Replacing Iowa income tax with higher sales tax

Republicans, who control the Iowa House, the Iowa Senate, and the Iowa governorship, make no secret of their intent to entirely eliminate the state’s income tax. It probably won’t happen this coming year or the next, but the plan is now on a glide path. If the Iowa GOP remains in power for the rest of the present decade, we should probably count on the demise of the Iowa income tax by the end of the 2020s or before.

Even though those rates have already started to drop by dint of Iowa legislative actions in the past few years, the state income tax still makes up a huge chunk of the state’s budget. In fiscal year 2022-23 the figure was 46.8% — nearly half of state budget revenues. That percentage is now no doubt somewhat lower due to state legislation that has dropped individual state income tax rates to a flat tax figure of 3.8% next year, but Iowa still depends on billions of state income tax dollars each year for its budget.

Meanwhile, the 2024 Iowa Republican platform approved at this year’s state GOP convention stated: “We demand the end of property tax.” True, platform planks often simply express party members’ personal desires, not carefully reasoned action proposals, but significant changes to the state’s property tax laws should not be ruled out over the next few years.

If both the state income tax and local property tax were eliminated, or even just sharply reduced, what revenues would remain to fund public education? There’s only one major source: the sales tax.

I asked that question of Greene County’s two legislators, Senator Jesse Green and Representative Carter Nordman, by email on Aug. 4.

Senator Green responded 10 minutes later, and we’ve continued a detailed and productive email thread ever since. Senator Green chairs the Senate’s local government committee and sits on the Senate education and appropriations committees as well, and is well positioned to understand and influence education tax policy.

As of this writing (Aug. 14), I’ve not yet heard from Representative Nordman. He may be on summer vacation or otherwise occupied. He chairs the House education appropriations subcommittee as part of his responsibilities on the full appropriations committee, so his position, like that of Senator Green, is an influential one in the Legislature, particularly on education tax policy. If he responds to my email, I’ll report his thoughts in a future column.

Senator Green laid it out clearly: “From a 30,000 ft. view, yes, Republicans generally lean towards desiring just some form of consumption taxation rather than other forms such as income or property tax.”

But he went on to point out problems with that approach: “From my standpoint, and the majority of other Republicans, it would not be realistic to pay for all local services on the back of a sales tax, especially when education funding is over half of both local and state budgets.”

Green noted accurately that consumption/ sales taxes can be very volatile. That’s why, he explained, essential services related to property are taxed as they are, in order to withstand some volatility in economic conditions. So he is not for eliminating the property tax, but he says he is “100%” for reducing it. “This is the number one issue Iowans are concerned about as I door knock,” he wrote.

In order to do that, Green said substantial property tax relief can be accomplished by broadening the Local Option Sales Tax (LOST) and/or reforming the school formula.

The only tax that Green wants to eliminate completely, he wrote, is the state income tax.  That can realistically be done within about eight years, in his opinion. To do that today would require raising the sales tax rate to about 11% without changing any sales tax exemptions, he stated.

However, he wrote that “due to our growing economy, the sales tax revenue has gone up very significantly which has allowed us to ratchet down the income tax side of things.” The implication is that as the state’s economy grows, more of that replacement can continue.

If that is the case — and economic analysts may differ on that statement — the volatility that Senator Green noted may now be coming into play. Iowa ranks 31st in the nation for economic growth rate, and this year’s downturn in farm income is likely to push us even lower.

Senator Green added something I doubt many Iowans have considered. “The reason Republicans have not raised the state sales tax yet to eliminate the income tax is because constitutionally, we would have to give 3/8th of that new penny towards certain Natural Resource issues which some fear would go towards more public land acquisition which many Republicans do not agree with. If we can figure out how to put safeguards on how that money is spent, this could be an option for Republicans.”

So besides the volatility problem with sales tax revenues, Republicans have refrained from raising the state sales tax because some of the money would have to go for natural resource purposes that might include increasing the amount of public land in the state.

Regarding public school funding, Senator Green advocated that school districts be allowed more flexibility within the revenue that they have. He would like to find a way to cut back the restrictions that the state places on how schools can spend their dollars. That’s a philosophical position that certainly gets plenty of discussion, both at the Capitol and out in the state, but it doesn’t speak to the question of the sources of those dollars.

All in all, I’m grateful to Senator Green for his delineation of the Republican position on taxes in Iowa. I think he accurately reflects the opinions of most of his Republican colleagues, with whom he works closely on tax policy in his committee positions.

The question for Iowans to consider is if they’d rather pay more in sales tax and less in income and property tax, and how much more sales tax they’re willing to pay. The answer will be different depending on one’s personal income.

Well-to-do people may be very happy to trade their current income tax and/or property tax dollars for a higher sales tax rate. For low-to-middle income Iowans, the reverse may be true, since their income and/or property tax bill is significantly lower than that of their affluent neighbors. 

Bottom line: as Iowa income taxes drop and finally disappear, Iowa sales taxes will go up if the state is to maintain essential state-supported public services at their current level, to say nothing of modest year-to-year spending increases. 

Iowans will decide at the polls if the coming shift in the tax mix is to their liking.

Rick Morain is a reporter and columnist with the Jefferson Herald.