Tax cuts don’t always turn out the way we’re led to believe.

 

A friend who makes a comfortable income noted recently that the last big Iowa tax cut – the one that does away with federal deductibility in 2023 – will actually result in his paying more state income taxes. 

 

That’s a bit of a surprise because, while it’s true that doing away with federal deductibility increases the amount of money Iowa can tax, lawmakers and the governor told us lower tax rates would offset the increase. 

 

But apparently they didn’t lower rates enough in all cases. 

 

Des Moines accountant Joe Kristan confirmed that Iowa’s elimination of federal deductibility will not be completely offset by lower tax rates in all cases.  

 

He said other high-income Iowans also may be surprised to learn next year that their individual Iowa income tax payments go up instead of down. 

 

The increase won’t affect a large number of taxpayers, but it may cause some wealthy Iowans to wonder, like my friend is, whether policymakers in Des Moines know what they are doing. 

 

Speaking of which, Gov. Kim Reynolds’ proposed 4% flat tax rate has captured a lot of attention. 

 

If I remember correctly, the late Bill “I-own-the-store” Reichardt was the most prominent Iowan to seriously propose a flat-rate income tax back in the 1970s when he was a Democrat and served in the Iowa Legislature. 

 

His proposal did not get significant traction, and for good reason. 

 

Iowans, even wealthy ones, understood that having rich people pay the same tax rate as poor people was an idea that worked best in the Medieval Ages. 

 

Not only would it result in overcharging poor people and preventing many from ever joining the middle class, it also would undercharge the wealthy to an extent that there would not be enough money to operate state services in the manner to which Iowans are accustomed. 

 

Now, in the wake of a pandemic and a major political shift that converted some former Democrats to Trump Republicans, Iowa’s Republican governor and Legislature believe it’s time to rewrite history and bring the flat tax to Iowa.

 

As one might expect, the sales pitch is a bit misleading. 

 

During the governor’s state-of-the-state speech last week, she said her 4% flat tax would mean “an average Iowa family will pay over $1,300 less in taxes” when her proposed flat rate is fully implemented.

 

Assuming the 4% rate brings in enough money to run state government, which many believe is unlikely, Reynolds’ promise of a $1,300 savings for “an average Iowa family” isn’t what it appears to be.

 

Her $1,300 savings is based on an Iowa Department of Revenue projection of an average savings of $1,318 for “all tax filers” in 2027 under a 4% flat tax.

 

That is not the same as the savings for “an average Iowa family.” 

 

Average Iowa household income was $60,523 in 2019, according to the most recent U.S Census Bureau estimate. 

 

The closest the Revenue Department document gets to that is for households earning between $60,000 and $70,000. Those households, it said, would receive average savings of $902 in 2027 under the change.

 

Two-thirds of the $1.4 billion saved by Iowa residents would go to the 26% of taxpayers who earn more than $100,000.

 

Even then, the bulk of the savings would not be spent, as Reynolds predicted, “every single day on Main Street, in grocery stores and at restaurants all across Iowa.”

 

That’s because a large share of tax savings for high net worth households “gets invested in national securities markets and spent on luxury goods,” said Michael Lipsman, a now-retired longtime analyst for the Iowa Revenue Department. 

 

Also, he said, the reduced public spending required by the tax cut “will reduce economic activity in Iowa.”

 

“This is not hypothetical,” Lipsman added. “We saw this happen after the tax cuts enacted in 1997 and 1998, which disproportionately benefited high income taxpayers.”