Iowans Deserve Predictable Taxes Wherever They ROAM
Iowa shares its border with six other states, and while many Iowans live and work in the Hawkeye state, there are a number of Iowans who work elsewhere. This results in not all Iowans being taxed the same. Depending on where they live and work, the state tax liability for Iowans can vary substantially.
Every state with an income tax has some form of out-of-state tax credit for residents who earn income elsewhere. These credits recognize the income taxes residents have paid to other states, thereby reducing (and sometimes eliminating) the income tax due in their home state. In Iowa, out-of-state credit claims totaled $151.8 million on 81,395 returns in tax year 2021, a significant jump from 2020 pre-pandemic life.
What's the Problem?
Iowa lawmakers have been delivering multiple rounds of income tax cuts, but not all Iowans get to benefit from them. In fact, depending on where some Iowans work, they could miss out on those cuts altogether. It means that Iowa’s recent tax reform hasn’t, unfortunately, helped everyone equally.
For example, someone who lives in Council Bluffs and commutes to Omaha, Nebraska, is required to file a tax return and is subject to income tax liability in both states. Since’s Nebraska’s rates are only nominally higher than Iowa’s, that commuter isn’t hit with a substantially larger tax bill. But someone in North Central Iowa who works in Minnesota is subject to the North Star State’s high income tax rates that top out at 9.85%, more than double Iowa’s soon-to-be implemented 3.9% flat tax. And regardless of where the rates land in those two neighboring states, Iowans who cross state lines for work still must go through the headaches and complications of filing two tax returns.
The interactive map below depicts the dollars and amounts of tax credits Iowans received from working out of state, including work performed remotely; hover or click on a specific state to see the data.
This problem wasn’t always as noticeable as it is today. Due to the pandemic, the trend of workers transitioning away from the traditional office setting has continued, meaning states’ policies towards remote work have become more impactful. Regulations that previously affected limited segments of mobile workers are now applied to a wider array of professionals spanning various industries.
Whether it is a simple commute or a remote work arrangement, it is good that so many workers now have flexibility surrounding where they live and work. This flexibility, though, can pose challenges during tax filing season. The National Taxpayers Union Foundation issues an annual report called the ROAM Index that measures key metrics of tax codes’ effects on remote and mobile workers. Iowa currently ranks 25th nationwide, with room for adding simplicity and predictability to its tax code.
What is the Solution?
A mutual agreement, called a reciprocity agreement, is between two or more states that allows individuals who work across state lines to pay income taxes only to their state of residence, rather than to both their state of residence and the state where they work. In other words, a taxpayer residing in Davenport who works in Moline, Illinois only files and pays income taxes in Iowa where they live, because the two states have a reciprocity agreement.
Reciprocity agreements are typically established between neighboring states or those with significant commuter traffic to simplify tax obligations for workers and avoid administrative burdens for both taxpayers and tax authorities. Iowa has such an agreement with Illinois, but not the other five states with which it shares borders.
Iowa lawmakers should begin securing new reciprocal agreements by authorizing the Department of Revenue to negotiate and enter into agreements with other states, as illustrated in the current agreement with Illinois. Another option is to mimic Indiana law and unilaterally extend an offer of reciprocity to any state willing to provide it in return. This would benefit many Iowans, especially those on the western and northern sides of the state since 42% of the credits are applied to Nebraska income, and another 11% is applied to Minnesota income.
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