Flat tax could spark economic growth in Iowa
One of the most prominent and well-known of all Republican Party buzzwords has once again re-entered the Iowa political realm: The flat tax.
Iowa House Speaker Kraig Paulsen, R-Hiawatha, revived discussion on the topic recently when he proposed implementing an optional flat rate income tax for state taxpayers. The idea has been batted around by Republicans in the past, but nothing’s ever come of it – the Democrat-controlled Senate would never pass such a significant change in the state’s tax code. They claim a flat tax would unfairly shift the burden away from Iowa’s richest tax bracket and on to less wealthy classes.
To an extent, the Democrats’ claims hold water. Altering Iowa’s current graduated income tax scale so everyone pays the same rate would create marked changes. Some people that pay more would pay less, and some that pay less would pay more. However, Paulsen’s proposal allows some flexibility for taxpayers hesitant about moving to a fully-fixed income tax rate.
According to an article in the May 15 Globe Gazette, Paulsen’s plan would implement optional 4.5 percent flat rate income tax with no deductions. Iowans could still choose to pay their current rate with the same amount of deductions under today’s tax code if they wanted, which would help alleviate backlash about unfair taxation. Paulsen estimated the revised system would cut between $400 million to $500 million from the state’s income tax coffers.
Reduced tax revenue may create fears about cuts to state-funded programs and other agencies, but that’s not necessarily worth fretting over. There’s been a growth in the federal safety net in past years and Iowa currently has a budget surplus of around $1 billion. Additionally, the flat rate income tax creates more opportunities for wealthier taxpayers to reinvest their money into the state’s economy. If they have less taxes to pay, it frees up more capital for various investment possibilites throughout the state. This could lead to more businesses, which leads to more jobs, which leads to an expanded taxbase. Any revenue lost from a flat tax could arguably be made up quite easily through economic development.
All these scenarios would mesh together to form one harmonious tax system if we lived in a perfect world. But we don’t, and signficant roadblocks exist for the flat rate income tax. As last week’s report noted, commercial and industrial tax rollbacks passed in 2013 goes into affect this year. Those cuts will no doubt have an impact throughout the state, and it’s uncertain whether Iowa can afford to slash even more revenue in the near future.
Nonetheless, it will be interesting to see if Paulsen’s proposal gains more momentum during the campaign season this summer. Republicans would love to control both houses and the governor’s office following the November election, and the flat tax’s probability increases significantly if that scenario plays out. However, that’s entirely hypothetical at this point. Paulsen’s plan will most likely end up as political fodder and nothing more, but its potential to expand the tax base through added businesses and job growth is certainly worth investigating further.