How Iowa Can Build A Bold, Progressive Tax System

Guest post from Jack Hatch on his upcoming book

Iowa’s economic priorities are going in the wrong direction and Iowa Democrats and progressives will need to engage our leaders in a new and different dialogue, and advocate bold strategies for future economic and social security. We do have big city problems and small town challenges. Iowa has one of the highest graduation rates in the nation but too many of our students are not prepared for college. Iowa is the only state bordered by two navigable rivers, but our water is more contaminated every year. We have incredible colleges and universities, but student debt is the third highest in the nation. We have one of the lowest unemployment rates, but we are one of the lowest wage states in the nation. The list goes on.

We must lay out our most fundamental beliefs and ask voters to embrace them. Our vocabulary must go beyond political campaigns and the language of the legislative committees and resonate at kitchen tables across the state.

We know Iowans want taxes that are fair and honest, a public education that offers learning to match our needs, water we can drink and allow our kids to play in, wages that will support our families and affordable health care for everyone.

This is the premise of my upcoming book, No Surrender: Building a Progressive Agenda with the Five Securities.

The Five Securities are not mere political slogans. They are principles that guide our policymaking. They show how Iowans’ pursuit of our economic and social dreams could become a reality under real leadership. Following are bold new strategies and specific policy initiatives that will help bring equity to our state’s economic policy.

The Five Securities are:

• First Security:             A tax system that is fair and honest.
• Second Security:        Fight income inequality by creating better paying jobs.
• Third Security:            An environment in which our soil and water are protected.
• Fourth Security:          An educational system built for a lifetime of learning.  
• Fifth Security:             A Health Care system that provides “Healthcare for All”.

Not only are these aspirations reasonable, they are attainable within this generation.    Iowans will support them if given the opportunity to vote for strong progressive candidates who are unafraid to articulate them.

THE FIRST SECURITY: A PROGRESSIVE TAX STRUCTURE THAT BENEFITS THE MIDDLE CLASS

Iowa’s tax priorities are way off target. In 2013 when the legislature passed Governor Branstad’s corporate property tax reduction, it disproportionately went to giant corporations while Iowa families received nothing. Democrats including me were complicit in this failure, and now cannot be absolved of its consequences. We have taken the wrong direction.

Democrats believe Iowa taxes should value work and family over corporate giveaways. We must reform our tax code for the first time in 40 years to make it happen. We’re going to ask those at the top to pay a little more and we’re going to give the benefits to the hardworking families in the middle.

The primary reason the usually mind-numbing topic of tax policy is the First Security is because whom we choose to tax and how we do it forms the basis of our revenue source for everything state government does.

When we cut nearly $300 million a year out of state revenues by enacting the 2013 tax giveaway, we are saying eliminating those taxes on existing Iowa businesses is more important than anything else we could think of doing with the money. We are saying the risk of Home Depot moving out of Ankeny is more important than preschool for every Iowa 4-year-old.

PROGRESSIVE INCOME TAX RELIEF FOR IOWA’S MIDDLE CLASS

We should say Democrats absolutely do not believe in the status quo, and we will play favorites on behalf of the middle class every time. We will value families in our words and deeds and when a corporation comes up against the needs of middle income Iowans, we won’t even pause before jumping to the side of the middle class. This is the messaging challenge, to stop pretending we think business ought to get a fair shake. Enough! It’s been 40 years since the middle class got anything like a decent break on wages and taxes in this state. We should be ferocious about it, not simply adding in little cuts here and there but ripping up the Iowa income tax tables, throwing them out and starting over.

Wholesale tax reform is about as bold a policy change as anybody can propose.

Democrats should propose to change the income tax to reward families who have children and families who have two-incomes. We also should propose getting rid of a hindrance to national favorable economic rankings by ending federal deductibility.

What a Progressive Tax System Looks Like – A Middle-Class Income Protection Act for Iowa

The goal is to update our tax code to reflect realities for working middle class Iowa families. The principles to be applied to any Iowa income tax overhaul include the following:

• simplicity for Iowa taxpayers filling out their forms or trying to predict their tax liability;
• progressivity in which Iowans and companies that make more in income pay a little more into the system upon which their success is built;
• fairness that eliminates excessive tax breaks but rewards Iowa families; and
• sustaining and enhancing revenues to assure the state can fund critical services such as education, mental health, clean water and public safety.

Each of these goals would guide the development of our re-imagined income tax system that favors the middle-class and allows families to keep a little more of what they make.

Goal 1: Simplify the Iowa tax code with fewer brackets.  The overall tax burden of the middle class must decrease. An effective tax rate that hovers around 10 % must end. In its place should be a progressive and fairer system with fewer brackets and lower rates. Iowa’s current 9-bracket system should be replaced by a simple 4-bracket system with an effective rate between 3% to 6.2%.

Goal 2: Increased Tax Benefits for Families with Children.  Iowa is one of only a handful of states with such a paltry per-child tax credit of only $40. Iowa’s new per-child tax credit should be $500 per child per year for all taxpayers regardless of income level or tax bracket. A per-child tax credit is one of the most pro-family policies any government can implement, and for Iowa the failure to focus on it is an error long overdue for correction.

Goal 3: Create a Cutting-Edge Two-earner Household Income Tax Deduction. 

Iowa is within the top five states with the highest percentage of families with two wage earners. Recent studies show economic gains made by families over the past 5 years are coming from more hours worked, not necessarily from higher pay for the same work.

The result of this new reality is a double-bind for parents: working more hours to make comparatively less and less money each year after inflation. This treadmill is preventing families from saving and planning for maybe a new home, college or retirement.

The State of Maryland, through the leadership of Democratic Governor Martin O’Malley, provides a deduction for two-income families. Iowa should enact Maryland’s policy and implement a $1,000 “two-earner” household income tax deduction per family per year to acknowledge the hard work Iowans do just to survive, and perhaps provide a little help along the way.

Goal 4: Eliminate federal deductibility.  As reviewed above, Iowa law allows taxpayers to deduct federal income taxes paid from income prior to calculating state income tax liability. The presence of federal deductibility makes Iowa’s tax rates appear artificially high by comparison with other states. It further rewards those who earn in the top 20 percent of income earners because those taxpayers’ federal liability is higher and therefore they pay more into the federal system and receive more back on their state taxes as a deduction.

These proposals are intended to update the Iowa income tax system, but also to act as policy to restore trust in the Democratic Party as an agent of positive economic change in this state.  Both things can happen, and when they do, Democrats will win up and down the ballot.

by Jack Hatch
Posted 9/20/16