Mike Owen

Oh, the outrage.

Apple Inc., is (gasp!) working the federal tax code to its advantage, exploiting loopholes in the code to legally avoid paying taxes. OK, but we’ve heard it all before.

Many are expressing outrage — not an unreasonable reaction. Senator Carl Levin of Michigan is leading hearings in Washington about the issue, noting, “Our purpose with these hearings is to shine a light on practices that have allowed U.S.-based multinational corporations to amass an estimated $1.9 trillion in profits in offshore tax havens, shielded from U.S. taxes.” He went on:

A recent study found that 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three year period. Zero. These corporations use multiple offshore loopholes that give them significant control over how much U.S. income they will report and how much tax, if any, they will pay.

Senator Levin is indeed shining a light on a serious issue, but you can already see the excuses coming.

As a New York Times story notes:

While Apple’s strategy is unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say. At the same time, it shows how difficult it will be for Washington to overhaul the tax system.

In Iowa alone, as we showed many years ago, this also happens with some big, multistate companies, which use gimmicks to get out of paying state corporate income tax. Instead of shifting profits to phantom companies in Ireland to avoid U.S. tax, these companies shift Iowa profits to shell companies in Delaware, where they go untaxed by either Delaware or Iowa. And it could be fixed, but Iowa lawmakers simply have chosen not to. Not acting, after all, is the easiest course.

Tell lawmakers privately about what’s happening and if it’s new to them, they express outrage. Wait a few weeks, and for many the outrage is gone. Frequently, the view changes to either (1) it’s something we need to accept so companies won’t move away, or (2) the issue is just too big to address.

Of course both arguments are what big business lobbyists want everyone to believe. And both are wrong.

The business lobby has obscured the fact that there would be no reason under Iowa tax law for these companies to move away if the state were to pass legislation to plug loopholes — and lawmakers certainly can do so, with a device called “combined reporting.” Read about it here.

The long and short of it: Iowa does not have to sit by while big companies drain the state’s coffers and push the bill to other taxpayers, both smaller business competitors and working families. And neither does the United States.

Posted by Mike Owen, Assistant Director
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Peter Fisher

The Iowa House today proved that bipartisanship is no guarantor of good policy. On a vote of 87-9, the House approved HF 641, which would authorize a new and wasteful incentive program that would divert money from the state general fund to support hotel and retail projects in cities. So we will be taking money that should be supporting state investments in education, health, the environment, public safety, and other services, and using it to subsidize hotel developers and retail strip malls. All in the name of “economic development.”

Cities already have more than enough ability to divert taxes to development projects through property tax TIFs and abatements. There is no need for additional diversions of revenue from other jurisdictions.

The House bill would authorize any city or county to establish “Reinvestment Districts.” From the date of establishment onward for the next 25 years, 4 cents of the 6-cent statewide sales tax, and all 5 cents of the state hotel-motel tax, from all “new” sales or room rentals would be diverted from the state general fund to the city for use in the district. What uses? Pretty much anything; any building, public or private, could qualify for a subsidy, and there is no limit on how much of the cost of a project can be subsidized.

“New sales” are sales from a business that first got a state sales-tax permit (or hotel-motel tax permit) after the date the district was established. Given the high rate of turnover among retail businesses, it is not hard to imagine a scenario in which most of the sales taxes in a district are diverted from the state general fund even though there has been little additional economic activity, or even decline. All that is needed is that old businesses are replaced by new ones, even if that means replacing an Applebees with a pawn shop.

Why will a city ever again be content to finance commercial redevelopment on their own, or with property tax TIFs alone? Why will a developer ever again finance a project entirely from private sources – try to remember, if you can, when that was the norm – when he or she can just ask the city to get the money from the state?

More importantly, what will become of market standards? While every legislator who voted for the bill surely believes in free markets and private enterprise, this measure undermines markets. There was a time, before the incentive wars got out of hand, when a project had to stand on its own – there had to be a sufficient market to support it, and banks had to be convinced that revenues would be sufficient to repay the loans. No more. Now local government officials are determined to force development to happen when it can’t stand on its own, creating oversupply that hurts existing businesses. Or the private sector happily rakes in all the new incentive cash to do something it would have done anyway. Those are really the only two alternatives for a local market activity: either market conditions support it and it can be financed privately, or the market can’t support it, and the city uses taxpayer money to force overbuilding.

We can hope that this bill gets careful scrutiny before it goes any further.

