|
Institute on Taxation and Economic PolicyFor Release on September 14, 1998 |
New Study Finds Shift in Iowa Taxes--Away from Well-off and Onto Middle- and Low-Income Households
Increases in sales taxes, combined with recent cuts in the Iowa personal income tax, have caused a shift in state taxes from the wealthy to middle- and low-income households, according to a study released today by the Washington, DC-based Institute on Taxation and Economic Policy.
"Since the 1980's sales and excise taxes on middle- and low-income families have been on the rise while the corporate income taxes, personal income taxes and inheritance taxes that the wealthy pay have been declining," said Tyson Slocum, an author of the study. "Recent tax changes in Iowa have continued this long-term trend."
The study, Choices for Iowa: Building a Better Tax System, found that the 1992 state
sales tax hike currently raises the same amount of revenue as has been cut in personal
income taxes since then. The '92 tax increase, however, hit middle- and low-income
families the hardest, whereas the recent income tax cuts have been most generous to the
well-off. The net effect has been a tax cut for the richest 20% of taxpayers and a tax hike
on the middle- and low-income families of the bottom 60%.
Iowa Tax System Asks More of Middle- and Low-Income Iowans Than Well-Off
"This tax shift, on top of a tax system already skewed to the wealthy, has left Iowa with a significantly more regressive tax system," said Slocum. The study found that currently, middle- and low-income families pay a higher share of their income in state and local taxes than do the well-off. Indeed, the middle 20% of Iowa families and individuals--with average income of $32,100--pay 10.1% of their income in Iowa state and local taxes. The poorest 20% of taxpayers--with income below $14,000--pay 11.1% of their income in Iowa taxes. But the wealthiest 1%--with average income of $476,000--pay only 6.8% of their income in Iowa taxes.
Shift Raises Federal Income Taxes for Iowans
The study also found that the shift of reliance from personal income tax to sales tax has raised the federal personal income tax payments by Iowans by $45 million. "Iowans can deduct their state and local personal income tax on their federal tax returns, but can't deduct the sales tax," said Slocum. "Every time Iowa reduces its personal income tax it raises Iowans' federal income tax. But raising the sales tax doesn't lower federal tax payments. Thus, the shift is a net tax loss for Iowa."
What Makes Iowa's Tax System Regressive
Choices for Iowa identifies the key features contributing to Iowa's overall
regressivity: highly regressive sales and excise taxes and an insufficiently progressive
personal income tax.
"Although personal income tax rates in Iowa look like they hit the best-off much harder than everyone else, loopholes in the tax code let the wealthy avoid a substantial amount of tax," said Slocum. "The deduction for federal taxes paid is a huge tax break for the well-off. Only Alabama and Louisiana offer such a comprehensive deduction."
In addition to analyzing tax trends and the current Iowa tax system, the study discusses Iowa's performance in a variety of economic and social indicators. Many of Iowa's economic and social indicators have shown signs of improvement. These improvements could not have happened without government investments. Unfortunately, Choices for Iowa shows that support for some key government programs has been declining relative to other states.
Choices for Iowa also analyzes a broad variety of 18 tax reform options. These include tax cutting, revenue-raising and revenue-neutral options. The analyses include distributional, revenue and federal tax implications of each reform proposal.
The Institute on Taxation & Economic Policy has engaged in research on tax issues since 1980, with a focus on the distributional consequences of both current law and proposed changes. ITEP's research is relied on by the public and policymakers, and ITEP is frequently consulted by government estimators in performing their official analyses.
Back To Iowa Menu