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The repeal that dares not speak its name

March 06, 2010

We can talk about it in public now.

Last fall some participants at a a the tax policy committee of the Iowa Association of Business and Industry said repealing Iowa's corporate income tax was just too radical for even a business group to bring up. Now the idea has made it to the business pages of the Des Moines Register, and riots have yet to ensue. In fact, one of the candidates for Governor has embraced corporation tax repeal, and I understand that others are considering the idea.

While getting rid of Iowa's corporation tax is only one step in improving Iowa's awful business tax climate, it's a big step.

Why it makes sense.Right now Iowa has the highest stated corporate tax rate in the country. Even when you add in Iowa's partial deduction for federal taxes, Iowa still has the second highest rate. That's not exactly a welcome mat for businesses.

Defenders of the status quo fire back "but you don't mention single factor apportionment! And what about our 30-odd special economic development incentives?"

Any salesman will tell you that it's hard to close with somebody who's already hung up on you. A high rate can trigger that hang-up before Iowa's economic development shills can say "but." Even if they don't hang up, they'll learn that single-factor is no longer just an Iowa treat. Nine other states have adopted "single-factor," which allocates income of corporations based only on in-state sales, instead of the traditional three-factor formula that splits income among states based on sales, property and payroll. Single-factor + lower rates trumps single factor every time.

But what about our wonderful economic development incentives? We have 30-odd targeted tax credits to attract new businesses!

Businesses can see through that. They know that the money Iowa is using to try to bribe them into coming comes from businesses that are already here. They know that once they settle in, the state will use their tax money to lure and subsidize their competitors. When Iowa tries to pay other businesses to come here, it's like a guy who brings his wife's purse into a bar to buy drinks for the girls. The girls aren't impressed, and any he does pick up aren't worth much.

Taking the tax rate to zero simplifies things. "No corporate income tax" is a pitch they won't hang up on.

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Related: The Tax Update's Quick and Dirty Iowa Tax Reform.

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