In the old days before the web, I used to go through the Reader’s Digest almanac to find interesting facts. One thing that always grabbed my attention was the tax tables for various states. Hey, I’m a nerd, spelled e-c-o-n-o-m-i-s-t. I remember being surprised at how heavily Iowa’s government taxed income.
In 1987, Iowa’s top state income tax rate was 9.98 percent, and that rate kicked in at an income of $45,000. That put Iowa into California territory. In California that same year, the top tax rate was 11 percent. But California Republican Governor George Deukmejian and the legislature dropped the top rate to 9.3 percent in 1988, and that rate kicked in at $47,000. I don’t know which part of the previous sentence is more surprising: that California’s government dropped the tax rate or that California once had a Republican governor. The two facts are connected.
Back to Iowa. Since 1996, when the government indexed the tax rates to inflation, Iowa has been moving in the right direction on taxes. In 1998, all tax rates were cut by 10 percent, making the top rate 8.98 percent. Then all rates were cut in 2019, making the top rate 8.53 percent.
This is from David R. Henderson, “Iowa Leads the Way on Tax Cuts,” TaxBytes, October 11, 2023, Institute for Policy Innovation.
Read the whole thing. You’ve already read half of it.
READER COMMENTS
robc
Oct 12 2023 at 8:43am
Isn’t easier to lead the way on tax cuts when you start outrageously high?
David Henderson
Oct 12 2023 at 9:14am
Yes. Please tell Newsom.
robc
Oct 12 2023 at 9:24am
In 54 years, I have never set foot in California. A talk with Newsom is not gonna be how I start.
robc
Oct 12 2023 at 8:54am
Colorado has constitutional limits on the growth rate of spending (limited to population growth plus inflation). This election, I have 4 ballot questions to make exceptions to that. 2 of them are statewide, 2 are local.
TABOR (taxpayer bill of rights) requires refunds and tax cuts when revenue exceeds the limits. Politicians (of both parties, as my city is a GOP area) hate sending money back. Every year is a fight about whether or not an exception can be made and in what form it gets sent back.
The two statewide questions this year, one is to change the limit to population growth plus inflation plus 1%, which guts the entire idea.
The other is because a new tobacco tax raised more revenue than expected so manufacturers/distributors/retailers are going to get a large rebate and they want to keep it instead. The tobacco tax was from a ballot measure a few years ago and CO requires the new tax measures to state amount of revenue that cannot be exceeded. And they guessed wrong.
One of the local ones is asking for a 12 year moratorium on sending back and lowering property tax rates. If it fails, property tax rates will have to be lowered about 18%.
The final one is actually different, its just asking for a new fire tax. The amount would lead to a huge increase in the fire budget, so would be offset by shifting some current fire dept funding back to the general fund for spending elsewhere. Its a bait and switch.
Walter Boggs
Oct 12 2023 at 1:39pm
I live in Colorado as well, and now I suspect it’s the same town.
robc
Oct 12 2023 at 4:33pm
I would be surprised if two cities have those exact same initiatives. The second one especially. I noticed in the description booklet that no one bothered to right a PRO piece for it.
David Henderson
Oct 12 2023 at 4:40pm
It’s too late now to write a PRO piece, of course, but I recommend it. When a colleague and I wrote anti-tax arguments for local tax initiatives, we tended to win. What led us to do so was a local tax measure that had not ANTI argument; the measure passed. We resolved not to let that happen again without a fight and were successful on about 4 tax hikes.
It’s a fun way to exercise one civic engagement, and so different from what I ever saw in Canada.
robc
Oct 12 2023 at 5:36pm
I was glad to see no PRO argument, I am hoping that means it has little chance of passing. The ANTI argument was well written and pointed out the fungibility of general funds and how a targetted tax just freed up general funds for other spending.
David Henderson
Oct 12 2023 at 6:43pm
Oops. I misunderstood. I thought the PRO was in favor of further restricting taxes and spending. Now I get it.
That’s awesome news. In Taxifornia, where I live and have voted since becoming a citizen in 1986, I’ve never seen a proposal for a spending or tax increase that didn’t have a pro argument. I’ve seen many that didn’t have an anti.
Vivian Darkbloom
Oct 12 2023 at 9:49am
A fairly complete history of Iowa tax rates (not only income) can be found here:
https://tax.iowa.gov/iowa-tax-rate-history
If we use 2008 as a baseline, California has reduced its state sales tax from 7.25 percent to 6 percent today (local rates not included). Iowa’s state sales tax has been steady at 6 percent. Iowa recently reduced its marginal corporate tax rate from 12 percent to 9.8 percent while California’s marginal rate is 8.84 percent.
States have a variety of means to tax its residents and local economic activity. What matters is the level of spending and the choices made as to the mix of taxes needed to fund that spending. In general, it appears to me that Iowa is moving somewhat more to consumption and use taxes while California is moving modestly in the other direction to raise more from income. For what it’s worth, if economic efficiency is the goal, it appears that Iowa is moving in the right direction. I don’t consider the history since 1988 to be quite “amazing” but it would be closer to “amazing” if one considers that from 1975 to 1987 the top marginal income tax rate in Iowa was 13 percent!
David Henderson
Oct 12 2023 at 9:57am
Thanks, Vivian, as always.
I wasn’t aware of the sales tax changes in California, where I live, probably because the overall sales tax (including local) is, I think, the highest it has ever been in the time I’ve lived here on this round (since 1984.)
I do point out in the rest of the piece, which I encouraged people to read, the facts about the corporate income tax.
steve
Oct 12 2023 at 3:14pm
From my POV this is another in a long line of articles about income tax rates. What we almost never see is analysis of total tax rates. I understand that you only have so much time and so much space, so looking at individual taxes should happen, its just striking that there is such paucity of work, especially in general media, looking at total tax incidence. It’s not that hard to find but you do have to go look for it.
Steve
David Henderson
Oct 12 2023 at 3:32pm
Steve,
Tax incidence is a whole different problem from total taxes. And much more difficult.
Data on total taxes are not that hard to find, as you say. In my piece, I gave the data on both income tax rates and corporate tax rates. Vivian Darkbloom above has given the data on sales tax rates: they have remained constant in Iowa. The bottom line is that total taxes as a percent of income have fallen substantially in Iowa.
Jose Pablo
Oct 12 2023 at 7:19pm
Tax incidence is a whole different problem from total taxes
I am always puzzled by how little analysis on tax incidence is out there.
People seem to assume that taxes are really “paid” by whoever the tax code says is the taxable person. The astounding prevalence of such a wrong belief can’t be any good for having a sensible discussion. Although I imagine that politicians just love this confusion.
David Henderson
Oct 12 2023 at 11:46pm
Well said.
Your last sentence is especially a propos re the corporate tax. Politicians can tell people that corporations bear the whole burden.
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