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New legislation proposed by Iowa Republicans would dramatically change the state tax code, initiating some overdue reforms.

However, revenue reductions in proposals from Senate Republicans and, to a lesser extent, Gov. Kim Reynolds are cause for great concern.

We have advocated doing away with federal deductibility, which becomes more imperative with recent changes in federal taxes. Both proposals would gradually phase it out.

Iowa is only one of three states allowing federal taxes to be deducted. That makes both individual and corporate tax rates artificially high, a disincentive to business recruitment. Iowa’s 12 percent top corporate tax rate is among the nation’s highest.

Under the Senate bill, Iowa businesses with less than $250,000 in net income would have a 5.5 percent rate, while it would be 7 percent for businesses with more than $250,000.

But that would go along with curtailing and re-evaluating the willy-nilly bestowing of tax credits on individual corporations, which has soared from $153 million in 2005 to more than $427 million.

Iowa’s current nine individual tax brackets would be reduced. Reynolds wants eight, the Senate five. Nebraska and Missouri have three. Illinois has one.

Individual tax brackets now range from 0.36 percent to 8.98 percent (for incomes of $73,260 or above), the nation’s fourth highest.

The Senate would reduce the top rate by 2023 to 6.3 percent for those making $75,000. Reynolds would cut it to 6.9 percent for those with incomes above $160,965, while substantially increasing the standard deduction.

The Republican plan envisions $73 million in new revenues by 2023 by collecting online goods from out-of-state retailers. That initiative, which we have long supported, would help create a level playing field with local businesses that charge sales taxes.

But it comes with a caveat. A 1967 U.S. Supreme Court decision involving catalog sales gave a pass to retailers without a physical presence in a state. It was last reviewed in 1992, a year before the internet was opened to commercial business.

The high court agreed in January to hear an appeal from South Dakota, which relies heavily on sales taxes. It is supported by 36 states and the District of Columbia, which cite revenue losses of $34 billion. The General Accounting Office — Congress’ investigative arm — estimated $8 billion to $13 billion last year.

The Republican proposals also would put Iowa more in line with federal tax changes.

While the Iowa tax code needs to be modernized, state government has a recent history of enacting various corporate tax incentives without commensurate economic growth, albeit amid a farm recession and slumping retail sector.

The U.S. Bureau of Analytical Analysis reported in November 2017 that Iowa was dead last in annual Gross Domestic Product growth at minus-0.7 percent.

Meanwhile, Iowa had a $927 million surplus in 2013, but last year reserves fell to $625.1 million — $112 million below the statutory maximum.

With minimal debate or public scrutiny Wednesday, the Senate rushed through its plan to cut taxes by $1.2 billion in 2023 when fully implemented. The nonpartisan Legislative Services Agency fiscal analysis predicted it would reduce state income by $1.1 billion that year.

For perspective, the current state budget is $7.2 billion, and Republicans are struggling to fill a $34 million shortfall, after making last-minute cuts to higher education, the judicial system and human services an annual ritual.

The Senate didn’t even contemplate the ramifications for FY 2019 with a predicted $208 million revenue loss.

Reynolds’ plan would reduce income taxes by a total of $1.7 billion between FY 2019 and 2023. She said tax reform must be done “in a responsible manner. I need to honor the commitments that have been made, for example, to education. I want to make sure that we can continue to fund priorities of our administration.”

The House leadership agrees.

The tax cuts, Republicans have stated, go hand-in-hand with shaping smaller, smarter state government, which they claim had been bloated. Indeed, some streamlining has been in order.

Yet “smarter” hasn’t always been evident.

We have a Medicaid privatization mess, a worst-in-the-nation mental health system, stagnant K-12 investment, depleted state patrol, huge autopsy backlog, deaths of foster children blamed on a depleted Department of Human Services, overburdened corrections system, ever-increasing university tuition and a judicial system that may need to cut county courthouses.

Tax-cut orthodoxy in Kansas, Oklahoma and Louisiana produced budget, education and public service disasters. The Senate didn’t heed those lessons. Given the inevitability of tax cuts, we hope the House exercises considerably more caution while following Reynolds’ blueprint.

The Iowa tax code is long overdue for reform, but it must be crafted carefully, incorporating the role of an efficient and responsive state government. Otherwise, you get what you pay for.


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