Economist: Reynolds’ ‘Flat Tax’ Benefits Rich, Puts Burden on Poor

Iowa’s proposed flat tax rate will have a major winner: The Rich.

Gov. Kim Reynolds’ proposal to create a 4% flat tax rate over four years would benefit higher earners, according to longtime Iowa State University economist Dave Swenson.

“You’re going to get a shifting of the tax burden away from the wealthy, towards the middle class and lower-income taxpayers as a consequence of this,” he said.

The tax proposal was a signature moment of Reynolds’ Condition of the State address on Tuesday. The Republican official said her plan would create a “flat and fair” system for Iowa taxpayers, a notion Swenson disagrees with.

“With regard to fundamental tax principles, a flat tax is not a fair tax,” he said. “When we think in terms of what constitutes a fair tax, a fair tax—there are many criteria for them—but one of the criteria for a fair tax is that your tax liability increases as your ability to pay increases. That’s what we consider fairness in a conventional discussion.”

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For decades, Iowa has operated under a progressive tax system that determines how much filers pay based on their income level. In the 2022 tax year, a person making $15,687 annually—$7.54 per hour working full time, which is 29-cents higher than Iowa’s minimum wage of $7.25 an hour—has a tax rate of 4.14%, whereas a person making more than $78,435 annually has a rate of 8.53%.

The effective, average rates paid are a little different, as Iowans take various itemizations to reduce their tax burden. The wealthiest of Iowans rarely pay the full amount due to a loophole that allows them to itemize their federal tax payments from their state taxes, and those making about $50,000/year in 2019 were able to get theirs under a 4% rate.

“Wealthier people want the top tax brackets lowered so that their taxes go down,” Swenson said. “One of the arguments that has been made—oftentimes in conservative circles—is that what we really need are to have flat taxes, where everybody pays the same rate.

“Because in a form of perverse logic, they’re able to convince many people that a flat tax is a fair tax.”

In addition to putting a larger financial burden on people with lower incomes, Swenson noted a lower tax rate would hamper state revenues and directly impact state-funded services such as education, health care, human services, public safety, roads, and more.

In data provided to The Des Moines Register, Reynolds’s office projected the tax proposal would reduce state revenues by $500 million in 2023 and by nearly $1.6 billion by 2026, the first year it would be fully implemented. Her staff told The Register if state revenues continue to grow at 4% and spending is kept at an average 2% rate, it should balance the scales.

Reynolds’ said she would prioritize education and public safety even as tax revenues decrease, but Swenson doesn’t see how that’s possible.

“If the state takes in less revenue, then it is going to have to provide fewer services period,” Swenson said.

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In her speech, Reynolds noted Iowa’s $1.2 billion surplus from the previous fiscal year budget as one impetus for this tax proposal; however, she neglected to mention a large portion of those funds come from federal relief dollars to offset the pandemic.

“Basically, they banked what they could,” Swenson said. “They banked what they could and now they are using that as an excuse to accelerate a cut in taxes. That’s what I think is really going on. Once that’s gone—that’s one-time money—once that’s gone, we’re back to business as usual in the state of Iowa.

“If the governor is proposing to lower the amount of revenues collected, then by extension, she is promising to lower the amount of government services provided.”

by Ty Rushing
01/12/22

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