Nebraskanomics: Iowa’s Incredible Tax Reform Turnaround

Nebraskanomics: Iowa’s Incredible Tax Reform Turnaround

Chris Ingstad of Iowans for Tax Relief joins Jim Vokal to update Nebraskans about major movements on tax policy in the Hawkeye State. A transcript of this episode is available below.

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Episode Transcript

Jim Vokal: Nebraskanomics is produced at Platte Institute headquarters in central Omaha. If we recorded this episode while driving in the car, we could actually arrive in Iowa before finishing today’s discussion with my guest, who is my counterpart in the Hawkeye State.

Chris Ingstad is President of Iowans for Tax Relief and he’s going to fill us in on some major tax reform developments happening in Iowa—or from where I sit—just across town. Chris, thanks for joining me on Nebraskanomics.

Chris Ingstad
: Thanks for having us we’re happy to talk about this story.

Jim Vokal: All right, let’s dig in here. I’ve been at the Platte Institute nearly ten years now, and when I would work on tax issues, I would usually have the luxury of regarding Iowa as Nebraska’s higher-tax neighbor. Iowa’s income taxes were among the country’s highest, and like Nebraska, you levied an inheritance tax. Not very stiff competition compared to some of our other regional peers. But that’s beginning to change. Give us an overview of what’s happening in Iowa.

Chris Ingstad: Well, we’ll get right to the point and share that just earlier this month our governor signed into law another tax reform bill that will eventually get us to a flat 3.9% income tax rate. Along with that, there is a path to reduce our corporate tax rate to 5.5% and it reins in some credits along the way. And in this tax reform bill we also eliminated the state tax on all retirement income, and they tried to make some provisions to do the same for farmers who are retiring or small business owners, as those folks don’t usually have a 401k or an IRA.

But what’s happening is really two things have changed in Iowa since the 2016 election. The first is political and then falling on the heels of that is policy. And all of this happens because we have the right lawmakers in office. That starts with our Governor, Kim Reynolds, who by the way we are very proud of her, not just how she’s led our state, but the response she gave to President Biden’s State of the Union address, we thought she did a great job, and she’s certainly done a great job leading our state, you know, throughout the pandemic in 2020 and everything that followed.

But winning elections, having the right governor, and then having conservative control of both our Senate and House has made a big difference. Historically, Iowa has been a purple state at best, and the unified control of the trifecta maybe only lasted for a couple of years, but recently Iowa has really looked solidly red, at least in terms of their election results. And so what that has meant has been, again, conservative majorities and a conservative governor coming out of the ‘16 ‘18 and ‘20 elections, and I think the lesson that our lawmakers are learning is that Iowans want the state moving in a conservative direction. They’ve given them that mandate by continuing to re-elect them and so what has followed that then are some policy changes. We actually did one round of tax reform in 2018 to get this whole thing started. We came back last year and did some more work, and this year, took a really big swing at this, and really put us on a nice path.

Again, we’ll be at 3.9% within three or four years, and you know, one reason that’s been able to happen is because we’ve had legislators in Des Moines who are going to hold the line on spending growth. They’re not cutting spending, they’re just making sure it grows at a reasonable rate, and what that’s led to was they’ve controlled spending, and our economy has been very strong, almost a structural imbalance between how we collect money and how we spend it. We’ve had three years in a row now of huge budget surpluses, meaning overcollection of taxpayers’ money, and frankly that’s projected to continue for a while, and honestly it was borderline immoral to keep collecting money at that rate, and so really what the legislature has done is they’ve now sort of bent the revenue curve down so that in a few years the revenue we’re collecting will really more closely match our spending needs and the things that are going to fund the priorities of the state.

So the long answer short is we got the right people in office and they’ve really learned to govern in a conservative manner.

Jim Vokal: Well, I think a couple things are fair to say about our states. So we both consider our states prosperous, or at least stable, and the second thing is change generally hasn’t come easy. So, what are the economic challenges Iowa is looking to overcome through tax reform and do you have any insight about how Iowans view the tax reforms being made?

Chris Ingstad: I’ll start with that second one first. Our foundation did some polling the last week of February, in fact, right before legislators voted for this. And I’m looking at the numbers here. It was a plus 33% favorable. So Iowans, by and large, certainly among Republicans or independents, really were in favor of this reform. Now, you’re right that Iowa and Nebraska are similar in a lot of ways.

