Posted tagged ‘tax reform’

How to make Iowa’s tax system more unfair

February 5, 2013
David Osterberg

David Osterberg

How odd that a new proposal to make Iowa’s tax system more regressive and unfair comes out just when new evidence shows it already is unfair. HF3 would make the Iowa income tax rate flat where it needs to reflect ability to pay. Since higher income people pay more in income tax, and because they are expected to pay a greater percentage as their income rises, moving to a flat or flatter income tax is a reward to them. It does not help low- and moderate-income people.

As shown in the recent “Who Pays?” report by the Institute on Taxation and Economic Policy (ITEP), the poorest pay the highest portion of their income in taxes. (See graph.) The sales tax is much steeper as a share of income from low-income Iowans than it is from high-income Iowans, and the property tax is marginally more expensive to low-income people as a share of income than it is to those with high incomes. The income tax is the only progressive element of Iowa’s state and local tax system.

graph of Who Pays Iowa taxesTo flatten the only progressive feature of Iowa’s tax system would make the overall tax system more regressive. That would be the inevitable effect of HF3.

The problem with Iowa’s tax system is not that it’s too progressive. In fact, it is regressive — taking a larger share of the income of people at low incomes and middle incomes than of people at the top. HF3 would compound this.

Posted by David Osterberg, Executive Director

Sound budgeting doesn’t include blanket tax credit

January 28, 2013
Mike Owen

Mike Owen

This session of the Iowa Legislature offers a tremendous opportunity to move the state forward with a balanced approach — including responsible, fair tax reform and investments in critical needs that have gone unmet, in education at all levels, in environmental quality and public safety.

The proposal for a blanket $750 tax credit to couples, regardless of need and blind to the opportunity cost of even more lost investments, does not fit that approach. To compound a penchant to spend money on tax breaks is fiscally irresponsible to the needs of Iowa taxpayers, who will benefit from better services, and to the promise that we would return to proper investments when the economy turned up, as it has. Furthermore, to give away Iowa’s surplus when uncertainty remains about the impact of federal budget decisions on our state’s tax system and services is tremendously short-sighted.

As the Iowa Fiscal Partnership has established, cutbacks in higher education funding have caused costs and debt to rise for students and their families, not only at the Regents institutions but community colleges as well. While Iowa voters, through a statewide referendum, have expressly called for new revenues to go toward better environmental stewardship, lawmakers have not taken action. The surplus we now see should be used responsibly for the future of Iowans, who patiently endured budget austerity for the day when we could once again see support for critical services. This is no time to be forgetting our responsibilities.

Iowa can do better by returning to the basics of good budgeting, crafting budget and tax choices that keep a long-term focus on the needs of young and future generations, whose lives will be shaped by the foundations we leave them.

Posted by Mike Owen, Assistant Director

EITC boost would help families who need it — and economy

January 17, 2013
Heather Gibney, Research Associate

Heather Gibney

If you imagine a packed Kinnick Stadium on game day you have an idea of how many Iowans were kept out of poverty from 2009 to 2011 thanks to two refundable tax credits.

A new state-by-state analysis from the Brookings Institution finds that the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 71,123 Iowans out of poverty, over half of them children.

The Governor’s Condition of the State speech Tuesday missed an opportunity to discuss the value of Iowa’s own Earned Income Tax Credit (EITC) to Iowa families and prospects for an expansion — something he has twice vetoed on grounds that he wanted more comprehensive tax reforms.

The Brookings analysis uses a new way of looking at poverty: the Supplemental Poverty Measure, an updated approach to the calculation of whether an Americans household is in poverty. So it’s a valuable look that we haven’t seen for state-level figures.

The EITC is designed to encourage work when low-income jobs don’t provide enough for a family to make ends meet. So, as a family earns more income, they become eligible for a larger credit; as their income approaches self-sufficiency the EITC gradually phases out.[1]

At the state level, Iowa families who are eligible for the federal EITC also qualify for the state EITC, which is set at 7 percent of the federal credit. Proposals in the past would take that higher, to 10 percent or even 20 percent. It can be an important break for lower-income working families because Iowa already taxes the income of many who don’t earn enough to pay federal income tax. Currently, a married couple with two incomes and two children who qualifies for the federal EITC doesn’t have to start paying federal income taxes until their incomes reach $45,400. That same family would have to pay Iowa income taxes when their incomes reached $22,600.[2]

The EITC is the the nation’s largest and most successful anti-poverty program, largely because it encourages and rewards working families. With Iowa’s 85th General Assembly under way, discussions about raising Iowa’s EITC above 7 percent may once again emerge after lawmakers failed to reach an agreement last year.