Posted by Peter Fisher, Research Director

Colin Gordon

Each month about this time, the Bureau of Labor Statistics updates its regional and state job numbers. It’s an important monthly scorecard, an opportunity to measure the state’s performance against the experience of other states, the national picture, and our own recent employment trends. And it’s an important political moment — especially as Governors around the country (and here in Iowa) have tied policy and budgetary decisions to job creation or employment targets.

But this monthly flurry of interest can also distract us from the bigger picture. How many jobs we added this month or last, after all, is less important than the larger and longer term goal of real recovery from the Great Recession. And on that score, we still have some ground to cover.

The graph below (from our State of Working Iowa report, updated through March 2013) compares the 2007 recession to all other postwar recessions, for Iowa and the United States. For the country, the 2007 recession is deeper and longer than any other postwar downturn. Now more than five years (63 months) since the onset of the recession in December 2007, we are far short of pre-recession employment levels.  For Iowa, the picture is a little better — but we are still 7,700 jobs short of the pre-recession peak.

http://public.tableausoftware.com/shared/5DDG8FS3T?:display_count=no

This is only part of the story.  As the recessions (and weak recovery) have dragged on, the state has continued to add to its labor force:  now five year’s worth of immigration, in-migration, and high school or college graduations. So our real jobs deficit is not the number of jobs we are short of the pre-recession peak. It is the number of jobs, given our current labor force, we are short of returning to pre-recession rates of employment. That deficit, captured in the graph below, is over 65,000 jobs. In order to clear that deficit in the next three years (during which time the labor force will continue to grow), we would need to add over 80,000 jobs — about 2,000 a month over that span.  Over the past year, or rate of job creation has been about half that (averaging only 920 jobs/month).

Posted by Colin Gordon, Senior Research Consultant

This is a trend we’ve been watching and reporting on at the Iowa Policy Project for many years, as have several good research organizations such as the Economic Policy Institute.

The Affordable Care Act offers at least a partial remedy. As health insurance exchanges are developed, affordable insurance should be more readily available. Tax credits for employers providing insurance will provide a targeted incentive to offer employees a better option than what employees might find on the individual insurance market.

Colin Gordon

Our State of Working Iowa report for 2012 offers another good look at this issue. As author Colin Gordon observes, wage stagnation, erosion of good jobs and recession have combined to batter workers, at the same time non-wage forms of compensation, health and pension benefits, also have declined. This has eroded both job quality and family financial security, and increased the need for public insurance. In Chapter 3, “The Bigger Picture,” Gordon writes that Iowa is one of 15 states, including five in the Midwest, to lose more than 10 percent of job-based coverage in a decade. He continues:

These losses reflect two overlapping trends. The first of these is costs. Health spending has slowed in recent years, but still runs well ahead of general inflation. Both premium costs … and the employee’s share of premiums have risen sharply — especially for family coverage — while wages have stagnated.

In 1999, a full-time median-wage worker in Iowa needed to work for about 10 weeks in order to pay an annual family premium; by 2011, this had swollen to nearly 25 weeks. Steep cost increases have pressed employers to drop or cut back coverage, or employees to decline it when offered. High costs may also encourage more employees to elect single coverage — counting on spousal coverage from another source and kids’ coverage through public programs. The second factor here is the shift in sectoral employment outlined above: Job losses are heaviest in sectors that have historically offered group health coverage; and job gains (or projected job gains) are strongest in sectors that don’t offer coverage.

This graph looks at the rate of employer-sponsored coverage, by industry sector, from 2002 to 2012.

An interactive version of that graph in the online report allows the reader to toggle between those two years; the colored balloons sink on the graph in moving from 2002 to 2012, as if they all are losing air — the result of declining rates of coverage.

Good public policy could help to fill them again.

Posted by Mike Owen, Assistant Director

Peter Fisher

You can’t fix problems you can’t find. That’s why transparency is so important in public policy and especially spending through the tax code.

You would never find some of this information just going to the Iowa Economic Development Authority website — you have to know where to look. And even then, there are limitations on what is available from the state for its citizens to see.

The Iowa Policy Project and Iowa Fiscal Partnership have long argued for greater transparency with regard to the state’s expenditures on economic development through the tax code. We are happy to see a new report from the Iowa Public Interest Research Group that brings attention to this issue, properly including business tax credits and other tax expenditures among the categories of state spending that citizens have a right to know about.

But it’s very important to look at the deficiencies that remain in Iowa. In our view, those problems tell far more about the state’s interest in transparency than the items that are given a favorable rating by PIRG.

While the PIRG report gives Iowa credit for having a website that allows a citizen to find economic development subsidies awarded by company name (including the amount, the jobs promised, the jobs created, and the location), two problems in particular should be addressed in the future.

