Iowa bests most of its neighbors with low sales tax rating

(The Center Square) - Iowa ranks 29th for its combined state and local sales tax rate, better than all of its neighboring states except Wisconsin and South Dakota, according to a report from the Tax Foundation.

The state sales tax rate is 6%, the 17th highest. The average local sales tax rate of 0.943% is one the lowest, placing the state at 29th in the country with a combined rating of 6.94%.

Wisconsin has the lowest combined sales tax rate among Iowa's neighbors, with a state sales tax rate of 5% and an average local sales tax rate of 0.69%, placing the state at 42nd highest in the country, according to the report.

South Dakota ranks 36th lowest, with a combined rate of 6.11%. In 2023, the state agreed to roll back its state sales tax rate from 4.5% to 4.2%. The tax break expires in 2026.

Illinois has the highest rate of Iowa's neighbors, coming in at 8.8%, which is 7th in the country, according to the report. Missouri ranks 11th with a combined rate of 8.39%. Iowa's northern neighbor, Minnesota, ranks 15th with an 8.12% rate.

Iowa also has a 6% use tax, which is charged on goods and services provided where no sales tax was collected, according to the Iowa Department of Revenue . For example, if an Iowa resident purchases items from an out-of-state vendor that does not charge a sales tax, the purchaser is responsible for remitting sales tax on the items, according to the DOR.

Iowa lawmakers did not address sales tax in the 2024 legislative session but did fast-forward income tax cuts. A 3.8% flat tax takes effect with the 2025 tax year. The Iowa Legislature also agreed to remove taxes on retirement and inheritance income.

Sales taxes should be considered in context with other taxes, according to the Tax Foundation.

"For example, Tennessee has high sales taxes but no income tax, whereas Oregon has no sales tax but high income taxes," the Tax Foundation said in its report . "While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts."