John Hendrickson Guest Columnist
For fifteen years, the American Legislative Exchange Council (ALEC) has produced Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. This broad index measures 15 policy variables that the ALEC has deemed important for economic growth, with a particular focus on tax and spending policies.
Since the inception of Rich States, Poor States, Utah’s economic outlook has been ranked number one on the index every year. This year, North Carolina prospects received the second-highest ranking. Both Utah and North Carolina adopted conservative tax policies that reduced tax rates and kept them low. North Carolina, especially in recent years, has been the gold standard for other states to reap the benefits of an improved economy by controlling spending and lowering tax rates.
Beginning in 2013, North Carolina implemented several rounds of significant tax cuts. Last year, their legislature reduced the flat personal income tax rate to 4.99% and the rate will continue to be lowered until it reaches 3.99% in 2027. The tax rate 2.5% corporate tax will be entirely eliminated by 2030. As a result of these types of tax reforms North Carolina has significantly improved its rankings in both rich and poor states over the past decade.
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In 2012, the index ranked North Carolina 23rd in terms of economic prospects. That same year, Iowa was ranked 22 in the economic outlook. Since then, North Carolina has steadily climbed the rankings while Iowa now sits at 32. North Carolina has had a tremendous turnaround due to tax reform.
Interestingly, Iowa didn’t slip in the rankings because we splurged or raised tax rates. On the contrary, Iowa essentially stood still while North Carolina and other states gradually embarked on the path of pro-growth reforms. In a competitive economy, the status quo is not enough.
The good news for Iowans is that our state is no longer standing still. In fact, Iowa sparked a tax reform movement this year, continuing a recent trend. Since 2018, Governor Kim Reynolds and the Legislature have enacted three rounds of tax cuts that have lowered personal and corporate income tax rates. In addition, the legislator has abolished inheritance tax, which will soon be completely abolished. By 2026, Iowa will have a flat income tax of 3.9% and corporate income tax will be slowly reduced until it reaches a flat rate of 5.5%.
When fully implemented, Iowa’s improved tax code will almost certainly lead to higher rankings in both rich state and poor state rankings. Governor Reynolds and the Legislature understand that Iowa is in economic competition with other states and that more and more people are reacting to tax rates by voting with their feet. This is one of the reasons they passed such a sweeping tax reform measure this year.
However, even with Iowa’s recent progress, policymakers need to think about what’s next. Other states are also enacting significant tax reforms, and they will continue to do so. As an example, Missouri is considering legislation that would not only further reduce its personal income tax rates, but also eliminate corporate income tax by 2023. According to the ranking of this year, Iowa sits squarely in the middle of our neighboring states, a reminder that appeasement is not an option.
Finally, Rich States, Poor States is another notice that Iowans are suffering from a heavy property tax burden, hitting 38 this year. High property taxes not only hurt taxpayers, they also discourage economic growth. Iowa taxpayers demand a political solution for high property taxes. A priority for the 2023 legislative session should be the enactment of a strong property tax reform measure on Truth in Taxation that will finally deliver relief.
Iowa and North Carolina had nearly identical prospects a decade ago. Since then, North Carolina has rightly been called the gold standard for tax reform. It won’t be long before people across the country are talking about Iowa’s reform story in the same way.
John Hendrickson is Policy Director of the Iowans for Tax Relief Foundation
John Hendrickson is director of policy for the Iowans for Tax Relief Foundation.