House File 3, which creates an alternative flat tax equal to 4.5%, passed the House Ways and Means Committee last week on a party line vote. Iowa’s current income tax system has nine brackets and allows filers numerous deductions. This bill creates an alternative system, a simple flat tax with zero deductions, giving taxpayers a choice between the old or new system.
The 4.5% flat tax proposal includes a standard deduction of $6,235 for a single person or $12,470 for a married couple filing jointly. Taxpayers are allowed to elect each tax year to use the current individual income tax structure or this alternative flat tax.
The Legislative Service Agency or LSA, predicts that close to 39% of all income tax filers would chose this option, with the tax burden reduced on Iowans by close to $400 million dollars. Overall LSA predicts that the beneficiaries would be concentrated in both the middle-income and higher-income households. An estimated 42% of Iowa residents would experience a lower tax liability.
Among income levels, from $30,000 of income to $500,000 of income 43% to 64% of filers would experience a lower tax burden by choosing this alternative 4.5% flat tax. Overall, for all filers, those who elected this option would save an average of $819 dollars.
In 2006, Utah enacted a 5% flat tax which has seen significant success. Annual revenue growth has stayed strong, and most taxpayers have seen their tax bills lowered. Approximately 97 percent of tax returns paid the same or less under the new system in place in 2008 relative to the old system in place in 2005. In addition, about 91 percent of tax returns paid the same or less under the new system in 2008 relative to the systems in place in 2006 and 2007.
Click here to read the full article about Utah’s flat tax success from 2010. In addition, Utah has a tax climate that ranks 10th in the nation compared to Iowa which is ranked 41st.