Iowa conservatives have learned from the mistakes made in nearby Kansas and are cutting taxes responsibly.
The Economist published an article about the state-tax-cut revolution we’ve seen over the past three years, with conservatives cutting income taxes around the country. I wrote a piece on the same topic for the July 10 issue of National Review. Both articles focused on Iowa, where Republicans under Governor Kim Reynolds have enacted one of the most comprehensive tax reforms in the country.
Iowa used to have nine income-tax brackets and a top rate of 8.53 percent, which was one of the highest in the country. By 2026, assuming revenue targets are met (and they have been so far), Iowa will have a flat tax at 3.9 percent.
The Economist found the same things I did when I talked to an Iowa legislator and tax-policy experts: Iowa conservatives have learned from the mistakes made in nearby Kansas and are cutting taxes responsibly.
In 2012, Kansas Republicans passed significant tax cuts that they said would spur economic growth. But Kansas paired those cuts with increased spending. The economic growth didn’t happen as promised, and the state experienced budgetary shortfalls. Voters have now elected and reelected a Democratic governor. Midwestern conservatives are extremely cautious not to repeat that political and budgetary mistake.
To that end, the Buckeye Institute, a free-market group from Ohio, developed much better state-level computer modeling for revenue forecasts that conservatives have used in several states, including Iowa. Iowa’s tax cuts are designed to be phased in over several years subject to revenue triggers. If revenue targets aren’t met, the tax cuts don’t happen. Iowa has been careful to keep spending growth in check, only spending around 90 percent of its new revenues the past few years. And the state’s rainy-day-fund balance has increased each of the past five years, and sits at nearly $1 billion, compared with a state budget of $8.5 billion.
Iowa is far from alone in cutting taxes. Four other states are moving to a flat tax (Mississippi, Georgia, Arizona, and Idaho). Over half of the states with income taxes have cut their top rates in the past three years. Some proposals have been irresponsible, but lawmakers have generally been successful in beating them back. Tax cuts have been based on revenue projections that do not rely on one-time federal funding, and states across the country have built up their rainy-day funds.
Of course there are still naysayers. The Economist quotes left-leaning critics of Iowa’s tax reforms who say the state should be expanding government services with the extra revenue instead of giving it back to taxpayers. Iowa house speaker pro tempore John Wills had an answer to that criticism in my piece from July: “They keep saying, ‘This is the state taxpayers’ money, and we need to spend this money in an appropriate manner so that taxpayers have all the policies that they want,’ and we absolutely are. We’re doing that already without spending excess money.” The voters seem to have agreed with Wills when they increased the GOP majority in the legislature after the tax cuts passed.
Other critics warn of a Kansas-style breakdown, ignoring the differences in the way the Iowa cuts were structured and executed. Of course, with so many states enacting reforms, they all aren’t going to work out the same way. I predict the anti-tax-cut narrative will develop in one of two ways in the next several years:
- One or two states will botch their tax reforms, likely in ways that conservative policy analysts had warned about ahead of time, and they will become the poster children for tax cuts everywhere, despite the other 20+ success stories around the country; or
- General economic trends will change such that nearly every state, regardless of its tax policies, suffers decreased revenue, but the decrease will nonetheless be blamed on tax-cutting Republicans.
The big-government side of the argument is going to be desperate to make out Iowa and other tax-cutting states to be failures. They’ve gotten a lot of mileage out of Kansas’s mistakes, despite other states cutting taxes successfully over the past decade. The ongoing tax-cut revolution is being carried out mostly by people who have learned from what Kansas did wrong and are ensuring that they do not repeat those errors. That doesn’t guarantee success, but tax-cutting states have generally been meeting or exceeding their revenue targets so far. Nonetheless, be prepared: Any semblance of bad fiscal news from tax-cutting states will be latched onto and amplified.