Simplicity is generally seen as a virtue in tax systems. The National Council of State Legislatures argues that a properly functioning tax system should “facilitate taxpayer compliance by avoiding a maze of taxes, forms and filing requirements.”1 Iowa Governor Tom Vilsack has echoed this sentiment, calling for a move to a “postcard” income tax in his “Condition of the State” address on January 14. This goal is complicated, however, by the state’s emerging fiscal troubles: recent estimates suggest that legislators crafting the state’s fiscal year 2004 state budget must make up almost $400 million in revenues through budget cuts or tax increases.
Iowa is also facing a tax equity crisis. State policy makers have chosen to finance government services with a tax structure that requires low-income taxpayers to pay the highest effective state and local tax burdens—and allows the wealthiest taxpayers to pay the lowest effective tax rates.
This analysis looks at various tax reform options available to Iowa legislators as they seek to simplify the income tax while maintaining the short-run and long-term adequacy of state tax revenues. The analysis builds upon the tax reform options included in ITEP’s September 1998 study, Choices for Iowa: Building a Better Tax System.2