water quality in the state, investment in rural Iowa, fixing the state’s health care market, tax reform, focusing on mental health care, stemming the opioid crisis and recalibrating the education system to enable students to seize the opportunities of the 21st century economy.

The governor focused on the impact of the Tax Cuts and Jobs Act of 2017 (the recent federal tax reform package) on the state. She celebrated that “across the board, in virtually every income bracket, Iowans will see relief, and for that, I want to thank Congress and the President.” Governor Reynolds elaborated on her discussions with Iowans struggling financially who will now benefit from lower federal taxes.

At the same time, Reynolds warned that absent legislative action to alter the state tax code, Iowans will effectively see a tax increase on their state tax returns. Iowa is one of only three states with a full federal deductibility provision, which allows taxpayers to fully deduct their federal taxes from their state return. Since federal taxes have now been decreased, the result is a smaller federal deduction for Iowans and a larger overall state tax burden. Reynolds declared she will propose “a tax reform package that significantly reduces rates, modernizes our tax code, eliminates federal deductibility and provides real tax relief for middle-class families, farmers, and small businesses.”

Citing difficulties with the state budget, the governor expressed opposition to state corporate income tax reductions in the current year. However, she expects substantive reforms over a multi-year period and plans to create a bipartisan task force to analyze the state’s many inefficient tax credits.

Iowa ranks 29th in terms of the economic outlook in the 10th edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. Unfortunately, this mediocre ranking is due in large part to the state’s uncompetitive tax climate, which includes one of the highest top marginal rates for both corporate and personal income. Based on Governor Reynolds’ impressive inaugural Condition of the State address, the Hawkeye State will see major tax changes during this legislative session to develop Iowa into “a place where businesses—big and small—want to grow and expand.”

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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