Proposed tax amendments would enshrine unfairness into Iowa's constitution

Let's ask the right questions first

Photo by Jon Tyson on Unsplash

In Iowa, we don’t raise income taxes. We argue about how much to cut them.

Don’t believe me?

Then maybe you can tell me the last time we raised income taxes. I’ll make it simple: When was the last time we raised the top rate?

Don’t remember?

Small wonder.

The top rate reached its peak in 1975.

Gerald Ford was president. Gas was 57 cents per gallon. And Chuck Grassley was finishing up a stint in the state legislature. He was just starting his career in Congress.

Like I said, we don’t raise income taxes in Iowa.

Which isn’t to say we don’t raise taxes.

The state sales tax was just 3% in 1982. It’s now 6%, although one-sixth of that goes to school infrastructure. Many areas of Iowa also levy an additional 1% sales tax, bringing the total to 7%.

This brief review of our state’s recent tax history is important for a couple reasons:

1.       The state sales tax—the one that’s gone up—takes a bigger share out of the paycheck of a poor and middle-income Iowan than it does a rich person. That’s why it’s called a regressive tax.

2.       The income tax—the one that's been falling—takes a bigger bite out of a rich person’s paycheck. It’s what’s called a progressive tax. That’s what we’ve had for years in Iowa. However, Republicans passed a law in 2022 to convert Iowa to a flat income tax rate. (If it’s not lowered even more or income taxes aren’t eliminated entirely, a flat rate of 3.9% for individuals is scheduled to go into full effect in 2026.)

Now Republican lawmakers want to make the flat tax rate permanent.

This session, they’re proposing separate measures to put the flat rate into the state constitution, or alternatively, to require a supermajority in the Legislature to raise income taxes.

Both will have the same effect: They will enshrine Iowa’s unfair tax system into the state constitution in perpetuity.

The people pushing these amendments hope you won’t take a close look at Iowa’s entire tax system before you vote. They only want you to look at the income tax. And what could be fairer than a single, simple tax rate that applies to everybody?

Except that Iowans know the income tax isn’t the only tax in our state.

We already know the rich pay proportionately less of their income on sales taxes than people down the income scale. But they also get a big break on the other major tax, the property tax.

Photo by J King on Unsplash

Multiple studies have shown that the owners of expensive houses in the US pay lower effective property taxes than the people who live in more modest places. One large study, by a University of Chicago researcher, said the lowest priced homes had an effective tax rate more than double that of the highest priced houses. A later study by an economist at the Federal Reserve Bank of Philadelphia put the difference at about 50%. Still, the basic premise is the same: The wealthy get a break at the expense of the rest of us.

In January, Rob Sand, the state auditor in Iowa, released a study showing that people living in the parts of the state where incomes were higher had a lower property tax burden than people living in areas where incomes were lower.

Yet, nobody in the Republican-controlled Legislature is moving to fix this problem.

Ask yourself why.

The idea of a flat income tax rate does appeal to Iowans. A Des Moines Register poll in 2022 said a majority supported a flat tax rate for individuals. But how many folks who responded to that poll know that property and sales taxes favor the wealthy and disadvantage the rest of us?

The challenge for opponents of these proposed constitutional questions is to make sure this unfairness is widely known. There is some time to spread the word. To put these proposals on the ballot, lawmakers still have to approve these measures again in 2025 or 2026.

Already, critics have argued these tax cuts will endanger priorities like schools and clean water. And this is true. The state cut income taxes in the 1980s and 1990s, including the top rate. But those cuts passed with bipartisan majorities, and they were comparatively modest and sustainable.

Basic state school aid in the years encompassing the tax cut years of 1988 and 1997 increased by an average 3.5% per year. But ever since Kim Reynolds became the governor, those yearly school aid increases have shrunk by 37%, to 2.2%. They haven’t even covered the rate of inflation.

Meanwhile, two years ago, she signed a law that cut the top income tax rate by 60%. The law gave the average millionaire a savings of $67,000; the typical Iowan got $600. She also cut corporate taxes.

Make no mistake, these kinds of policies will endanger future investments in Iowa.

The Legislature’s move to increase teacher salaries this year was a good thing, but it also was the first time it’s happened in 11 years. The fact is teacher salaries have gotten so bad that Iowa ranked 35^th in the nation for average teacher pay. How far will we fall before the next raise gets approved?

Yes, Iowa has a big surplus. Like a lot of states, a gusher of revenue from a recovering post-pandemic economy and unprecedented federal aid flowed into state coffers, which helped state capitols with their finances. In fact, most states ended 2023 with a budget surplus.

However, surpluses don’t last forever. Why should we plow that money into changing an income tax system that will unfairly benefit the wealthy, especially when they’re already getting a break from our sales and property tax systems?

If we want to lower taxes, why not the state sales tax? That would really help working families. Why haven’t lawmakers tried to fix the unfairness in the state’s property tax system? And why are they trying to permanently kill the one tax policy that seeks to balance out the unfairness of the other major taxes in Iowa?

These are the questions we should be asking ourselves, not whether to enshrine this skewed tax system into the state constitution.

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