Tax cuts working for Iowa; Wisconsin left standing still

Taxpayers in Iowa had themselves another pretty darned good year.

Iowa Gov. Kim Reynolds, somewhat quietly announced late last week the state government finished its fiscal year business with a surplus of $1.83 billion. It’s the third consecutive fiscal year with a surplus.

With $902 million in reserve funds and $2.74 billion in the Taxpayer Relief Fund, Reynolds projected that next year the Iowa corporate tax rate will slip from 8.4% to 7.1% — significantly lower than Wisconsin’s 7.9%.

Wisconsin’s top individual income tax rate, meanwhile, remains at 7.65% after Gov. Tony Evers vetoed a Republican tax cut — already far higher than Iowa’s plummeting individual rate.

The top individual income tax rate in Iowa dropped from 8.53% in fiscal 2022 to 6% this past year. Reynolds has set ambitious goals of a flat income tax rate of 3.9% by 2026 and “My goal is to get to zero individual income-tax rate by the end of this second term (2027),” Reynolds has told the state press.

This “Tax-Cut Triumph,” as the Wall Street Journal editorial board called it this week (Wednesday), has been years in the making, Jared Walczak, who has been tracking the tax reform progress for the Tax Foundation, told the Badger Institute.

Walczak, Vice President of State Projects for the foundation, said Reynolds committed to the idea of improving Iowa’s overall tax climate while she served as lieutenant governor from 2011-17.

Already in her first year as governor, Walczak wrote in 2018, “Reynolds (R) is on the verge of signing tax reform legislation which reduces rates and simplifies certain aspects of the tax code.” Tax reform legislation driven by a Republican legislative majority followed in 2021 and 2022.

By fully implementing the 2022 legislation, Walczak said in his 2022 report, Iowa stood to climb to 15 in the ranking of states in the foundation’s State Business Tax Climate Index, tied for the biggest jump in the Index’s history.

Wisconsin is currently 27th.

“The ongoing transformation of Iowa’s tax code is certainly remarkable,” Walczak wrote.

It is particularly remarkable for where Iowa has been in recent history. For all the recent reforms, Iowa still ranks 38th overall in a formula that combines corporate, individual income, property sales and unemployment insurance taxes.

Only Minnesota, at 45th, currently ranks lower than Iowa among the states adjacent to Wisconsin. Illinois, with its reputation as a tax hell, ranks 36th and Michigan ranks 12th, although analysts question whether the state has the political will or the economy to carry through on its tax reforms.

While Iowa has been a leader, it is just one of most states that have lowered their top income tax rates, Walczak told the Badger Institute. Indiana, North Carolina and Utah have all made big jumps up the Tax Climate Index.

“Iowa is a particularly strong example of a trend across the country,” Walczak said. “It’s spurred by competition. States are looking around at a more mobile workforce and more mobile companies. There is a sense that unless you do something you will be left behind.”

The national economy returning to pre-pandemic vigor has produced fat revenue surpluses in states like Iowa and Wisconsin. While CARES Act and ARPA guidelines prohibited states from spending any of those trillions to alleviate budget debt, the aid lavished on millions of businesses helped swell state tax coffers.

Prior to the pandemic, a joint investigation by the Tax Foundation and the Badger Institute acknowledged the struggle to convince political leadership in Wisconsin to make tax reform a priority.

As the Badger Institute reported in detail during the spring session here and here and here, the tax philosophy of Democratic Gov. Tony Evers is at sharp variance with a Republican majority in the state Legislature. And with the first option of the Tax Foundation and the Badger Institute report, calling for a “streamlined, simplified flat tax, balanced by modernizing and increasing the sales tax.”

In keeping with his role as a non-partisan tax expert, Walczak declined to compare the governors of Iowa and Wisconsin and the influence of their political parties on their taxing philosophy.

“I can say that from her time as lieutenant governor, Gov. Reynolds has made this a priority,” he said. “Iowa has seen substantial growth in its revenues. Having a governor fully on board, leading and cheerleading for this reform is important to its success.”

Democrats in the Iowa legislature do not see Reynolds’ tax cutting and frugality as any sort of triumph. With billions in reserve, Reynolds signed off on a budget of $8.52 billion for the next fiscal year, nearly $2 billion less than it could have spent. That amount, according to the state’s Legislative Services Agency, will represent the state’s fourth consecutive budget surplus.

Legislators, state Rep. Beth Wessel-Kroeschell, a Democrat from Ames, said, are much better at deciding how taxpayer money is spent than actual taxpayers. “There are lots of ways that we can give it back to the taxpayers through quality services,” a Des Moines Register story reported.

“Some see a surplus as government not spending enough, but I view it as an over collection from the hard-working men and women of Iowa,” Reynolds responded in her press statement. “We’ve seen what the powerful combination of growth-oriented policies and fiscal restraint can create, and now it’s time for Iowans to directly receive the benefits.”

But can Reynolds keep her promise and zero-out the income tax rate in Iowa by 2027? Walczak said yes, but it won’t be easy. The state economy will have to remain strong and the tax revenue generation robust. The legislature — and the governor — will have to remain committed to fiscal restraint. And there can be no surprise catastrophes.

“Fully eliminating income taxes is very difficult to do,” Walczak said. “It may take more time than originally planned for. And it will have to be done incrementally.”

Mark Lisheron is the Managing Editor of the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.