Once again, tax cuts aren't the solution
Posted on January 27, 2025 at 9:45 AM by Mike Owen
Common Good Iowa research has identified many ways Iowa could do better by working families who are struggling. It’s always good to see discussion of that at the Capitol, but some responses would make matters worse for many. Actual solutions lie not in tax policy, but in getting employers to pay better.
Case in point: a state-level tax break for overtime or tip income. Billed as help for lower-income or even middle-income workers, these plans would worsen tax inequities and continue a gutting of revenues for services those families count on. The state of Alabama is seeing these effects right now, in the first year of a law exempting overtime income from tax. Through the first nine months, that new law cost $230 million – more than expected – and Alabama legislators concerned about education funding now are considering whether to keep the tax break in place.
The Department of Revenue’s latest report on the state income tax indicates a large share of workers who depend on tip income or extra hours – by overtime or by working more than full time – in many cases do not have income-tax liability. More than one-third of workers with taxable income below about $35,000 pay no income tax, and more than one-fourth of workers below about $53,000 income, pay no income tax.[1] Those households would be among those most likely to depend on overtime or tip income. Exempting the tip or overtime share of their income from tax would have no impact on them. They simply would continue to struggle making ends meet.
It is not surprising that a new tax break – as that offered in House File 110 for overtime income – would be offered after candidate Donald Trump proposed it at the federal level during the 2024 presidential campaign. Tax breaks are often the first place Iowa’s majority legislators turn, no matter the fact that they are a clumsy, ineffective and costly tool to achieve better results for Iowans and the state economy.
There are better ways to help those workers and their families.
-
Senate File 101 would raise the state minimum wage to $15 an hour and index it to an inflation measure. That would benefit, conservatively, over 200,000 workers and their families and the local stores and service providers that depend on their business. Iowa’s minimum wage has been $7.25 for 17 years while most of our neighbors have gone far above that level.
-
We could expand and enhance the Earned Income Tax Credit, which helps many families that would depend on tip or overtime income – and which would benefit a greater share of families earning at low and moderate incomes regardless of tips or overtime.
-
We could raise or eliminate the subminimum tipped wage, so that tipped employees would get at least minimum wage plus whatever tips their customers offer.
Iowa lawmakers need to be more creative than to address every problem with a tax cut. When they do use the tax code, changes should not arbitrarily benefit one earner over another at the same income, as tip and overtime exemptions would do, or make changes that disregard the revenue impact for services that benefit all Iowans.
Mike Owen is deputy director of Common Good Iowa. Contact: mowen@commongoodiowa.org
Categories: Budget & taxes, Jobs & labor