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Iowa’s tax system is upside down: Those with the lowest income pay a higher percentage of their income in state and local taxes than those at the top. Along comes the governor with a “flat tax” proposal. What would it do? Make things worse. Even less flat, more skewed in favor of the rich.
Consider an elderly couple living on $20,000 in Social Security, or a single mom earning $10 an hour and trying to cover rent, food and child care out of $20,000 a year. Both fall in the bottom 20% of Iowa families in terms of income and pay about 12% of their income in taxes, but little or nothing in income tax. Mostly they pay sales taxes and, as part of their rent, property taxes.
Now consider a retired hedge fund manager with an income of $500,000 a year, mostly from stocks and bonds and a generous pension. That person would fall in the top 1% of Iowa taxpayers, paying about 8% of income in state and local taxes.
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If the governor were truly interested in a flat tax system as “fair,” she would take a much broader approach, toward the entire state tax system for individuals and families. A flat tax system overall — not limited to one tax — would take the same percentage of income from everyone, not 8% from the rich and 12% from the poor, as Iowa’s system does now. The only way to get to a flat tax is to raise income tax rates for those at the top, cut the sales tax, and/or provide a renters’ credit for property taxes.
Instead of flattening Iowa’s tax system, the governor’s proposal moves us a long way in the other direction. The hedge fund manager gets a huge income tax cut. The top tax bracket would fall from 6.5% to 4.0%, a 38% reduction, and all private pension income would be exempt.
The low-earning single mom, or the retired couple on Social Security, would get little or nothing. They would continue to pay sales taxes and property taxes as they do now, but the income-tax cut would make no difference in their household budget — while hurting services that matter to them.
According to the Department of Revenue analysis of the governor’s proposal, when fully phased in by 2027, less than 1% of the total tax cut is directed to the bottom fifth of Iowa income tax filers, whose average savings are less than a dollar per week. The richest 2.3% — those with over $250,000 in taxable income — would get almost 36% of the cuts. For the millionaires, the average cut is $68,000, or $1,316 a week. Two-thirds of the cuts go to those making over $100,000 per year — the richest 14% of Iowa taxpayers.
Meanwhile, the state general fund will lose about $1.6 billion a year. It will become even harder to adequately fund public schools, or to expand affordable housing or child care or elderly services. The hedge fund manager, of course, couldn’t care less. But the retired couple or the single mom will be worse off than before.
That’s not flat, and it’s certainly not fair.
Peter Fisher is research director of Common Good Iowa, a nonpartisan, nonprofit public policy research and advocacy organization with offices in Des Moines and Iowa City. Contact: email@example.com.
This article originally appeared on Des Moines Register: Opinion: Kim Reynolds' tax proposal is neither flat nor fair