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PLAIN ECONOMIC SENSE
For release after March 8, 1999
Column 371
The Impacts of Recent Iowa Tax Policy Shifts
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Last fall a Washington-based nonpartisan group called the Institute on Taxation and Economic Policy released a report "Choices for Iowa: Building a Better Tax System." The report represents the results of a six-month study funded by the Joyce Foundation. The Iowa project was one that is similar to others done in other states. Here are some selected excerpts from the findings based on data that were available at that time.
Iowa cannot be unambiguously described as either a "high tax" or "low tax" state, since the state's ranking depends to some extent on the measure of tax burden used. The Institute concluded that Iowa state and local taxes per capita were below the national average. However, Iowa was above the national average in terms of state and local taxes as a percent of personal income. Perhaps part of the difference was due in part to Iowa's high proportion of senior citizens and personal income per capita below the national average.
The Institute's report states that Iowa's tax system is unambiguously regressive. That is, middle- and lower-income taxpayers are required to pay a higher share of their incomes in taxes compared to higher-income groups.
The poorest 20 percent of families, with incomes of less than $14,000 per year, pays 11.1 percent of their income in total Iowa state and local taxes. Families in the middle of the income scale pay 10.2 percent of their income in Iowa taxes. The report concludes that taxpayers at the high income end pay 8.5 percent.
The regressive nature of Iowa's tax system is the result of the interplay between its major taxes. The personal income tax is progressive in that higher income groups pay a higher percentage of their income in state and local taxes than do lower income groups. The property tax is mildly regressive. The sales and excise taxes are the most regressive.
The regressivity of Iowa's tax system is compounded by interactions with the federal system. The federal itemized deduction for state and local income and property taxes reduces the average total tax burden on highest income taxpayers by an additional 1.7 percent, while middle income Iowans see an average reduction of 0.1 percent. The poorest 20 percent see no federal offset.
The Institute concludes that the single most important trend in Iowa's tax system has been its increasing reliance on consumption taxes and simultaneous movement away from income taxes as a source of revenue. The report also noted that the property tax is still the single largest tax of state and local government but that its share of total revenues has also declined in recent years.
The primary effect of this shift from progressive income taxes to regressive consumption taxes has been to shift Iowa's tax burden from high income groups to lower income groups. Specifically, the study finds that Iowa's tax policy changes between 1992 and 1998 have increased taxes by 0.5 percent of income on the 20 percent of taxpayers with the lowest income, while taxes have declined by 0.4 percent of income for the highest income taxpayers. Those in the middle 20 percent of the income scale saw taxes increase slightly by 0.1 percent of their income.
The study also points out that moving from property and income taxes to sales taxes also represents a shift from federally deductible taxes to taxes that are not federally deductible. Thus, Iowans collectively are paying $45 million more a year to the federal government because of the policy shift to sales taxes and from property and income taxes.
The Institute report concludes that the recent trends toward a more regressive tax system are likely to continue with the combination of state policy to encourage more use of local option sales taxes and possible adoption of constitutional amendments proposing limitations on taxes and expenditures of state government.
A copy of the report may be requested by calling the Institute on Taxation and Economic Policy at (202) 626-3780.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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