• First, only tax credits that must be awarded are listed; similar information should be available for all economic development tax credits, including those that are automatic.
• Second, the database of subsidies is buried deep in the website of the Iowa Economic Development Authority (for those interested it is here: http://www.iowaeconomicdevelopment.com/annualrpt/?cmd=default&rptyear=2011). It’s hard for the public to find. A link to this database should be posted on the state’s DataShare website, where only aggregate information on tax credits is available.

The Legislature did pass a notable transparency improvement in 2009 that requires the state to identify by name the recipients of Research Activities Credits in excess of $500,000. The bill failed, however, to require identification of how much of a company’s credit was in the form of a refund check. Taxpayers have a right to know how much of their tax dollars are going to subsidize corporations that are paying no state income tax.

It should be clear by now that the disclosure of company-specific subsidy information does no harm to the company or to the state’s economic development efforts; there is no excuse not to make all of our business tax subsidies transparent.

Posted by Peter S. Fisher, Research Director

David Osterberg

The graph below offers one way — actually, four ways — to look at the latest nonfarm job numbers in the context of history and job goals for Iowa.

As of February, we’re 4,100 behind where we were at the start of the recession in December 2007, and 7,200 behind Iowa’s peak nonfarm job level in May 2008.

However, Economic Policy Institute analysis suggests that those historical numbers don’t give an apples-to-apples picture for how well the economy is producing jobs to meet the demand for jobs — that you need to factor in growth in the population. When that is done, Iowa still has 60,900 to go to reach where we were before the recession.

Yet another number to consider is Governor Branstad’s goal of creating 200,000 jobs in five years. Since his term started in January 2011, Iowa has produced a net total of 44,900 jobs, which works out to a pace of 1,800 net new jobs per month. At that pace, the state is well off what is necessary to reach the Governor’s goal — 4,400 per month for the remaining 35 months of the five-year period.

As we point out in our monthly Iowa JobWatch report, the overall job numbers do not tell the full story about the job climate in our state. One thing those monthly numbers do not disclose is any detail about job quality — whether jobs gained or lost are full-time or part-time jobs, or are permanent or temporary positions, or pay well, or offer health and/or retirement benefits.

For more, see our latest Iowa JobWatch report and also The State of Working Iowa 2012.

Posted by David Osterberg, Executive Director
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Any discussion of prices for electricity must be qualified since the amount of wind electricity produced is not the same as the amount consumed in the state. States around Iowa have requirements that a percentage of electricity sold be from renewable energy. Iowa also has such a requirement and ours was the first in the nation, a fact the governor tends to emphasize, and the requirement was met long ago. Some wind electricity is certainly exported. Thus, while data on wind electricity consumption would be helpful, information is unavailable on what portion of electricity from each fuel source serves retail load and what is sold on the wholesale market. It should also be pointed out that selling at the wholesale level has some benefit to Iowa ratepayers.

Peter Fisher

The Iowa House of Representatives will soon take up a bill that would legalize cheating on your Iowa income taxes. While that isn’t the intent, it will certainly be the effect, at least for anyone who has an accountant or who can figure out how to do it on their own.

Officially, the bill is HF3, which would create an alternative flat tax of 4.5 percent. The taxpayer could choose between the current system and the flat rate. If you choose the flat rate, you get a standard deduction but cannot deduct federal income taxes, itemize deductions, or take any credits. But if you currently pay a higher rate than 4.5 percent, and don’t have a lot of deductions or federal income taxes, you might come out ahead picking the alternative flat rate.

To see how this opens the door to massive tax avoidance, you need to understand one important feature of Iowa’s income tax: federal deductibility.

Let’s say you earn $75,000 in Iowa adjusted gross income (AGI) for 2013 and you had $5,000 in federal income taxes deducted from your paycheck during the year. You can deduct the $5,000 from your AGI, leaving you with that much less income to pay tax on. But if you also got a refund check from the federal government in 2013 (because you had too much withheld during 2012, and deducted too much federal tax on your 2012 Iowa return), you have to add that back to your taxable income. This ensures that, over the years, you always end up deducting exactly what you actually paid in federal taxes.

HF3 changes the rules — and here’s how any taxpayer could game the system under HF3. Let’s call it, “Follow the 20,000.”

