Tax credits: Just review them!

Iowa lawmakers are making the issue of tax credit reform much more difficult than it needs to be.

Put another way, consider tax credit reform as a different task: If we were setting out to design the first wheel, no cars would be on the road today.

The latest foot-dragging came in late October, with the first meeting of a so-called “Tax Credit Review Committee,” which if not for the delay was a rare, promising nugget in an ill-conceived, expensive and inequitable income-tax cut bill in 2018.

It was 10 years ago this fall that a scandal in the Iowa Film Tax Credit program led Governor Chet Culver to order a review of all state tax credits. A special panel of state department heads went through the credits and offered a set of reforms in January 2010.

Virtually nothing was done in response. Tax credits, particularly those for business, have gone merrily along, rising to a projected $434 million for this budget year. Of that, about 7 out of every 10 dollars, or $314 million, is for businesses. State revenue analysts expect under current law for these numbers to be similar through FY2024.

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While the tax credits themselves can be complicated, the fundamental issues are not.

  • Tax credits are expensive.
  • Tax credits are regularly and extensively analyzed by the Department of Revenue, making plenty of information available.
  • Tax credits, like any spending of public money — and this is, in fact, spending ordered outside the budget process — demand accountability and a demonstration of a public benefit.
  • The Legislature creates these exceptions to our tax code; thus, it falls to the Legislature to review them to determine if they meet their expected purpose.
  • Even if a given credit may benefit the public, it must be shown to be a better public expenditure than something else, like education or health care services.

As it is, the 2020 legislative session will open without anything serious being done about a review ordered two years before.

Truly it is easier not to do anything, to keep the gravy train running for the corporate lobbyists who benefit from these credits. But if you’re going to talk the talk about accountability in public spending, you should walk the walk.

The low-hanging fruit that could start lawmakers on that path is the Research Activities Credit, or RAC. The RAC is a refundable credit, which means that if you have more credits than you owe in taxes, you get a check from the state for the balance. The annual cost of the RAC is about one-fifth of the cost of all business and family tax credits.

As we have shown repeatedly — using data from an annual state report by the Department of Revenue — most of the RAC is paid as so-called “refunds,” not of taxes owed, but of tax credits not needed, and most of the benefit goes to very large firms.

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DOR evaluations — here and here as examples — provide evidence that is at best sketchy on whether the RAC promotes significant new research in the state. Companies that benefit from the RAC have to do the research anyway, just to be in business, or they wouldn’t bother with it.

In the case of a small startup firm, a credit for some period of time might help the firm get established. For multinational corporations with hundreds of millions or billions in profit, good luck proving the need.

Think of it this way: You could reduce or even eliminate the refundability of the RAC and not raise taxes on a single company or individual. But you’d have $40 million more available to put into public schools, or clean water projects, or any number of public priorities.

Incoming House Speaker Pat Grassley said tax credit reform “is kind of a long process.” But if one never starts, one will never design that wheel.

These are budget choices, ultimately. Why are legislators so afraid to even start on them?

MMike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

Health care premiums are taxes

Do not let people mislead you by focusing just on taxes, leaving out the services those taxes pay for and the other costs those taxes replace.

Guest post: Ted Boettner, West Virginia Center on Budget & Policy

(Note: This piece also appeared in the Charleston, W.V., Gazette-Mail)

While the United States is a low-tax country compared to most industrialized nations, for a majority of Americans it doesn’t feel this way. That’s largely because private health insurance companies receive a large portion of our income every month. If we sent our money to a publicly run health insurance plan (e.g. Medicare) instead, almost all of us would save thousands of dollars each year while guaranteeing comprehensive health coverage for everyone.

The United States is unique in that we pay for a large part of our health care costs through an employer-based system. It is a creature of World War II, when we had price controls on wages and everything else to stamp down on inflation. Instead of increasing wages, employers offered health insurance. No other modern industrialized nation finances most of its health care system this way, because it does a terrible job of controlling costs, it’s highly regressive and it causes job lock, where people stay with a job just to receive health insurance.

For private-sector workers in West Virginia, the average health insurance premium was nearly $21,000 for family coverage in 2018. While employers typically cover most of these payments, it is widely recognized that employers consider the payments as part of an employee’s total compensation. Large increases in health insurance premiums have downward effects on workers’ wages.

The Economic Policy Institute finds that the rapid growth in employer-sponsored insurance premiums since 1979 had crowded out almost $390 billion in potential cash-wage increases for American workers by 2016, with employer-based family premiums now comprising over half of most worker’s wages.