I think our cultures and our ethos are very similar, and frankly, our economies are similar too, right? Importance on small towns and Main Streets and agriculture, as well as having, you know, Omaha and Des Moines are very similar too, in our largest cities. So, there’s a lot there. I think what we’re going for is the same thing as you guys.

Look, our states are not backsliding. They’re not backsliding in terms of population, but they’re maybe not growing as much as we’d like. So O think a better tax code that we’re building here in Iowa will help us grow our population, it will welcome businesses and employers to come to our state, and frankly it’ll help keep people here. You know, eliminating tax on retirement income was a very politically popular thing to do, and I can’t tell you that people are going to stop going to Florida or Arizona or Texas for the winters, in fact they probably will, but maybe it will only be for the winters and they’ll then stick around Iowa the rest of times. There will no longer be a tax benefit heading south year-round.

Jim Vokal: All right, there’s always going to be people who will say tax reform is a failure no matter how positive the outcomes may be, but tax policies as we all know—saw it in Kansas—need to be sustainable. So how do you make sure Iowa doesn’t backslide on these reforms either because of financial errors, or as the state’s political leadership changes over time in the future?

Chris Ingstad: Sure. One, hopefully you crafted your tax plan in a prudent manner anyway. I believe in Iowa, we did. For instance, we phased it in over a number of years. More importantly, states where tax reform in theory hasn’t worked—it’s not the tax reform that didn’t work—it’s the spending that didn’t work. States where they want to point to it being a failure, it’s because they didn’t control their spending, and they kept spending, frankly, wildly, okay? In Iowa…we’ve had several years in a row of big budget surpluses, and we’ve got several years ahead of us where large budget surpluses are projected, again frankly, we’re cutting taxes from the excess already, and we’re cutting it from the growth, we’re not talking about cutting below an amount that would allow us to keep spending and funding our priorities. Also, we in Iowa have something called the Taxpayer Relief Fund, which basically is what catches and holds onto those surpluses. So we have a cushion there, and part of this tax reform plan will wisely use dollars from that Taxpayer Relief Fund, but even after it’s all phased in there will be a significant amount of money there. You can think of that as another rainy day fund, or you can think of it as a catalyst for more cuts in the future. But the whole key to this stuff is controlling the spending, and in Iowa, like most states, we’re required to have a balanced budget, so the legislature, no matter who’s in charge, can’t go overspend.

But, you know, your point about political leadership is a good one. And it goes back to what I started with, is you know, you’ve got to have the right folks in office, and elections matter. And so Iowans and hopefully Nebraskans soon, maybe we can have another conversation in a year or two where I’m asking you the questions on what’s going on and how you did it. But you’ve got to have the right people in office to keep leading your state in this direction.

Jim Vokal: All right, let’s shift to inheritance tax now. Nebraska and Iowa are the last two states west of the Mississippi River that have an inheritance tax. But starting in 2025, your state, that inheritance tax is going to go away forever for Iowans. We’ve observed, Chris that there is a huge gap between the way Nebraska voters look at the inheritance tax (which is overwhelmingly negative, by the way) and the way some of our elected officials look at it. What was the process like in Iowa at deciding on a multi-year repeal of the inheritance tax, and does it contain any lessons that we can learn here in Nebraska?

Chris Ingstad: I think yes to that. You know, the comment you made, Jim, about the people, the voter, the taxpayers don’t like the inheritance tax, but some legislators certainly do, reminds me of what our founders said. A lot of folks get elected with all the right intents, but once they get into office they realize it’s just too much fun to spend other people’s money. And so, you would be cutting off a revenue stream for some elected officials, and they just don’t want to give that up. Yeah, while acknowledging that the way Iowa administered their inheritance tax and Nebraska’s are different, again, some of those similarities we talked about earlier—I think could be helpful here.