•  First stop, your W-4. During 2013 you file a W-4 to have five times as much federal income taxes withheld from your paycheck as you really need to. (Or, if you are self-employed, pay quarterly estimated taxes five times what is required.) So when you go to file your 2013 Iowa tax in April 2014, you can deduct $25,000 from your income instead of $5,000. This lowers your Iowa tax bill considerably. If you were in the top 8.98 percent bracket, the extra $20,000 deduction would save you $1,796 on your state income tax. So you choose to file under the current system instead of using the flat rate.

•  Why that’s a bad idea now. Under the current system, your strategy would bite you in the back the next year, because now the $20,000 excess withheld in 2013 comes back as a refund check in 2014. The $20,000 refund check from the feds in 2014 would have to be added back to your 2014 income. You have to pay state tax on it.

•  Flat tax changes the game. If you can take the alternative flat tax for 2014, you will see a huge break. While you would not be able to deduct federal taxes withheld during 2014 under that scheme, you don’t have to add back the $20,000 refund check either.

So for 2014, you pick the flat tax alternative, and pay 4.5 percent on “all” your income — but in the state’s eyes, it’s like that $20,000 never existed.

•  An endless payoff. By doing this, you magically avoid ever paying Iowa income taxes on that $20,000. You didn’t pay tax on it the year it was withheld, because that year you filed the old way and took federal deductibility. And you didn’t pay tax on it the next year, either, because that year you chose the flat tax alternative and didn’t have to add in the $20,000 refund check.

You could argue that if the Legislature makes it legal, it can’t be called cheating. But it sure smells like it. That’s a “tax avoidance” strategy useful only to those in the higher tax brackets.

And that strategy can be avoided if HF3 gets no further in the Iowa House.

Posted by Peter Fisher, Research Director
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Heather Gibney

Dialogue about increasing the minimum wage is finally emerging in 2013. President Obama proposed an increase in the minimum wage to $9.00 per hour in his State of the Union address, and Senator Tom Harkin and Representative George Miller have introduced the Fair Minimum Wage Act of 2013 — which would raise the minimum wage from $7.25 an hour to $10.10. The Harkin-Miller bill would raise the wage in three steps of 95 cents before indexing it to keep up with the rising cost of living.

Iowa’s minimum wage now matches the federal. Raising it to $10.10 per hour would put nearly $6,000 more dollars in the pockets of Iowa families, and for the first time since the late 1970s a single parent with two children would be above the federal poverty level — a wage gap that we should have seen diminishing over time, but have not.

Recognizing that the federal minimum wage is too low, 19 other states, including the District of Columbia have a higher minimum wage than the federal and 10 states annually increase their minimum to keep up with the rising cost of living. Unfortunately, attempts to raise the federal minimum wage and set automatic adjustments to keep pace with the rising cost of living have been hindered by bad economics. Beliefs that increasing the minimum wage will lead to job loss, that the majority of those benefiting would be teenagers and that it would decrease output for certain industries is the consensus among opponents, however unfounded. A recent report from the Center on Economic Policy and Research (CEPR) looked at the most influential research done on the minimum wage in the last 20 years and continuously found insignificant or no discernible effects feared — and promoted — by opponents of raises in the minimum wage.

While the passage of any of these proposals remains uncertain, Iowans working for the minimum wage will have to get by with their creativity; possibly working two jobs, relying on cash assistance and tax credits, going without those amenities that make life a little more enjoyable and hoping that one day they might join the middle class.

Posted by Heather Gibney, Research Associate

Heather Gibney

It doesn’t take long after someone proposes an increase in the minimum wage — as President Obama did in his State of the Union message — to hear the same, tired arguments against it.

Rather than repeat them, and the bad economics behind them, it’s important to put the minimum wage in the context of the cost of making ends meet. It doesn’t come close — which means two things: (1) the wage itself needs to keep pace with increases in typical household costs, and (2) to fill gaps between the wage and the cost of basic needs, and to encourage people to work, we can through public policy offer work supports, such as the Earned Income Tax Credit, as well as assistance with the costs of food, health care and child care.

The Cost of Living in Iowa analysis by the Iowa Policy Project last year provides a look at just how far short a $7.25 hourly wage would fall for a single parent even working two full-time jobs. It would not come close to paying the bills without work-support programs. Note these estimates in the accompanying table (Table 3 from that May 2012 report) of a basic-needs, no-frills household budget for a single-parent family of two or three.

The national minimum wage of $7.25 has not been increased in almost four years — and in Iowa it’s already been over five years, as the state’s $7.25 minimum took effect in January 2008. Prices are higher than they were then, and employers cannot be counted upon to raise pay for minimum-wage workers without the stick of wage-and-hour laws. That is why there’s a minimum.

Posted by Heather Gibney, Research Associate