Mike Lipsman has taken an informed look at Iowa’s new tax law and concluded that, while the changes are more reduction than reform, the door remains open for a “do-over” that could be groundbreaking.

To achieve a real breakthrough, Lipsman said, lawmakers must do two things they didn’t do this year.

First, they need to create a more open process that does not shut out the minority political party and other affected Iowans.

Also, they need to develop “a clear understanding of revenue requirements to adequately fund services in the areas of K-12 education, higher education, health care, social services, environmental protection, judicial services and others.”

Lipsman doesn’t say this, but it would also be helpful if political candidates of all stripes spent time between now and the November election talking with constituents about Iowa’s needs and how to adequately fund them.  

Those conversations can help elected officials reach a consensus about statewide goals, which will make it easier to agree on the basics of future tax law changes.

Lipsman’s 11-page analysis is a great resource for anyone interested in improving Iowa’s tax laws.  

He was the top tax analyst at the Iowa Department of Revenue before leaving state government in 2011 to join Des Moines-based Strategic Economics Group. I believe he still knows more about Iowa’s tax code and how it operates than anyone in or out of government.

His recent analysis is based on nonpartisan information from the Legislative Services Agency, the Iowa Department of Revenue and the actual tax bill, along with his own insights.

He said the tax bill that passed on May 5 “varies considerably” from earlier proposals.

Most notably it pulled back from the huge cuts proposed early in the session.

It also makes roughly half the individual income tax cuts “contingent on revenue growth thresholds.” And it delayed “implementation of significant corporate income tax provisions until TY [tax year] 2021.”

The delays give lawmakers time to fine-tune the rough draft they produced this year.

One of Lipsman’s concerns is that Iowa’s new tax tables are structured in ways that will effectively create a drag on the state’s economy.

That’s because the proposals concentrate benefits in high-income households, which “are much less likely to spend or invest their savings in Iowa.”

Lipsman noted that a study of 2011 data by the U.S. Bureau of Labor Statistics found that “households with income over $150,000 spend only about 53 percent of their after tax income. The remainder goes into savings and financial investments.”

Simply put, high-income households invest most of their tax windfalls in the stock and bond markets, thereby fueling growth for companies and operations located outside Iowa.

Conversely, when the bulk of tax cuts are concentrated in low- and middle-income households, something entirely different happens. Those families spend their tax savings where they live. And that spending turns over several times close to home, where it improves and grows the local economy.

That isn’t just theory.

Iowa saw the downside of a tax policy that was overly generous to high-income households in 1997, the last time the state made major tax law changes. That law, like the new one, concentrated the bulk of tax savings with the wealthy.

Later studies showed two things happened.

One was that the state revenue growth fell from 3.4 percent to 0.3 percent, well below cost-of-living increases, which at the time averaged 2.5 percent to 3.0 percent.

The second was that the Iowa economy, which had been keeping pace with national growth, started falling behind.

Unless we want to fall behind again, lawmakers need to take a fresh look at tax reform and come up with a “do-over” next year.