Both of our states, it is not hard to imagine or think about someone you know, even a family farm or maybe in your case even a ranch has passed down, or that small business, that Main Street business, a farmer or business can be worth quite a bit. Usually, they’re not flush with cash. And so what happens is that passes from one generation to the next—and there’s an inheritance tax—there’s not cash on hand to pay that. That leads to some bad outcomes. A family business is sold. Part of the family farm is sold off. All those things, and that’s not the outcome that tax policy should be driving for us. It was really helpful to point out, look, depending on how it bounces around from sibling, to nephew, to grandchild—whatever it might be—a single farm may stay in the hands of the same family but have an inheritance tax levied against it, like, three different times, all the while, you know, property taxes are being paid on that property, income taxes are being paid, it just doesn’t make sense for the government to keep grabbing that cash. It was ultimately a fairness issue, and I think once legislators grabbed a hold of that, then it was “How do you make it work within the budget?” Again, it was a multi-year phase-out on our standpoint, so that those elected officials could sort of accommodate less dollars coming in. Frankly, if we hadn’t passed it… last year and it was on the table now, maybe we would eliminate that in one fell swoop, but we did not, and that’s okay.

We found talking to businesses, as long as they understand the government’s not out to get them or as long as they understand they know where it’s going, that’s okay. And so we’ve been big proponents of phasing in some of these cuts. Folks know there’s light at the end of tunnel, they know it’s moving in the right direction. And frankly—government—it’s a little easier to accommodate those things being pieced in as opposed to just the one big one big hit.

Jim Vokal: Appreciate that history lesson there. Hopefully we can have the same success here in Nebraska. We did get the rates down, but our goal here at the Platte Institute obviously is to repeal this over time, and hopefully Iowa can be a good footprint for us All right, there’s been a lot more talk in recent years about states completely getting rid of income taxes in the style of South Dakota, Florida, or Texas. We’ve mentioned some of those states already. North Carolina is on track to eliminate its corporate income tax and some think that the Tarheel State might eventually even try to phase out the personal income tax, but that’s speculative at this point. Arizona is often mentioned because it’s already moving to a low, flat tax and like North Carolina, its population is growing pretty rapidly. But there are other states struggling to grow, like Mississippi, West Virginia, and Kentucky, that have lawmakers and some governors floating income tax repeal proposals. Do you see the flat tax in Iowa as a step to becoming more like South Dakota, or is it an end in itself?

Chris Ingstad: Yes [laughs]. It’s going to be one of those things.

Look, let’s think about the states with no income tax. No state that’s ever had a full-on income tax has ever eliminated it. Some that maybe only had interest and dividends have been able to roll that back. So we’re in a little bit of uncharted territory if we’re talking a full-out repeal. No matter what we do, whether Iowa’s final goal is total elimination—and that’s fine with us, that’s right in our name—we’re here for those discussions, or just further reductions. Getting to a flat tax gives us the best platform to make further changes. Because there’s not been the discussion about, you know, higher dollar levels or higher rates, who gets what. Everybody’s the same fair, flat tax and that’s the better platform to work from. Look, earlier iterations of the bill that passed in Iowa this year had mechanisms to keep those cuts going. Whether those cuts could ever get to zero or not, I don’t know Jim. You know as well as I do that the government, and we would even admit this, the government needs some level of revenue, right? And so if we just totally eliminate the income tax, that revenue has to go from somewhere. Maybe you’re growing enough and your sales tax base is strong enough to take care of it. I know that Platte has been a really good partner of ours looking at sales tax and exemptions, and maybe you broaden your base on some of those things. And again, those are discussions that we all should be having, and all the stakeholders in the state should be weighing in on. Ultimately, I think there’s folks in Iowa who have plans to keep these cuts going, whether they’ll get to zero, whether that is a hard goal or more aspirational, I don’t know. But look, if all goes well and even with a little bit of leeway, once we get our flat tax phased in, we’re probably going to have significant dollars in that Taxpayer Relief Fund. It should serve to spur us moving forward. South Dakota, as you know, probably gets brought up a lot with that 0%. That sounds really good. I’ll just tell you that, you know, 3.9% is a lot closer to zero than the 8.5% we are sitting at right now. And so, we’re thrilled to be moving that direction with a good platform to keep it going.

Chris Ingstad: Chris, congratulations to you, your team and all of your hard work that seems to have come to fruition in Iowa. And thanks for keeping us on our toes here in Nebraska and for joining us today on Nebraskanomics.

Chris Ingstad: Appreciate all that, Jim, thank you.

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