Editor’s Note: As tax negotiations continue in Des Moines, the ultimate House plan has yet to emerge. This post is based on the latest House bill available.
The “middle class tax cut” proposed by the Iowa House is a mirage. For the vast majority of Iowans, much or most of the small reduction in income taxes is taken back by the increase in sales tax — the other part of the House bill.
Compared to what middle-income Iowans paid in state income taxes when they filed this month for 2017 — and what they would have paid in the future if federal taxes had not been cut — the income tax cut in House File 2489 amounts to about $100 on average. Those with income between $20,000 and $100,000 represent over half of Iowa taxpayers. But they will face higher sales tax payments averaging about $47 a year. The net savings will amount to about $4 a month — but that’s on average. For some, there will not be a savings at all.
Table 1. Top 1 percent would take over one-third of tax benefit
House Bill: Income Tax Reduction Compared to Pre-Federal Baseline*
Iowa residents, tax year 2023
*Reduction in taxes compared to projected tax payments in 2023 under Iowa law but without the effect of the Federal tax cut legislation.
Source: IFP analysis of Iowa Department of Revenue estimates
For those at the top — the 0.7 percent of Iowa resident tax filers with income over $500,000 — the story is different. The average tax cut is $6,852, offset by on average $224, or less, in sales taxes and leaving them with at least $6,600 in net savings.
And that small group of well-off taxpayers gets 36.4 percent of the total income tax cut.
While the top 1 percent gets a tax cut averaging 11 percent, the other 99 percent get an average cut of 4 percent. If sales taxes were taken into account, the results would be even more skewed.
Table 2. Effects of Sales Tax Provisions of the House Bill — Iowa residents
Source: Institute on Taxation and Economic Policy, April 2018
Peter Fisher is research director of the nonpartisan Iowa Policy Project.