I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.
Finally, the Iowa tax table is nine tax brackets, the first seven of which are below $30,000. Of course, the state provides a booklet to ease tax calculation but it still seems needlessly complicated.
Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”
The Legislative Services Agency estimates that taxpayers who earn between $30,000 and $40,000 would see the most benefit, although 492,000 taxpayers would see a reduction. Iowa’s top income tax rate of 8.98 percent is among the highest in the country and higher than all neighboring states (see table below).
The bill reportedly will have a tough time in the Senate.
Top State Income Tax Rates, 2013
|
State |
Tax Rate |
Applicable Income Bracket (Single Filer) |
Applicable Income Bracket (Joint Filer) |
Rank |
|
California (top rate) |
13.3% |
>$1,000,000 |
>$1,000,000 |
1 |
|
New York City (top rate*) |
12.696% |
>$1,000,000 |
>$2,000,000 |
|
|
California (second rate) |
12.3% |
>$500,000 |
N/A |
|
|
California (third rate) |
11.3% |
>$300,000 |
>$600,000 |
|
|
Hawaii (top rate) |
11.0% |
>$200,000 |
>$400,000 |
2 |
|
New York City (second rate*) |
10.726% |
>$500,000 |
>$500,000 |
|
|
New York City (third rate*) |
10.498% |
>$200,000 |
>$300,000 |
|
|
California (fourth rate) |
10.3% |
>$250,000 |
>$500,000 |
|
|
New York City (fourth rate*) |
10.298% |
>$75,000 |
>$150,000 |
|
|
New York City (fifth rate*) |
10.098% |
>$50,000 |
>$90,000 |
|
|
New York City (sixth rate*) |
10.041% |
>$25,000 |
>$45,000 |
|
|
Hawaii (second rate) |
10.0% |
>$175,000 |
>$350,000 |
|
|
New York City (seventh rate*) |
9.984% |
>$20,000 |
>$40,000 |
|
|
Oregon (top rate) |
9.9% |
>$125,000 |
>$250,000 |
3 |
|
New York City (eighth rate*) |
9.434% |
>$13,000 |
>$26,000 |
|
|
California (fifth rate) |
9.3% |
>$48,942 |
>$97,884 |
|
|
Hawaii (third rate) |
9.0% |
>$150,000 |
>$300,000 |
|
|
Oregon (second rate) |
9.0% |
>$8,150 |
>$16,300 |
|
|
Iowa (top rate) |
8.98% |
>$66,105 |
>$66,105 |
4 |
|
New Jersey (top rate) |
8.97% |
>$500,000 |
>$500,000 |
5 |
*-New York refers to non-New York City tax rates. New York City refers to the combined state and city income taxes. New York and New York City tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. are 2012 figures, as 2013 inflation-adjusted figures have not yet been released. New York also has a benefit recapture provision, meaning that higher tax rates apply to all income of some taxpayers, not just income above the bracket threshold.
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