Iowa State economists suggest Iowans could save $100 million collectively each year if the state sales tax was eliminated.

These findings were published in “Are All Taxes Equally Bad? How Replacing Iowa’s Sales Tax Could Save Iowans More than $100 Million per Year,” a paper written by Harvey Lapan and GianCarlo Moschini economics professors and Brad Caruth, senior in economics.

Moschini described the situation as a “tax loophole.”

Replacing all sales tax with an equivalent income-based tax would transfer the burden of taxation to the federal government. This would be possible because the federal government would be able to raise money needed by implementing an equivalent income tax, Moschini said.

Taxpayers can deduct income tax from their adjusted taxable income, according to federal law and the Internal Revenue Service.

Terry Alexander, ISU adjunct associate professor of economics, said if all states followed suit, the federal government might look seriously at removing the deduction of state income tax.

However, the authors said, in reality it will be difficult to implement a new tax system.

“Income tax is more visible, and people may be more startled when they pay $300 at a time instead of gradually paying it,” Lapan said.

Some might think they are paying even more than usual, Moschini said. “People may perceive it as a new tax,” he said.

Lapan said if the federal government were to remove the ability to deduct state income tax, the state of Iowa would be no worse off than it is now.

Although students would not see a huge difference in the amount of income tax they pay because their incomes are lower, they would see some benefits, Lapan said.

“Those with low incomes would feel the benefit of no sales tax because they spend a larger portion of their income on items that are subject to sales tax,” Moschini said.

Lapan said the lack of sales tax would make retailers more competitive, because it would save customers money.

An example of this would be someone living in Omaha, Neb. coming to Council Bluffs to make purchases because products have no sales tax.

Retailers will make more because of these extra customers, he said.

Moschini said the lack of sales tax would make Internet sales much easier, because it is hard to enforce taxes on products purchased over the Internet.

The money Iowans save could be equivalent to the sum of the tuition paid by all in-state students from Iowa, Lapan said.ÿ