An EITC increase would raise the threshold at which Iowa families start to owe income taxes — putting more money into the pockets of those who need it the most and encouraging them to spend that money in their local communities.

Posted by Heather Gibney, Research Associate


The Tax Foundation’s indefensible mish-mash

January 30, 2012
Peter Fisher

Peter Fisher

The Tax Foundation’s 2012 State Business Tax Climate Index is out, and not much has changed — including the political talk about it.

What this annual release offers is, at its core, an indefensible mish-mash of “Stuff the Tax Foundation Doesn’t Like,” which should be the title. Instead, the group slaps the term “State Business Tax Climate Index” on it, adds its slick logo and pretends the whole thing has meaning. For an ideological message, it may, but for decisions on business locations and expansions, not so much.

Problems with the methodology of this “index” are outlined in my 2005 book, Grading Places, published by the Economic Policy Institute. Much of the latest Tax Foundation (TF) report reads verbatim from earlier versions.

The Tax Foundation rests on contradictory messages. First, it claims that taxes paid make a difference in business decisions or growth, selectively citing literature to back the claim, despite a preponderance of evidence that taxes matter little. Then, it produces an “index” that has little relation to what businesses actually pay. In some cases, lower taxes actually produce a worse score on the index.

Rather than measuring what businesses actually pay, TF instead focuses on selected characteristics of the tax code while ignoring significant features. Results differ wildly from a ranking based on what businesses pay in many cases. This is because of the TF emphasizes rates of tax, without considering the base to which those rates apply. This feature penalizes Iowa, which in fact is a low-tax state for business; according to Ernst & Young, only 18 states have lower overall state and local taxes on business.

In other words, if a state — like Iowa with its single-factor apportionment formula — holds down the base on which tax rates apply, the Tax Foundation ignores the impact on actual taxes paid because it doesn’t like the rate structure.

Ironically, the report penalizes states that offer tax credits, which TF views as harmful to the business climate, a defensible position because it creates an uneven playing field for competing businesses, and jeopardizes critical public services that benefit businesses and their employees. But tax credits have strong lobbies in the Legislature. When the anti-tax politicians crow about Iowa’s low ranking in this report, something tells me that is one part of it they will not mention.

Like the Tax Foundation, they will stick with anything that backs the message they want to share, rather than examine the real issue of effects on business.

Posted by Peter S. Fisher, Research Director

It’s not theater: ‘The Pirates of River Landing’

October 11, 2011
Peter Fisher

Peter Fisher

The Coralville City Council recently approved an astounding incentive package to entice Von Maur from Iowa City’s Sycamore Mall to Coralville’s Iowa River Landing project. The city has agreed to build a $9.5 million store for Von Maur. It doesn’t matter how well your store is doing; if someone offers you free rent in perpetuity, that gets your attention.

But the $9.5 million is only half the story. The city also agreed to:

  • give Von Maur the $1.5 million building site for $10,
  • pay $650,000 to buy out the company’s lease at Sycamore Mall,
  • pay all of Von Maur’s expenses of moving from the mall to Coralville, and
  • pay all of the cost of constructing necessary streets, sidewalks, parking lots, landscaping, street lighting, water, sewer and storm sewers associated with or needed by the store.

And that’s still not the end. This was a TIF deal, where the rationale is that you are creating tax base, in the long run.

Well, guess what happens to most of the tax revenue — the city rebates it to Von Maur, with no ending date, because this TIF is in a “blighted area,” which means the TIF goes on forever.

So I guess the day after perpetuity, the schools and the county will start collecting all the taxes normally due them from this project.

The property tax deal caps Von Maur’s liability for property taxes at $150,000 per year (inflated each year by the consumer price index or 2 percent, whichever is less). If you take the building cost and add the land value you get $11 million. Then throw in another $1.0 to $1.5 million for the value of interior improvements made by Von Maur that count as part of the real estate, and you get a taxable value of about $12.2 million. At the current total property tax rate in that area of $36.57 per thousand, that is about $450,000 per year for a total property tax bill.

Under the agreement, Von Maur pays only $150,000, the city pays the remaining $300,000. There is no time limit on the cap. But if we assume that the store will have an economic life of 20 years, we can calculate the present value equivalent of giving them $300,000 a year. It’s about $4.5 million (using a 3 percent discount rate). You could argue about the time frame, or the discount rate, or about how much faster property taxes will go up than the 2 percent limit on the cap (which means the rebate amount will increase).

But you will in the end come to the conclusion that the tax cap is worth a lot — $4 million to $5 million. That is, giving Von Maur $4 million to $5 million up front would be worth about the same as giving the company $300,000 a year for 20 years. That means the total incentive package is worth at least $16 million (9.5 + 1.5 + .65 + 4.5). “At least,” because that figure doesn’t include all of the city infrastructure costs, which will be substantial, or the moving costs. Von Maur, meanwhile, has to come up with just the cost of finishing the interior space to its specifications, an expense that is likely to be in the $3.5 to $4.5 million range, plus $150,000 in property taxes each year, and its share of maintaining the common property (mostly parking lots).

Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal-ridden film tax credit, which briefly promised “half-price filmmaking” before the program was shut down. In addition to covering three-fourths of the up-front costs, the city will pay two-thirds of the annual property tax bill.

Coralville Council members — perhaps soon to be known as the Pirates of River Landing — apparently think this is a wise use of taxpayer funds. We can hope that the taxpayers of Coralville have a more sensible view of the world.

Posted by Peter S. Fisher, Research Director

Iowa’s already competitive tax system

August 18, 2011

“Pay no attention to that man behind the curtain!”

So said the Wizard of Oz, to distract his visitors from how he was manipulating them.

Well, thank goodness for Toto’s work in exposing the fraud.

Likewise, IPP’s Peter Fisher and others doing real research have exposed the myths about corporate taxes in Iowa that justify every political claim of a supposed need to reduce taxes on business. The fact is, it’s simply not a problem, as noted in the Iowa Fiscal Partnership backgrounder, “Iowa’s Businesses Already Are Taxed Lightly.”

Few States Tax Businesses Less Than Iowa

State Corporate Income Tax: Percent of Private-Sector GDP — Comparison to U.S. Average

Few States Tax Businesses Less Than Iowa — State Corporate Income Tax: Percent of Private-Sector GDP

Sources: IPP analysis of data from the U.S. Census, State Government Tax Collections; and the Bureau of Economic Analysis, Gross Domestic Product by State

Lawmakers often hear — and voice — complaints about the competitiveness of Iowa’s tax system. In fact, Iowa’s taxes on business already are very competitive. Whether one focuses only on the corporate income tax (above and linked here), or the whole range of taxes falling on business, Iowa’s state and local taxes are well below average, and have been for some time. (See state and local ranking of all states)

Iowa’s corporate income tax in recent years has been considerably lower than the national average level of taxation and lower than all but 11 states. The best summary measure of the level of corporate income taxation from one state to another, that takes into account all features of the tax code, is the amount of tax collected as a percent of the private economic activity generated in the state, as measured by state private sector GDP (gross domestic product).

In Iowa, this fraction fell from 0.31 percent in the mid-1990s to 0.24 percent over the last five fiscal years, as shown in the graph above. On this measure, Iowa’s rank among the 50 states fell from 36th to 40th. (For the most recent year, 2009, Iowa ranked 36th.) In both periods, Iowa taxed well below the average for all 50 states. Similarly, the conservative Tax Foundation found that Iowa ranks 43rd among the states in its level of corporate income taxation, measured as corporate taxes paid per capita on average for fiscal years 2004-2008 (and 36th for 2008).

See our two-page backgrounder on this issue at www.IowaFiscal.org.

Posted by Mike Owen, Assistant Director

Get budget rhetoric in line with reality

July 8, 2011
David Osterberg

David Osterberg

Now that we have a new state budget in place that was balanced in a cuts-only approach, we at least can finally all agree that state spending in Iowa is down.

Even before the new budget was passed, the general fund budget was smaller in relation to the Iowa economy than it was when Gov. Terry Branstad was last in office in 1998.

In other words, state spending has not kept pace with the growth in wages and business profits over the past dozen years. This shifts costs to Iowa citizens.

One example is in the Regents universities. In the just-ended fiscal year, the state provided fewer dollars to the University of Iowa than it did in 1998. By not adjusting state funds for inflation, tuitions have been forced higher: 227 percent up since 1998, from $1,333 per semester to $4,357.

In Iowa, budget rhetoric is what’s been out of control. Politicians have manufactured a crisis, when we need budget discussions to be based on logic and facts, not scare tactics.

When we do that, we can see that Iowa can afford to provide preschool for every Iowa 4-year-old, because we know it improves education and economic opportunity across the board. We can hold down the rapid increases in tuition at Kirkwood and the University of Iowa. We can mow the grass in our parks, improve the low salaries of our teachers and nurses, and do much more while keeping spending at or below 1990s levels.

What we can afford to cut are the perks for the profitable. Tax cuts for big corporations that already avoid their fair share of the bill cannot be sustained if we want to provide and maintain superior state services that attract residents and a productive workforce — which, by the way, is how companies make money.

Let’s put the old budget rhetoric on the shelf and invest in Iowans as we once did, for a dynamic economy and services in line with Iowa values.

Posted by David Osterberg, Executive Director

How do the House and Senate property tax proposals differ?

June 23, 2011
Andrew Cannon photo

Andrew Cannon

Legislation pending in both the Iowa House and Senate could change the way city and county governments gather revenue as early as 2012.

Among the features of the House Omnibus Budget proposal (HF697, passed by the House on June 8th) is a rollback of the assessment rates of commercial, industrial and railroad property taxes. The Iowa Legislature would allocate general fund monies to local governments to make up for some of that lost revenue. This plan further tilts the responsibility of funding local government toward individuals and families and away from business.

Equally important, it’s unclear whether the property tax replacement fund would adequately replace the revenue local governments lose as a result of the commercial and industrial property tax assessment rollback.

Additionally, the House bill alters and limits how city and county governments budget. Local government budgets would be capped, using a highly flawed formula. Though the formula accounts for inflation using the Midwest Consumer Price Index (CPI), the CPI isn’t a good measure of inflation in government costs. Further, the inflation factor is limited to 4 percent, meaning that in a high inflation year, this formula flaw could seriously impede the ability of local governments to meet their commitments.

The Senate’s counterpart, SF538 (introduced earlier this week and passed by the Senate June 22) would also reduce the tax responsibly of commercial, industrial and railroad property owners, as well as alter and limit local government budgets.

Rather than reducing the property tax assessment maximums, however, the Senate bill creates a Property Tax Credit for commercial, industrial and railroad property. The state’s general fund, the bulk of which is generated from of individual income taxes, would finance the Property Tax Credit. Though there would be less shifting of responsibility than in the House proposal, the distribution of this credit to businesses and railroads still would push more of the responsibility for financing government toward individuals and families.

The restriction on local government budgets in the Senate proposal is far less restrictive than the House version. Though the Senate version uses the same flawed formula, relying on the Midwest CPI to calculate maximum budgets, some slight deviations from the House version would leave local governments with considerably more freedom in their budgets. First, the inflation factor in the Senate proposal is not limited to 4 percent, meaning that in a high inflation year, local governments could correspondingly increase their budget. Second, local governments may factor unfunded federal or state mandates into their budget limit calculation under the Senate version. Third and most significantly, the Senate proposal does not curtail the revenue local governments can raise through commercial, industrial and railroad property tax.

Both the Senate and the House proposals would place a bigger chunk of the tab of financing government into the hands of individuals and families and further reduce the contributions of businesses to public services. Each chamber’s proposal would limit the ability of local governments to respond to citizens’ needs and demands. Though the mechanisms in each proposal differ slightly, the primary difference is simply one of magnitude.

