Tax Reform Is on the Move

Pro-growth tax reform is on the move in several states. This year 14 states have enacted tax reforms, which would have been unheard of just a year ago. The good news about tax reform doesn’t end with 2021, though. It appears that many states, including Iowa, are poised to keep reducing the tax burden on their citizens.

Voters in Louisiana approved Amendment 2, an income tax reform measure that will lower the individual income tax rate from 6 percent to 4.75 percent. The corporate tax will be consolidated into three brackets with the top rate falling from 8 percent to 7.5 percent. With the approval of Amendment 2, the tax reform legislation passed by the Louisiana legislature will now be carried out as a result.

“For too long Louisiana has been lagging behind our neighbors, but the people of Louisiana voted to start our comeback story by passing Amendment 2 to simplify our tax code and lower our income tax rates to the lowest in the Southeast of states that levy the tax. This is just the beginning. This is a stepping stone to bigger and more substantive reforms in coming years,” stated Daniel Erspamer, CEO of the Pelican Institute for Public Policy.

In North Carolina, the legislature has agreed upon a budget that includes further tax reform. North Carolina is considered the gold standard in state tax reform policy. Over several years the Tarheel State has been lowering both the individual and corporate tax rates, while creating a simpler, pro-growth tax code.

Under the agreement, the individual income tax will be lowered from 5.25 percent to 3.99 percent over a six-year period. Starting in 2025, North Carolina’s 2.5 percent corporate income tax rate will be phased out with full repeal by 2031. North Carolina’s tax reform is an example for other states as they have demonstrated that tax reform can be successful if you keep the growth of spending low.

In Mississippi, Governor Tate Reeves recently announced in his budget proposal that he is going to push further income tax reforms with the ultimate goal of eliminating the income tax. This is on top of the progress that Mississippi has already made. The “Taxpayer Pay Raise Act” phased-out the 3 percent income tax bracket, completely eliminating it in 2022.  Mississippi, just as with Iowa, is running a $1 billion surplus, and Governor Reeves is proposing funneling “excess revenue towards eliminating the state individual income tax.”

The newest proposal from Governor Reeves would eliminate the 4 percent income tax bracket in Fiscal Year 2023 and a “significant portion of the 5 percent bracket” would also be eliminated. The goal is to completely eliminate the income tax within five years. In order to protect the state’s budget and fiscal foundation, Reeves is calling for budget caps and restraining growth to 1.5 percent per fiscal year. In addition, “50 percent of the excess revenue shall go towards the elimination of Mississippi’s individual income tax…” Governor Reeves also stated that it will be “unnecessary to increase other taxes” in order to eliminate the income tax.

The stories from Louisiana, North Carolina, and Mississippi are just the start of states that will be working to lower income tax rates in 2022. Next year should be a gold standard year for tax reform across the country.

Governor Kim Reynolds and Republican legislative leaders are already making income tax reform a priority. Iowa’s fiscal house is in great shape with a $1.24 billion budget surplus. This will provide a historic opportunity for significant pro-growth tax reform. Reflecting on a recent court ruling that favors the taxpayer over the federal government, Governor Reynolds noted, “Biden’s Administration can’t keep us from cutting taxes and I look forward to doing just that.”

Governor Reynolds understands that the key element to strengthening Iowa’s economy and making the state more competitive is through a tax code that allows for economic growth that will create opportunities for Iowans. Iowa is in competition with other states for businesses and Census results demonstrate that tax climate matters. In fact, some economists have described this current era as “enhanced competition” among the states. Businesses and individuals are looking for better tax climates and relocating is becoming easier, which is especially true as more people work remotely.

Policymakers have an opportunity in 2022 to build upon past tax reforms and lower rates to make Iowa an economic leader that allows hard-working Iowa families and businesses to keep more of their hard-earned income.