Tax Foundation 2023 Business Tax Climate Index

Iowa’s tax climate is improving, and more work is needed to lower income and property taxes, but our state has made substantial progress. Once Iowa’s tax reform is fully implemented, it is estimated that Iowa will have the 13th-best tax ranking in the nation.

The Tax Foundation has released the 2023 State Business Tax Climate Index, which ranks the states on their tax competitiveness. Each state is ranked based on their individual, corporate, sales, property, and unemployment insurance tax rates. Iowa, which previously was in the bottom ten for worst tax climate, is now ranked 38th in the nation. However, it should be noted that this ranking does not factor in Iowa’s recent tax reforms. Once Iowa’s tax reform is fully implemented it is estimated that Iowa will have the 13th-best tax ranking in the nation. Since 2018, Iowa has made significant progress in implementing pro-growth tax reforms, including passing the most extensive tax reforms nationwide this year. Still, the State Business Tax Climate Index demonstrates that more work is needed to make Iowa’s tax climate even more competitive.

This year Governor Kim Reynolds and the legislature passed the most extensive tax reform measure in the nation. This was also the largest tax cut in state history. Iowa is a leader in what is being referred to as the state “flat tax revelation.”  

“When looking for the state that made the most significant changes to its tax code this year, that award probably goes to Iowa, the other state where lawmakers enacted tax reform in 2022 that moves in the same direction as North Carolina’s reforms,” argues Patrick Gleason, who serves as Vice President for State Affairs at Americans for Tax Reform.

The 2022 tax reform is a comprehensive tax reform measure that will phase out the current progressive nine-bracket income tax system and replace it with a flat 3.9 percent rate by 2026. Under the law, the flat rate phases in as follows:

  • 2023: four tax brackets, with a top marginal rate of 6.00 percent
  • 2024: three tax brackets, with a top marginal rate of 5.70 percent
  • 2025: two tax brackets, with a top marginal rate of 4.82 percent
  • 2026: a single (flat) tax bracket, with a rate of 3.90 percent

The corporate tax will also be phased down until it reaches a flat 5.5 percent. As a result of higher corporate tax revenues, the current rate of 9.8 percent will be lowered to 8.4 percent.

The reason why Iowa has been able to enact pro-growth tax reforms is the result of conservative budgeting. Governor Reynolds and the legislature have been following prudent budgeting, which has resulted in surpluses and full reserve accounts. For Fiscal Year 2023 the legislature passed a $8.2 billion budget, which was a slight increase from the previous fiscal year.

Fiscal Year 2022 ended with a $1.91 billion surplus, which was larger than the previous surplus. In addition, Iowa has $830 million in reserve funds, which are filled to their statutory limits. Those reserve funds are in addition to $1.6 billion in the Taxpayer Relief Fund, which is estimated to increase to over $2.6 billion in Fiscal Year 2024.

Governor Reynolds and the legislature have made a secure and stable fiscal foundation for Iowa. As a result of conservative budgeting, Iowa was not only prepared for the “black swan” event of the COVID-19 pandemic, but the state is in a strong condition to weather a potential national recession, which looks more realistic every day.

Some taxpayers may ask why the legislature decided to phase-in these income tax reforms. The reason for this is that policymakers wanted to make sure that the tax cuts were balanced with sensible budgeting. Iowa’s budget must be balanced by state law and there are a certain priorities of government that must be funded. Governor Reynolds and the legislature have struck a balance of lowering tax rates and funding the priorities of government, while maintaining fiscal discipline.

What lessons can we learn from the State Business Tax Climate Index? The first is that income tax reform is not finished in Iowa. This year, numerous states enacted tax reforms and the competition to lower rates will continue to increase. Iowa will have a low flat income tax rate by 2026, but we will also still be competing with states that either have zero income tax or a lower flat rate than Iowa. The same applies to the corporate tax rate. Tax rates matter and lower rates are the key to growing the state’s economy.

This means that income tax reform is not complete. If revenues continue to hold strong, policymakers could consider fast-tracking rate reductions with the goal of ultimately eliminating the income tax.

The second lesson that Iowa can learn is that property taxes must be addressed. Iowa is ranked 40th in the nation for the highest property taxes. Property taxes are a top concern for Iowans regardless of political party identification, or if they live in rural or urban areas. High property taxes are not only burdensome for taxpayers, but they deter economic growth. Property tax reform will be a priority issue during the 2023 legislative session.

In the coming weeks, Iowans for Tax Relief Foundation will be releasing a Property Tax Reform Toolkit, which will provide a series of policy recommendations which will help deliver property tax relief.

Iowa’s tax climate is improving, and more work is needed to lower income and property taxes, but our state has made substantial progress. Iowa is a national leader on how to balance pro-growth tax reforms with responsible conservative budgeting. This is the formula which makes a state strong and competitive.

State Business Tax Climate Index Rankings and Component Tax Rankings
2023

StateOverall RankCorporate Tax RankIndividual Income Tax RankSales Tax RankProperty Tax RankUnemployment Insurance Tax Rank
Illinois363813384443
Iowa383440154033
Minnesota45434329334
Missouri113212674
Nebraska29303293911
South Dakota211341437
Wisconsin27313871531

Iowa Business Tax Climate Index Rankings and Component Tax Rankings
(current ranking vs. fully implemented 2022 tax reform)

StateOverall RankCorporate Tax RankIndividual Income Tax RankSales Tax RankProperty Tax RankUnemployment Insurance Tax Rank
Current 2023 Ranking383440154033
Full Implemented Ranking131010153433
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