Hendrickson & Mozena: Time for tax credit reform

Iowa’s landmark tax reforms this year focused on reducing income tax rates paid by Iowans and the businesses that employ them. The next step must be to change who pays – and who doesn’t – these taxes. If Governor Kim Reynolds and the Legislature are serious about positioning Iowa for the future, it’s time to tackle the state’s reliance on special tax breaks.

The 2022 reforms could not have come at a better time to help the state win people and jobs. The planned reduction in personal tax rates to 3.9% and corporate taxes to 5.5% over the next few years will leave more money in Iowa’s pockets and allow businesses to spend more for payroll and other productive uses.

Since 2018, Governor Kim Reynolds and the Iowa Legislature have made tax reform a priority and they’ve made great strides, but they can’t stop now.

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One of the reasons Iowa’s income tax rates are so high is because policymakers have used the tax code to enact laws for purposes other than funding Iowa’s government services. ‘State. In other words, political problems have been solved by creating new tax credits with dozens of new tax credit bills introduced in each legislative session. Several are aimed at promoting socio-economic ends, such as the recent sales tax exemption on feminine hygiene products and diapers for children and adults. Therefore, comprehensive tax credit reform is needed, as each individual tax credit is fiercely defended by a particular interest group.

However, when policymakers legislate through the tax code like this, it leads to higher tax rates and increased complexity that makes it harder for small businesses and individuals to ensure they pay. what they owe in taxes – and nothing more. This results in a massive collection of tax credits which weighs down the State budget each year. The estimated responsibility for tax credits in Iowa is $581.4 million for fiscal year 2022, with the the biggest the corporate tax relief being the Research and Activities Tax Credit ($67.6 million in FY21).

To give context to that $581.4 million price tag for 2022, that’s $134 million more than the Iowa Department of Transportation spent on maintenance and construction of interstate highways this year. -the. Or, it could have pretty much covered the state Contribution of $550 million to operating the University of Iowa, Iowa State University, and the University of Northern Iowa. While proponents say many of these tax breaks are necessary for “economic development,” even the site-selection industry own research regularly finds that a state’s infrastructure and skilled workforce – highways and universities, in other words – are far more important factors for companies deciding where to locate than government credits. one-time taxes could never be.

Despite this, we saw during the debate on the 2022 tax reform measure how difficult it was to reform a single tax credit when Senate Majority Leader Jack Whitver and Senate Speaker Ways & Means, Senator Dan Dawson, fought to include tax credits – in particular, the Research and Activity Credit – in the overall reform plan. Reforming this credit helped make the numbers work to lower the overall corporate tax rate, but the vested interests behind a tax credit that primarily benefits large, politically powerful corporations have made it an epic fight. . Senator Whitver and Senator Dawson stuck to their guns and correctly argued that reducing income tax rates requires everything to be on the table, including tax credits.

The the proof is clear that tax credits do little to change business decisions about where to do business. That should be reason enough for a massive legislative cleanup of the state’s tax code to eliminate decades of entrenched tax credits, but if nothing else, the legislature should only continue the momentum of reform. historic state taxes by bringing greater transparency and tax reform. tax credits and strengthen its oversight of all existing tax credit programs. This should include giving teeth to the so far ineffective reviews of the Tax Expenditures Committee.

Once the evidence is in, it’s time to start reforming or even eliminating credits that aren’t delivering results. The more Iowa’s elected leaders can do to eliminate tax credit exclusions, the more they can continue to reduce everyone’s tax burden.