DES MOINES — Iowa’s tax policies scored poorly in a new state-by-state comparison of business climates, but experts think that picture will brighten as provisions of a property and income tax relief package approved last legislative session take effect.
Also, policymakers and business leaders in Iowa expressed concern that a No. 40 ranking in the Tax Foundation’s 2014 edition of the State Business Tax Climate Index projects a distorted view to prospective companies because of complexities caused by Iowa’s federal deductibility law that skew the comparisons.
Mike Ralston, president of the Iowa Association of Business & Industry, said he and members of his association think Iowa’s outlook for business is better than what is reflected in the foundation’s rankings, but outsiders likely will see the numbers and decide “Iowa’s not going to be on our radar.”
Tim Albrecht, Gov. Terry Branstad’s spokesman, said the report points up the governor’s concerns that “Iowa’s taxes are too high and wildly uncompetitive with the rest of the country” but also tells an incomplete story without factoring in federal deductibility or the recent tax changes that were enacted.
“Reports like this prove challenging because while Iowa’s tax climate isn’t as bad as portrayed, it creates a perception problem and a need for extensive explanation — which is one additional hurdle when trying to land new employers,” Albrecht said.
The Washington-based conservative foundation’s report said — as of last July 1 — Iowa had the “11th worst business tax climate” among the nation’s 50 states for the second straight year. That cutoff did not take into account the tax cut passed by Iowa’s Legislature last May and signed into law by Branstad.
The foundation ranked Iowa’s corporate income tax system 49th nationally and placed Iowa's individual income tax structure at No. 32 overall. The group’s analysis said Iowa has a top personal income tax rate of 8.98 percent, fourth highest of all states, but state officials said Iowans are allowed to deduct 100 percent of their federal tax liability and corporations 50 percent on their state returns, lowering the effective rate they actually pay.
Joseph Henchman, vice president for state projects at the Tax Foundation, acknowledged that federal deductibility skews the comparisons, but he said the report’s authors made an adjustment to account for that in the overall rankings.
“Part of the problem with having a complex provision like that is it’s difficult to calculate that kind of thing with any certainty, and it will be different for different taxpayers,” Henchman said. “We try to adjust it in what we put out, but if you’re just looking at top rates, Iowa stands out and not in a good way.”
While Iowa passed property and income tax relief last session, the partisan divide in the Legislature produced a hybrid approach that included a 10 percent roll-back on commercial property tax rates over the next two years and a tax credit for commercial property owners. The law also returns some of the state surplus to income taxpayers in the form of a tax credit worth about $60 per taxpayer next year, and lawmakers doubled the Earned Income Tax Credit for low-income working Iowans from 7 percent to 14 percent next year and to 15 percent the following year.
The wide-ranging legislative package provides tax relief to all classes of Iowa property — agricultural, residential, commercial and industrial — as well as gives breaks to Iowa income taxpayers. The legislation is projected to provide $4.4 billion in property tax relief over 10 years as well as $90 million a year in income tax savings.
“We see a lot of states with bad tax climates do this,” Henchman said, “instead of having low rates and a simple system for everybody, they have high rates and then carve outs for this or that group, and that’s not good policy, and that’s not effective in attracting business.”
Tax policy likely will be a hot topic in Iowa’s 2014 election-year session.
In recent years, majority House Republicans have offered various approaches to cut individual income tax rates by 20 percent across the board, to provide a tax credit as high as $369 per eligible individual and to offer Iowans the choice of paying a flat 4.5 percent state rate on their taxable income or using the current system of deducting expenses and federal taxes they pay if that was more advantageous.
Branstad previously has proposed to cut the state’s 12 percent corporate income tax rate in half and has advocated giving Iowa taxpayers the option to deduct federal taxes or pay a flat, lower state income tax rate. Albrecht said tax relief and reform likely will be a consideration again next session, but the governor currently is in the process of formulating his 2014 legislative action plan.
“As a part of that process, we constantly look at ways to make Iowa’s tax code more competitive,” Albrecht said. “The governor will again take a thoughtful approach when looking at Iowa’s tax code and certainly will explore any viable approach to reform.”
Senate Majority Leader Mike Gronstal, D-Council Bluffs, said Democrats are interested in making Iowa’s tax code fairer.
“We certainly have appetite for tax relief if it is going to accrue to the benefit of middle class and working families,” Gronstal said in a recent interview. “If it’s a great big tax giveaway to the wealthiest Iowans, we’re not particularly interested.”
With property tax relief addressed, Ralston said income tax reform or relief is “the next big issue” to come before lawmakers and Branstad next year. He said his organization would support simplification and would “take a look” at eliminating federal deductibility if income tax rates were brought down.
The Muscatine-based Iowans for Tax Relief has opposed ending federal deductibility without constitutional protections against future tax increases, contending that Iowans should not have to pay a tax on a tax.
In its Wednesday report, the Tax Foundation’s best states for business tax climate were Wyoming, South Dakota and Nevada, while the lowest ranked states in the 2014 index were Maryland, Connecticut and Wisconsin.