A 2019 University of Pennsylvania study found that workers in West Virginia had the fourth-highest health care cost burden (family premiums as a share of median household income) in the nation in 2016. So employee compensation is going up, due to health insurance getting more expensive, but the money is going to private health insurance companies, leaving employers less likely to increase wages.

Since paying health insurance premiums is basically mandatory for most workers (employers with 50 or more full-time workers must enroll them in a health insurance plan), insurance premiums paid by employers act just like a tax — but a tax paid to private insurance companies, instead of the government.

If you include these payments as a tax on labor, U.S. workers are taxed higher than those living in most European countries. The insurance premium payments are also highly regressive, falling harder on those with smaller incomes. And this doesn’t even take into consideration out-of-pocket spending, such as co-pays or deductibles, which have also grown considerably over the years.

This is a terrible to way to fund health care. Setting up a universal system, such as Medicare for All, would give the vast majority of workers the biggest take-home pay raise they’ve ever seen. Instead of paying private health insurance companies, it would be financed publicly by enacting a combination of higher taxes on the wealthy and big corporations, implementing costs savings (e.g. lower prescription drug prices and administration costs) along with a flat payroll tax similar to Social Security and Medicare.

While the naysayers of universal health care like to talk about Medicare for All being a huge tax increase, it’s actually a massive tax cut for most Americans. Here’s an illustrative example. Suppose we have a privately owned and poorly run water utility in Kanawha County that charges everyone $50 a month despite frequent leaks and boil water advisories. One day, this utility shuts down and the county decides to take it over and charge everyone an annual “tax” of $500. Would you be outraged that you have to pay $500 in a new tax or be happy that you will now save $100 on your water bill each year?

(Hint: Ask a resident in Morgantown if they would prefer to pay Charleston rates for water or the lower amount to their publicly owned water utility).

While opponents of Medicare for All like to scare people with big numbers, saying it will cost $32.6 trillion over the next 10 years, this is actually about $2 trillion less in total national projected health spending over this period. Estimates show Medicare for All would reduce total U.S. health expenditures by $5.1 trillion over 10 years relative to current projections under our existing system.

The moral of this story is do not let people mislead you by focusing just on taxes, leaving out the services those taxes pay for and the other costs those taxes replace. Like clean water, we all need affordable health care coverage and today our premiums are taxing us harder than ever. Solutions like Medicare for All can reduce overall health spending while ensuring we all have access to health care anytime we need it. Untying health premiums from overall compensation gives us not only more money in our pockets, but the freedom to start a new business, avoid bankruptcy, lower stress, improve productivity and live longer and healthier lives.

The Center, like the Iowa Fiscal Partnership of the Iowa Policy Project and the Child and Family Policy Center, is a member of the State Priorities Partnership.

Business tax rankings: Misinformation continues

Tax Foundation misrepresents Iowa once again.

The Tax Foundation is at it again. The corporate-funded think tank released their latest bogus measure of state tax competitiveness, the 2019 State Business Tax Climate Index (SBTCI), on October 22nd.  The major features of the SBTCI remain unchanged from earlier editions. The fundamental criticisms of their methodology remain as salient as ever.

The State Business Tax Climate Index purports to measure a state’s “tax competitiveness” but the index bears very little relationship to what businesses actually pay in taxes in one state versus another. Of the 10 supposedly “worst” states in terms of business taxation according to the latest Tax Foundation ranking, 6 (including Iowa) actually ranked among the 21 states with the lowest business taxes, including two among the lowest 10, according to of the Council on State Taxation.

The Tax Foundation ranking (they put Iowa as the 9th worst state) differs dramatically from more defensible analyses that simply measure the average effective corporate income tax rate. The Council on State Taxation produces periodic estimates of all business taxes as a share of private sector Gross State Product and has consistently found Iowa to be among a sizable group of states right in the middle. In fact, their latest report shows that only 17 states have a lower effective business tax rate than Iowa, while 30 states have a higher rate.

The SBTCI is a combination of 124 components of state tax systems, giving substantial emphasis to some components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes (single-factor apportionment and deduction of federal corporate income taxes). The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. These two features help explain why the Tax Foundation ranks us poorly while others show us with average, or lower than average, taxes on business.

