Are All Taxes Equally Bad? How Replacing Iowa’s Sales Tax Could Save Iowans More Than $100 Million per Year

Harvey E. Lapan, GianCarlo Moschini, Brad Caruth
September 2002  [02-WP 312]

Under current U.S. law, taxpayers can deduct up to 100 percent of their state income taxes from their adjusted gross income when calculating their federal income taxes. As a result, Iowans currently pay approximately $251 million less to the federal government than they would otherwise pay. There is, however, no equivalent stipulation allowing for the deduction of state sales taxes. Consequently, by eliminating the sales tax and replacing the lost revenue with an income-based tax, Iowans could save a substantial amount of money on their federal tax returns without any change in revenue for the Iowa government. Alternatively, by replacing the sales tax with an income-based tax, the State of Iowa could increase its tax revenue without increasing the total tax burden on Iowans. This analysis discusses four specific scenarios, with net benefits to Iowans ranging from $106 million to $157 million per year.

Keywords: federal itemized deductions, income tax, sales tax, state budget, tax policy.

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