Lower taxes spur new Nebraska-Iowa rivalry
The Nebraska-Iowa rivalry runs deep. Given the proximity of Nebraska’s largest cities, Iowa is usually considered our most comparable neighbor.
And our states do have a lot in common. Nebraskans and Iowans often share family roots or even work across state lines.
Some of our similarities are changing, though. Since the last time Nebraska beat Iowa in football in 2014, the Hawkeye State has begun to transform its tax system from one of the worst, to one of the best.
At that time, Iowa had one of the highest personal and corporate income taxes in the country, and was among the last states levying an inheritance tax, along with Nebraska.
But starting next year in 2023, all retirement income for Iowans age 55 and older will be tax-free. Meaning, if you have a pension, IRA, or deferred compensation plan, Iowa will be as favorable to you as any state with no individual income tax.
Lawmakers in Des Moines already initiated the repeal of the inheritance tax last year. It will be ended by 2025, leaving Nebraska as the only state west of the Mississippi with this kind of tax.
And now, legislation signed on March 1, 2022 will reduce Iowa’s personal and corporate income taxes each year through 2026, when the state is expected to fully adopt a new 3.9% flat personal income tax. This will give our next-door neighbors what would currently be the 4th lowest income tax among states that have one.
If Nebraska does nothing, a person paying our top tax rate will pay about 75% more tax on every extra dollar they earn compared to their peer in Iowa.
There’s really no reason Iowa should have this distinct economic advantage. They don’t have financial or commercial resources we lack. And as much as I’m talking about competing with Iowa, there’s wealth for both of our states and the region to gain if we have similarly attractive economic policies.
But what has set Iowa apart in recent years is simply having leaders who agreed to pursue ambitious goals and accomplish them.
Some detractors say Iowa will fail and be this decade’s Kansas. I wouldn’t count on that.
Iowa’s policy approach is likely more comparable to North Carolina, which has been remarkably successful in transitioning away from the highest income taxes in the southeast and becoming one of the most taxpayer-friendly states.
More states are going to follow. The Tax Foundation’s Jared Walczak said this week that while having a 5% income tax once put states on the low side nationally, “being competitive now means a top [tax] rate below 5%.”
There is a second tier of states emerging, like Iowa, that are not ultra-low-tax, but are highly competitive with states that are.
Certainly, they will look a whole lot better than the country’s ultra-high-tax states. And remember, states like Iowa and Nebraska should not be solely focused on trying to keep people from going to Texas or Florida from our states.
While it’s good if we can hang onto more people that way, there are a lot more Americans leaving states like California, New York, Minnesota, and Illinois, and they aren’t just considering Texas or Florida.
Statistically significant amounts of people are moving to places like Idaho, Alabama, and Oklahoma because they think it will give them a shot at a better life.
Iowa wants more Americans to know it’s a good financial decision to be an Iowan. That may not be everything, but in this kind of economy, it sure is something to a lot of people.
Learn more about Iowa and Nebraska tax reform developments with these Platte Institute resources:
Iowa’s repeal to leave Nebraska with region’s only inheritance tax
Nebraska’s 2022 Tax Agenda with Tax Foundation’s Jared Walczak