There are a few changes in the 2020 version of the index. The Tax Foundation now penalizes states for attempting to rein in corporate tax avoidance in two ways. First, they penalize a state’s score if they conform to the Global Intangible Low Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, which are intended to reduce the incentive to shift corporate assets abroad. State conformity would in fact help states avoid some of the corporate tax avoidance that has been eroding state revenues, due to the ability of corporations to shift profits overseas. But restoring revenues in this way is a bad thing, according to the TF. The second new feature is a penalty for states that conform to the net interest limitation in TCJA. This provision limits the ability of corporations to deduct interest expense, but apparently the TF thinks the deduction should be unlimited.

Iowa has chosen to conform to both of those provisions, for which the state’s taxpayers should be thankful. That the Tax Foundation has penalized Iowa in the rankings for trying to close corporate loopholes is just another reason to ignore their rankings.

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Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Full-time work not enough

Iowans are faced with limited economic opportunity despite their hard work.

Many Iowa families are unable to afford groceries, car maintenance or prescription refills, even though there is at least one full-time worker in the household. This presents a double bind, where Iowans are faced with limited economic opportunity despite their hard work.

The Iowa Policy Project’s 2019 Cost of Living report delves into these issues, finding work does not provide 1 in 5 Iowa working households enough to meet basic needs.

IPP constructs basic needs budgets that reflect a frugal standard of living — including food, health care, child care, household expenses, and transportation, then uses Census data to calculate the number of working households that make less than a wage that meets these basic requirements. These budgets leave no room for Netflix, student loan debt, vacations or eating at restaurants.

A majority of single-parent working households are unable to meet basic needs in Iowa. Our analysis shows that a wage of at nearly $20 per hour is needed just to afford basic expenses for single-parent families. This is consistent with research showing higher poverty rates among single-parent households, due to single incomes, child care expenses, generally lower educational attainment and low wages.

Evidence-based policymaking can address the reality that many working Iowans do not make enough to afford basic expenses. Policies that increase the minimum wage and adjust it to the cost of living, provide paid family leave, and boost Child Care Assistance will serve to ensure Iowans are able to just get by and hopefully get ahead.

Natalie Veldhouse is a research associate at the nonpartisan Iowa Policy Project. nveldhouse@iowapolicyproject.org

Alliant proposal: Equity, efficiency failure

The proposed Alliant rate increase is a sweeping denial of equitable treatment of customers and a rejection of environmental responsibility.

Alliant Energy, called Interstate Power and Light (IPL) in Iowa, is proposing a nearly 25 percent increase in its basic service rate. Since Alliant divides its charges to customers into energy, transmission, and basic service, the total bill increase will not be that large but it is a pretty big increase.

Since electric utilities are monopolies, some entity needs to “regulate” their actions. In Iowa this is the role of the Iowa Utilities Board (IUB), which must decide on the rate increase. The IUB can certainly reduce the proposed rate and can change the way IPL wants to charge individual customers.

Several electricity users in the Decorah area (the city of Decorah, Luther College, Winneshiek Energy District, and others). formed the Decorah Area Group (DAG) and intervened before the IUB to challenge the proposed rate increase. I wrote testimony on rate design for the DAG, and the following is the conclusion of my testimony:

It is apparent to me that IPL’s overriding desire is to sell more electricity at exactly the wrong times. The Company proposes in this case to:

•    Raise the Basic Customer Charge, which is already much higher than that of the other investor-owned electric company in the state; [$13.00 compared to $8.50 charged by MidAmerican Energy. Low-income customers use less electricity so boosting this charge hits them hardest.]

•    Reintroduce declining block rates during the summer peak period, which will likely cause IPL to add capacity for its system; [few utilities give large residential users a break for using more electricity in the summer and so again the smallest users — low income and conservationists are hurt again by this proposal.]

•    Discourage the production of solar power, when encouraging development of solar generation might help IPL to avoid adding generation do accommodate the super peak days; and,

•    Refrain from introducing a “super” off-peak rate that could redirect demand away from peak periods. [Their new meters allow them to make electricity really cheap around midnight so customers could charge electric cars or big capacity water heaters, but they aren’t doing it.]

These proposals, combined with IPL’s actions to convince the Iowa General Assembly to completely bypass the Board and greatly dismantle the state’s energy efficiency programs [in 2017], compels the conclusion that IPL wants to sell more power — not less — especially during the times of the day when IPL’s system is more costly to operate so that IPL will reap more profits.

As noted in the testimony, the Alliant/IPL proposal goes backward on both equity and energy efficiency, which are responsibilities of the IUB to ensure.

IUB’s own mission states that it “regulates utilities to ensure that reasonably priced, reliable, environmentally responsible, and safe utility services are available to all Iowans.” Note — “all Iowans.” This is IUB’s own assurance to even the least-powerful among us that they will be protected in the monopoly marketplace for electricity.