Posted by Andrew Cannon, Research Associate

Too many unknowns in proposed property tax rollback

June 15, 2011
Andrew Cannon photo

Andrew Cannon

The property tax rollback proposals we’ve seen this legislative session are concerning for a number of reasons. The latest — in an amendment to House Omnibus Budget bill (HF697) — though scaled back from an earlier proposal, does little to ease legitimate concerns.

Citizens and elected officials of cities and counties have reason to be both concerned and confused by the legislation.

The bill, passed by the House last week and yet to be taken up in the Senate, would reduce commercial and industrial property assessments and limit the amount of revenue city and county governments can raise from commercial and industrial tax (see our recent backgrounder for a more complete explanation).

Starting in Fiscal Year 2014, commercial and industrial property assessments would drop by 5 percent for five years, so that they are ultimately reduced by 25 percent. The same legislation provides for some property tax replacement monies to be allocated by the state. In FY14, the replacement fund would total $30 million, increasing by $30 million each year until it reached $150 million.

This formula has many problems, not the least of which is that no one knows if the replacement funds (1) will be enough to fully replace lost property tax revenues or even (2) will actually be allocated. The rollback would be written into law; the replacement dollars would be subject to the annual appropriations process. The $30 million figure — maybe it’s close, maybe not; for all we know it was one of many numbers on a dartboard. Either way, in a tight budget year, even that might not be provided. It’s one more note of uncertainty for local officials setting budgets.

Additionally, as we’ve noted before, the legislation disrupts the shared responsibility of financing local government between residential citizens, agricultural citizens, and corporations. The bulk of the general fund — the source of the replacement funds — is generated from individual income tax. Already, the corporate share of state funding is minimal due to many breaks written into law and unintended loopholes in the law. The proposed property-tax legislation does not target help to small businesses, but assures big corporations — some of which already do not pay income tax in Iowa — also get the new property-tax breaks. The big-picture impact: Homeowners will assume a greater share of funding local services, because big companies will get one more break.

Any legislation that emerges from House-Senate negotiations needs to do better than HF697 in assuring sustainable and fair changes to Iowa’s property-tax system.

Posted by Andrew Cannon, Research Associate

Is what Wal-Mart wants for Amazon also good for Wal-Mart?

June 10, 2011
Mike Owen

Mike Owen

An interesting column by Liz Peek on TheFiscalTimes.com notes Wal-Mart and other retail giants are banding together behind legislation to require Amazon.com to collect and pay state sales taxes rightfully owed on purchases made online.

OK, but why does Wal-Mart take advantage of its own wide reach to shield profits from state taxation?

As the Peek column notes:

Overall, retail sales over the Internet grew nearly 15% last year in the U.S., and totaled $165.4 billion.

Industry analysts are expecting that figure to swell to more than $188 billion this year. That presents quite a dual challenge to states unable to collect sales taxes on those purchases, and to traditional stores that are losing market share. Consequently, large retailers, and thousands of others across the country, have banded together to demand the playing field be leveled. (emphasis added)

So, Wal-Mart is demanding “the playing field be leveled.” Admirable, perhaps, but ironic, to be sure.

In an April 2007 report for the Iowa Fiscal Partnership, “Leveling the Playing Field,” Peter Fisher illustrates how Wal-Mart has gone to great trouble in tilting the field in its favor on corporate income tax. Wal-Mart created a multilayered, multistate structure to shift at least some profits where they are taxable to states where they are not. In a nutshell, Wal-Mart found a way to charge itself rent to reduce taxable profits.

All done by the book as the book has been written. But it creates an advantage for one retail giant that its small competitors who sell shoes, tires, clothes, office supplies, groceries, etc., cannot take. And Wal-Mart’s strategy is not the only one being used by large, multistate corporations to dodge tax responsibility. Many corporations do so by exploiting loopholes, the seams in tax law that companies use to defeat legislators’ intent.

Iowa could fix this — and level the playing field — with a simple solution already adopted by five neighboring states: Nebraska, Kansas, Illinois, Minnesota and Wisconsin. That solution is corporate combined reporting, supported by Iowa’s last two governors, but not once debated on the floor of the Iowa House or Senate.

When the solution not only could raise money for the state and make the playing field more fair for small businesses, this debate is long overdue.

Posted by Mike Owen, Assistant Director

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