This year, Iowa taxpayers will benefit from the 3.8% flat income tax rate. The transition from a high multi-rate progressive tax to a low flat tax will not only allow taxpayers to keep more of their earned income, but it will also make Iowa more competitive.
The 3.8% flat tax is just one of the several pro-growth tax reforms that have been enacted by Gov. Kim Reynolds and the legislature. Since 2018, Reynolds has made tax reform a priority, and now she is calling for unemployment taxes to be lowered. Lowering the unemployment tax will benefit both businesses and employees and keep Iowa’s competitiveness moving in the right direction.
The unemployment tax funds Iowa’s Unemployment Trust Fund, which provides temporary benefits to individuals who have lost their jobs. The Unemployment Trust Fund currently has close to a $2 billion balance, which Reynolds stated is the ninth highest in the nation.
Just as with the income tax, Iowa is over-collecting unemployment taxes.
“Clearly, we’re over-collecting. To make it worse, we apply our unemployment tax to more wages than any other state in the region. Iowa taxes up to $38,000 in wages; Illinois only taxes $13,000; South Dakota is at $15,000 and Wisconsin $14,000. Only Minnesota taxes its businesses more. We need to stop punishing our employers by requiring them to pay more tax than necessary,” stated Reynolds.
Iowa’s unemployment tax is not only complex, but employers are subject to eight different tax rate tables and each table having 21 ranks. The rates vary from zero percent to 9% in the first table and zero percent to 7% on the eighth table. The reason for the tables and wide-ranging rates is to maintain the solvency of the Unemployment Trust Fund. When the balance is low, the rates increase, and with a higher balance rates will decrease.
The over-collection of unemployment taxes impacts both businesses and their employees. The consequence is similar to high-income tax rates, which not only reduce earnings from an individual’s paycheck, but also serve as a deterrent for businesses just starting out or considering more hires.
“If we lower unemployment taxes, businesses will be able to hire more employees, increase wages, and decrease usage of the unemployment system,” argues Reynolds.
Reynolds is proposing that the legislature “reduce the unemployment insurance payments that employers make by half.” This means that the maximum tax rate on all tables would be lowered to 5.4%. This rate reduction, noted Reynolds, “will result in nearly $1 billion in savings, which will flow through businesses of all sizes, to communities all across our state.”
Further, this will not only simplify a complex system, but also “encourage businesses to reinvest savings into their employees.”
To attain these savings at this key time, rather than maintaining a rigid and outdated system, lawmakers should consider our recommendation of implementing a sliding scale for unemployment insurance benefits, following the lead of states like Florida and North Carolina.
A sliding scale approach would provide a more tailored solution, ensuring that the number of weeks of unemployment benefits aligns with both economic conditions and workforce needs. This would create a more flexible system that encourages reemployment while maintaining essential protection for workers.
“With these substantial savings for small businesses in Iowa, we anticipate this money will be used to enhance employee wages, add new workers, buy new equipment or update retail and office spaces,” stated Matt Everson, who serves as Iowa’s State Director of the National Federation of Independent Business
Iowa has made tremendous progress in improving the state’s tax climate. Lowering the unemployment tax will be another step in improving our competitiveness. Gov. Reynolds understands that economic growth best occurs when businesses and individuals are not restrained by heavy levels of taxation.
