The cupola of the Iowa Statehouse is shown in Des Moines. (The Gazette)
As Iowa Republicans scramble to negotiate a bill that would cut state income tax rates, some lawmakers are touting tax reform as a way to compete with other states for workers and to make Iowa attractive to a growing workforce.
Senator Mike Klimesh, R-Spillville
Iowa Sen. Mike Klimesh, R-Spillville, wrote in a Jan. 14 legislative bulletin about legislative proposals to ensure Iowans “keep more of their hard-earned money.” Democrats have criticized those plans as disproportionately benefiting top earners.
Gov. Kim Reynolds has proposed a flat tax rate of 4%, which would be less than half of Iowa’s current top tax rate if approved. The House and Senate have both unveiled different packages that staff estimate would provide $1.7 billion and nearly $2 billion in tax relief, respectively. These both carry higher prices than Reynolds’ $1.6 billion proposal.
The governor’s proposal also calls for a gradual reduction in the corporate tax rate each year revenues exceed $700 million, until the top rate is 5.5%. The Senate has proposed a five-year phased reduction of the top rate from 9.8% to 7.8%, while the House plan makes no changes.
“Data has long shown that states with low or no income taxes grow faster than states with high and punitive tax rates,” Klimesh wrote.
To analyse
Klimesh pointed to articles highlighting population shifts from high-income states to low-income or no-income states to back up his claim.
The Wall Street Journal reported that this migration, particularly among Sun Belt states, “has been going on for more than a decade.”
According to the Journal, “Illinois’ population declined a further 141,039 between spring 2020 and last summer, with 151,512 netizens leaving the state for other states. California lost 300,387 people amid a net emigration of 429,283 residents. The biggest loser – as you already know – was New York, whose population fell by 365,336 due to an exodus of 406,257 inhabitants.
The article continues: “Texas added 382,436 new residents, including 211,289 from other states. Florida gained 242,941 residents as 263,958 people from other states poured in. …Same for Arizona whose population grew by 124,814.” Texas and Florida have no income tax, while Arizona has tax rates below 5% (the highest high is 4.5%).
Klimesh also pointed to data from right-wing organizations such as the American Legislative Exchange Council, the Tax Foundation think tank and the National Review showing that Americans are moving toward low-tax states.
Besides tax rates, which can be a “major consideration,” there are a number of other reasons Americans were on the move in 2021, according to a report by North American Moving Services. Using data from neighbor.com’s survey of movers, people said they wanted a lower cost of living, closer to family, and increased work flexibility as key factors in their move. Other key factors were new job opportunities, better schools, and greater COVID-19 safety in less dense communities.
The report noted that “states with the highest number of inbound Americans are among the most tax-friendly states in the United States, including Arizona with a rate of 1.8% (rate of taxation) and Tennessee without income tax, while South Carolina has progressive income. tax” from 0 to 7%.
Of the states mentioned by the Journal, it should be noted that although Arizona has seen a population increase, Illinois, a state that has seen a population loss, does not have a tax rate on much higher income – its flat rate is 4.95%.
To assess similar claims used to justify state income tax cuts, the nonpartisan, nonprofit Institute on Taxation and Economic Policy in 2017 analyzed 18 states with opposing tax policies: the nine without personal income tax and the nine with the highest rate. marginal personal income tax rates over the past decade.
Using data from the Bureau of Economic Analysis, the institute found that overall and per capita GDP, as well as average incomes, grew faster in states with the highest income taxes. (These findings were also retained in an analysis with data through 2019.)
The institute noted that its study did not take into account factors such as “industry mixes, natural resource endowments, tourism advantages, federal spending patterns, geography and climate.” He cautioned against concluding that a state’s tax policy was the primary cause of its economic growth, but suggested that his findings cast doubt on claims that tax cuts equate to economic growth.
On the contrary, a 2018 study published in the Quarterly Journal of Economics found that “marginal rate cuts lead to higher real GDP and lower unemployment. There is also evidence that the answers are at marginal tax rates rather than average tax rates.
Some experts acknowledge that there is little academic consensus.
A 2015 Brookings Institution study on the relationship between state taxes and growth notes that there are studies available to support each finding: that tax cuts accelerate growth, have no effect, or it is difficult to determine their effect.
But according to his study, “the overall impression generated by these results is that state-level economic growth is not closely related to state-level fiscal policy. The results are not consistent with the view that reductions in top state income tax rates will automatically or necessarily generate significant impacts, or any impact, on growth. The effects of different taxes – on income, on corporations, on property and on sales – vary considerably within and between studies.
Opponents of this trickle-down economics theory, which suggests that lowering taxes for high earners will promote job creation and investment so that the benefits are felt by all, point to Kansas’ failure to tax cuts.
In 2012 and 2013, Kansas Governor Sam Brownback implemented tax cuts in an effort to stimulate the state’s economy. Lawmakers reduced the top rate of state income tax from 6.45 and 6.25 percent to 4.9 percent, allowing these taxpayers to pay the same marginal rate as middle-income earners, and the lower rate went from 3.5 to 3%.
The Republican-controlled legislature later reversed the cuts as a failure after it led to sluggish growth and declining revenues, fueling cuts in public spending on priorities such as education and infrastructure.
Conclusion
While population shifts, in many cases, attract residents of higher-tax states to lower-tax states, experts suggest that correlation does not necessarily equate to causation, as people move to various reasons. Some findings support Klimesh’s statement, but others refute it.
Overall, there is little consensus among economic experts on the relationship between a state’s fiscal policy and its economic growth, so it’s an overstatement to say that “the data has long shown” that tax cuts taxes stimulate the economy. Additionally, the Kansas case study shows that tax cuts can put a state’s economy on a precarious path if not done right.
The research is not as conclusive as Klimesh’s definitive statement – “Data has long shown that states with low or no income taxes grow faster than states with high and punitive tax rates”, he wrote – and the example of Kansas indicates that economic growth is not a given. when tax cuts are introduced.
He may or may not be right that tax cuts accelerate growth. But we welcome him because it is a hotly debated issue among experts and there is little certainty that tax cuts are a magic bullet for growth, as he claimed. Because he omitted much of the debate, we give the claim a D.
Criteria
The Fact Checker team verifies statements made by an Iowa political candidate/leader or national candidate/leader about Iowa, or in advertisements that appear in our marketplace.
Claims must be independently verifiable. We assign statements grades from A to F based on accuracy and context.
If you spot a claim that you think needs checking, email us at factchecker@thegazette.com.
The members of the Fact Checker team are Elijah Decious, Erin Jordan, Michaela Ramm and Marissa Payne. This fact checker was researched and written by Marissa Payne.
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