Iowa's state and local tax burden is below national average, says ISU researcher

AMES, Iowa -- Iowans pay less in total state and local taxes than do residents of most other states, according to a report just published by an Iowa State University researcher.

David Peters, assistant professor of sociology, found that Iowa ranks 36th out of the 50 states and the District of Columbia in how much tax revenue is paid to state and local governments.

"About 8 percent of our total business and individual income is consumed in taxes," said Peters. "Nationally that rate is about 9 percent."

If the current legislation on federal tax deductibility is passed, Iowa may no longer stay below the national average.

"That would likely move us higher, as the plan would hit higher-income filers," said Peters. "It would increase our tax burden relative to other states."

Iowans currently can deduct their federal tax burden from their state tax. Iowa is considering repealing that deduction.

Peters looked at five different types of taxes nationally and ranked the 51 areas studied.

Iowa ranked below the national average in four categories -- sales tax (38th), individual income taxes (30th), miscellaneous taxes (34th) and corporate income taxes (42nd).

Iowa ranked above the national average in one category -- property taxes (19th).

Peters says Iowa's higher property tax may be related to the state's emphasis on education.

"It's probably a function of the educational system in Iowa," said Peters. "We have a well-developed K-12 educational system, and that is primarily funded through property taxes. It generally follows that areas with higher property taxes place a greater emphasis on education."

When examining how Iowa ranks in comparison to neighboring states, Iowa is about in the middle.

"In terms of our surrounding states, generally we are more competitive in terms of lower taxes than Minnesota or Wisconsin," said Peters. "We are about equivalent to Nebraska and Illinois. Iowa has higher taxes than Missouri and South Dakota. South Dakota has no individual income tax."

These tax rates can be among the criteria considered when businesses are looking to relocate to the Midwest from another region of the United States or another country.

"If a business is looking to relocate, Missouri and Iowa both have many reasons to come to either state -- infrastructure, central location -- but Missouri has much lower taxes and that would make them more competitive," said Peters.

Comparing tax burdens from one state to another is more than just looking at tax rates. Peters' formula also factors in variables such as each state's personal income and business profits.

"Just using rates doesn't really capture how much people and businesses are taxed relative to their income," said Peters. "Compared to poorer states, a very high income state can generate the same amount of revenue by having a lower tax rate. You have to make it comparable to the earning power of the state."

Just as rates can be misleading, so can taxes in states with very large and very small population bases.

"Some people talk about taxes per capita, but that's not an ideal measure because it doesn't capture the amount of income. Governments don't tax people, they tax income and consumption -- what you buy and what you spend," said Peters.

The method Peters used is called GDP+Transfers, which compares the amount of revenue each state produces with the total of individual and business income.

Using this analysis, Peters was able to quantify the real tax burden of people in each state and the District of Columbia.

He found that only about 41 percent of all state and local revenues in Iowa are generated by taxes.

Other revenues are generated by charging fees for services including education, health and utilities. These sources generated about 27 percent of Iowa's state and local revenues.

Just more than 18 percent of Iowa revenues were generated from federal intergovernmental transfers.

The remaining almost 13 percent of revenue for state and local governments in Iowa is from insurance trusts, including unemployment trusts, workers compensation and pension funds.

Peters' entire study can be found at