August 30, 2014

Economist: Iowa income taxes not competitive

A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.

“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.

Republican Governor Terry Branstad has been calling for cutting commercial property tax rates for the past two years, but Goss says cutting income taxes is a better way to prime the state’s economic engine.

“Property taxes are sort of what people complain about, but it’s not as fundamental, in my judgement, to economic growth as the income tax,” Goss says, “so I would argue for fixing some of your income tax issues and lowering those rates, and, again, cutting out some of the deductions.”

A major deduction in Iowa gives taxpayers the ability to deduct what they paid in federal income taxes from their state tax liability. It’s often called “federal deductability” and Goss says it makes Iowa’s income tax rates seem articifically high.

“You can’t gauge what your actual tax rate is. How do you compare Iowa to Nebraska where you don’t have that same deduction?” Goss asks. “And it makes you somewhat subject to the whims…of Washington. Think about that. And when you raise taxes there, of course, that raises your deduction here in Iowa and cuts your tax collections.”

Goss made his remarks this morning during taping of the “Iowa Press” program which will air tonight at 7:30 on Iowa Public Television.

Kansas now has three tax brackets, with a top rate of 6.45 percent. Nebraska’s top tax rate is slightly higher, but still less than seven percent. Iowa has a far more complicated system, with nine tax brackets and a top rate of 8.98 percent.