Recently, the House Ways and Means committee passed income tax reform legislation (HF 604) that would not only give Iowans a choice on how they file their taxes, but also would effectually put more money back into their pockets.
The bill gives Iowans an option to file their taxes under the present nine-tier system or file under one flat rate of five percent. Taxpayers choosing the flat rate would trade their claim on all credits and deductions for one standard deduction, which would be more than three times more than the current one.
The optional flat tax would not only benefit low and middle income tax filers, but it would also help retirees, as it would exempt pension income from being taxed. Under this bill, no one would see a tax increase and Iowans in each tax bracket would have the potential of seeing a decrease in their tax burden.
Unfortunately, opponents of this tax reform have seized the opportunity to demagogue the issue by claiming it will “cost the state money” in the first year of implementation. While this makes for good political rhetoric, it is terribly shortsighted and misses the point of the issue entirely.
With a variety of factors contributing to our declining revenues, here is a question that we should be asking ourselves: how do we best position our state to generate more revenue long term and jump-start our sluggish economy?
Many states — including some of our next-door neighbors — are seriously considering tax reforms that are designed to entice people and industry to move in and contribute to the growth of their economy. Specifically, several states are migrating to a flat tax model with the goal of phasing it out altogether.
States that already have these tax policies in place have experienced a robust and growing economy despite the recent nationwide recession. The formula is simple: Lower tax rate + a broader tax base = increased revenue.
While it is true there would be an initial dip in state revenue once this tax policy is implemented, that should not overshadow the overall goal of increasing state revenue — which only serves to address the current shortfall in various areas of our state budget, namely public education.
States that have chosen the quick and dirty route of just raising taxes to solve their budget problems, have been experiencing a decline in revenue. Why? Because people vote with their feet. While these states may have a higher tax rate, the people left to pay the bills soon grow weary of their tax burden and start looking for greener pastures to expand their business and raise their family. Thus, higher tax rates tend to be counter-productive in the long run.
We need to be cognizant that other states are seriously considering tax reform policies designed to attract more industry and people. If Iowa continues to ignore this fact and doesn’t participate in the discussion, then we run the risk of getting left behind economically.
Representative Greg Heartsill (R-Columbia) represents Iowa House District 28.