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Editorial: Lower corporate taxes

BY DI EDITORIAL BOARD | JULY 02, 2013 5:00 AM

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Though Iowa’s economy has recently had some economic good fortune — relatively low unemployment numbers and a budget surplus, for example — the state’s economic development is held back by one of the country’s least business-friendly tax codes.

According to a state-by-state study of 2013 law from the conservative leaning Tax Foundation, Iowa’s tax climate is the ninth most burdensome in the country for businesses.

The report ranks Iowa 37th in terms of property taxes, 33rd for individual income taxes, and 49th for its corporate tax rate.

Last month, Gov. Terry Branstad and the Legislature took a step toward making the tax code a bit friendlier by implementing a plan that will lower the business community’s property-tax burden over the next decade.

This action was made fiscally possible by a budget surplus that grants the state a little flexibility with its tax revenues. But the state’s action on property taxes doesn’t strike at the heart of Iowa’s burdensome tax environment. If the state government wants to use its fiscal surplus to stimulate growth, it should lower the state’s corporate tax rate.

Under current law, Iowa has a progressive corporate-tax system. The smallest businesses in the state pay 6 percent, while companies that make more then $250,000 pay a massive 12 percent. That’s the highest state-level corporate tax rate in the country, on top of the high federal tax on corporate income.

High tax rates on businesses have a deleterious effect on the economy by effectively slowing growth. According to a 2012 comparative study of corporate taxation in Canadian provinces published in the National Tax Journal, a 1 percentage point reduction in the corporate tax rate coincided with a 0.1 to 0.2 percentage point increase in the annual GDP growth rate.

A report from the Organization for Economic Cooperation and Development illustrates the mechanism by which high corporate taxation inhibits growth.

“Corporate income taxes can be expected to be the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and in productivity improvements,” the report notes.

Reducing the state’s corporate tax rate could have the added benefit of making Iowa a more desirable regional location for businesses to set up shop. As it stands, Iowa’s tax code cannot compete with the relatively lax environments of such neighboring states as South Dakota and Missouri.

This change would not be prudent, of course, if slashing the corporate tax rate required the state to make up the lost revenue with higher income taxes or new regressive consumption taxes. The fiscal effects of lowering the corporate tax rate would be surprisingly small.

According to the fiscal 2012 annual report from the Iowa Department of Revenue, only 5 percent of the state’s net tax revenue that year came from corporate taxes. Individual income tax, by contrast, accounted for more than 40 percent of the state’s tax revenue. Reducing Iowa’s top corporate income tax bracket from 12 percent to 8 percent, for example, would produce a relatively small budget shortfall that could be absorbed by the current budget surplus.

The Legislature should build upon its 2013 tax cut in the coming year by making corporate tax reform the centerpiece of its economic policy next year. Such a move would be highly beneficial to economic growth in Iowa.


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