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Failing on perception and reality


The Gazette

October 24, 2006

[Note: This material is copyright by The Gazette, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of The Gazette.]

  The early signs of winter are not the only chilly aspect of Iowa these days. The state’s business climate is not so hot, either. Iowa legislators need to realize the temperature and make changes, or all of the other pro-growth agendas being talked about on the campaign trail won’t make a bit of difference.

  The latest bad-news ranking comes from the Tax Foundation, a business-oriented think tank. Iowa is in the bottom 10 in the group’s annual ranking of business-friendly tax structures. Only Nebraska, California, Vermont, New York, New Jersey, Ohio and Rhode Island rank lower. The nation’s best tax system for business, according to the foundation report, is in Wyoming, with South Dakota, Alaska, Nevada and Florida just behind.

  The survey is based on a weighted sample of more than 100 factors in five major categories. Iowa does well in the sales tax category at 19th and is only slightly below average when it comes to unemployment insurance taxes (27th) and property taxes (33rd). What hurts the state in the ranking are its corporate and individual income tax rates, which respectively are numbers 46 and 45.

  The Tax Foundation says Iowa’s top corporate rate of 12 percent ‘‘is in a league of its own,’’ which is not intended as a compliment. No other state has a rate in double digits.

  Defenders of the state system will argue that the tax rate looks worse on paper than it is in practice because Iowa allows taxpayers to deduct their federal income taxes from their state tax liability. Therefore, the effective tax rate is lower than the schedule indicates.

  The problem with that argument is twofold. First, perception can be reality for businesses looking to expand or relocate. Iowa’s high-tax reputation can make recruiting difficult. Second, the Tax Foundation says that factoring in federal deductibility actually wouldn’t have helped Iowa’s ranking much. More important, a Tax Foundation researcher said, is a tax system with a broad base, uniformity and low rates. Iowa falls short in all three categories with high maximum rates, a number of graduated rates and a relatively complex collection of deductions and credits.

  The misperception created by Iowa’s tax system was mentioned by Clay Jones, chairman, president and CEO of Rockwell Collins at the ‘‘Edge of Excellence’’ awards ceremony in Coralville earlier this month.

  ‘‘We need a simplified income tax system in the state and the overall reform of the state income tax formula,’’ Jones said. ‘‘Publications and statistical data used in marketing the state continue to show a skewed view of the true income tax liability of companies and individuals by showing the combined tax rate. When I read in the editorial section of the Wall Street Journal that Iowa is in the top 10 of most heavily taxed states — no amount of explanation will reverse the damage done by that impression.’’

  Fairness. Simplicity. Perception.

  Three strong arguments for change.

  It is past time for the Legislature to make it.