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YEPSEN ON TAX REFORM

May 21, 2007

Des Moines Register columnist David Yepsen takes on the Iowa tax system. He is correct in noticing that we have a problem, but his solution just scratches the surface.

Mr. Yepsen suggests a big bipartisan solution:

One device for doing that would be to call a political "summit" to be held this summer and fall. Culver would bring together key lawmakers and interest groups in an effort to forge a compromise tax-reform plan to submit to the Legislature next January.

This has little hope because the Governor is committed to an anti-tax reform agenda of special interest tax breaks. Until those go on the chopping block, there's not much to talk about.

What might a compromise change look like?

- Income tax. Iowa could get rid of federal deductibility and adopt lower but graduated rates. (Liberals and business recruiters win.) Or, Iowa could adopt a flat or two-rate tax system. (Conservatives and business recruiters win.)

Mr. Yepsen misunderstands the dynamics of "business recruiters," the local and state "economic development professionals." They like high rates and loopholes because they peddle special interest tax credits. If you have a simple, low rate tax system, they become redundant, because businesses no longer have to be bribed to come to Iowa.

To protect taxpayers from future rate increases, a constitutional supermajority vote of the Legislature or a vote of the people could be required for future tax increases. (Conservatives win.)

Better still would be a constitutional limit on the growth in state government, based on population and economic growth. Just a dream, I know.

Each income-tax credit and deduction should be examined to see if it is doing what was intended. (Liberals win.)

Eh? Not so much. Tax credits are backdoor industrial policy, which is what liberals are all about. Witness the witless biofuel, film and investment subsidies that flew through the last session of the legislature. About the only liberal who stands up against these giveaways (with rare exceptions) is Ed Fallon, and he's not even in the legislature anymore .

Mr. Yepsen also has a strange take on sales taxes:

And it might be good tax policy. According to the Iowa Taxpayers Association, Iowa's sales-tax burden ranks 33rd among the 50 states per $1,000 of personal income. That's below average. But Iowa's property tax ranks 17th, which is above the national average.

So, it makes sense to increase a below-average sales tax that people don't mind paying to relieve the property tax they hate - and that perhaps impedes economic growth.

If we have a low sales tax burden, it's not because we have a low rate. We already have a relatively high rate at 6%, and a 7% rate would give us the highest in the nation.

One thing Mr. Yepsen says is absolutely true:

Just as it took several years to win approval of a cigarette-tax increase, it might take several years to win a rewrite of the tax code, because it might take that long for people to understand the change and grow comfortable with it.

Every special interest credit, from ethanol to rehab credits to film subsidies, creates a vocal constituency against change. Until these giveaways are ended, a simple system with lower rates is impossible. Only strong leadership by the Governor, maintained over a period of years, can prevail. It doesn't seem likely anytime soon.

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