State Sen. Brad Zaun (R-Urbandale) has had enough of the Iowa Income Tax. So, this week he authored a new bill that would repeal the income tax in exchange for a higher state sales and use tax – modeled after the well-known national effort commonly called the Fair Tax.
Senate File 481 has not yet been handed off to a committee. In addition to repealing the individual income tax and increasing the sales tax from 6 percent to 11 percent, it also makes numerous conforming changes throughout the Iowa Code.
The proposed legislation also repeals the following income tax surcharges as a result of the individual income tax’s repeal:
- emergency medical services income surtax in Iowa Code 422D,
- the instructional support income surtax in Iowa Code 257.21,
- the educational improvement income surtax in Iowa Code 257.29, and
- the physical plant and equipment income surtax in Iowa Code 298.2
If approved, the repeal of the individual income tax would take effect on Jan. 1, 2016.
SF 481 also provides, that by operation of law as provided in Article VII Section 10 of the Iowa Constitution, 0.375 percent of the state sales tax generated and collected from the rate increase will be transferred to the Natural Resources and Outdoor Recreation Trust Fund in Iowa Code 461.31. It also makes a mathematical change to the calculation of funds that are transferred to the Secure an Advanced Vision for Education Fund in Iowa Code 423F to ensure it receives approximately the same proportion of the total sales tax revenue as it did prior to the rate increase.
Zaun’s proposal, while revenue-neutral in some regards, would have a substantial impact on state revenue.
According to the most recent Revenue Estimating Conference last week, the individual income tax results in approximately $4 billion in revenue for the state. Based on Iowa Department of Revenue taxable sales data, an increase in the sales tax by 4.625 percentage points would generate roughly $1.66 billion in revenue to replace those funds.
“Taxes based on income are inherently wicked as they are hidden and subject to corrupting influences,” Iowans for Fair Taxation said in a statement responding to the bill. “Corporate taxes are the worst form as corporations never pay any taxes and simply pass them through to the end consumer in the form of higher prices. We greatly applaud this effort by Senator Zaun who has always been a friend of liberty and taxpayers.”
The IFT statement noted that, based on economic factors, Iowa’s neighbor to the northwest, South Dakota, is “more competitive than Iowa.” It also noted another Midwestern state to the southwest, Kansas, is working to become the next state to enact such reforms and abolish their income and corporate taxes.
“With Iowa’s corporate taxes among the highest in the nation, we are sure to encounter greater economic loses as our neighboring states enact reforms and we remain bound to a 19th century socialist tax model,” the IFT statement said.
“While some may believe that this bill raises taxes, it does not,” it continued. “Others may be inclined to seek to cut taxes as part of any reform; we at Iowans for Fair Taxation disagree with those objections. The battle for real reform is in the ‘how’ we tax not in the ‘how much’ we tax. Those who have focused their efforts on the ‘how much’ have failed to enact any serious reform and have failed to actually reduce the tax burden for the last 100 years.
“Until we win the much simpler, obvious, and moral case for how we tax, remove the hidden layers and expose the real level of taxation, we have no hope to win the debate over how much we tax. We fully support the effort to abolish these immoral, corrupt, and hidden taxes and replace them with a flat, simple, and transparent sales tax.”