State law [476.1(5)] demands that the IUB “promote the use of energy efficiency strategies by gas and electric utilities required to be rate-regulated.” The Alliant proposal, by contrast, is a recipe for energy inefficiency.

The IUB has limited latitude to deny this rate increase. However, this rate increase is such a sweeping denial of equitable treatment of customers and a rejection of environmental responsibility that they might. The decision will only come after months of more filings and hearings. Stay tuned.

David Osterberg is co-founder and former executive director of the nonpartisan Iowa Policy Project. He is a former state legislator and is IPP’s lead researcher on energy and environment issues.

dosterberg@iowapolicyproject.org

Science change and climate change

Science is ever changing. It is now possible to show that some of the increase in rainfall from storms and consequent flooding has a human fingerprint.

Science is getting better, and that is bad news for climate change deniers.

Only two years ago when I last taught a climate change course at the University of Iowa, I informed students that claiming any extreme weather event came from changes in the climate was too uncertain.

Now, that view needs revising. After working with Dr. James Boulter, professor of Chemistry in the Watershed Institute for Collaborative Environmental Studies at the University of Wisconsin–Eau Claire, I have learned more.

The Iowa Policy Project worked with the Environmental Defense Fund to have Professor Boulter produce a report on climate change and flooding in Iowa. Working on this paper, I read material from the last three years that that brought me up to date on science’s ability to attribute extreme weather events to greenhouse gas effects on the climate.

Here is one source for my new understanding of what is known as “event attribution.” It is a statement from a report of the state of science relating to climate change and its physical impacts, in the Fourth National Climate Assessment (NCA4), by the U.S. Global Change Research Program (USGCRP).[1]

“…(T)he science of event attribution is rapidly advancing, including the understanding of the mechanisms that produce extreme events and the rapid progress in development of methods used for event attribution.”

Attribution has also been a subject addressed in a recent report of the National Academies of Sciences, Engineering and Medicine.[2]

Science is ever changing. It is now possible to show that some of the increase in rainfall from storms and consequent flooding has a human fingerprint. We should not deny that, even as fossil-fuel supporters recklessly deny the existence of climate change or that we can already see its effects.

As Professor Boulter stated in his conclusion to the IPP report, “Now, as national politics begin to inundate Iowa’s media landscape — much as the floodwaters overran the physical landscape — it is crucial that science-informed discussions of policy responses to climate change be prominent in our personal conversations, candidates’ political statements and debates, and our community discussions across all forms of media.”

 

[1] Fourth National Climate Assessment (NCA4), by the U.S. Global Change Research Program (USGCRP). https://science2017.globalchange.gov/chapter/3/

[2] National Academies of Sciences, Engineering and Medicine: “Attribution of Extreme Weather Events in the Context of Climate Change,” 2016. https://www.nap.edu/read/21852/chapter/1#x

David Osterberg is founder and former executive director of the nonpartisan Iowa Policy Project and is IPP’s lead researcher on the environment and energy issues. He is professor emeritus of occupational and environmental health at the University of Iowa.

dosterberg@iowapolicyproject.org

Illusory and elusive economic strength

The hard work of Iowans ought to be celebrated through public policy that raises wages to meet worker productivity and the cost of living, protects workers on the job, and ensures dignified retirement.

This Labor Day we celebrate the successes of the labor movement and workers across Iowa. In that spirit, let’s look at how our economy is doing a decade after the Great Recession. Why doesn’t this feel like an economic recovery? And, isn’t it a bit late to call this a recovery?

Wages

In terms of wage growth, only high-wage earners (making $41.53 hourly) have seen meaningful wage growth over the past 10 years. We see disparities in Midwest median wages by gender and race: Women make $4 less per hour than male peers, and Latino and African American workers make $5 less per hour than their white peers. As we will demonstrate in an upcoming report, these disparities are driven by structural factors like discrimination before and after hiring and the loss of unionized manufacturing jobs.

 

Jobs

Job growth in Iowa has been slow this year compared to monthly averages from 2011 to 2014. A low unemployment rate shrouds the reality that many Iowans have low-paying jobs without benefits, with some cobbling together multiple part-time jobs. We are almost 40,000 jobs short (graph below) of what is needed for a full recovery from the last recession when considering population growth.

Family Security

Many working Iowa households are unable to meet basic needs despite having one or more full-time worker in the house. For example, IPP’s Cost of Living in Iowa analysis shows 6 in 10 single-parent working households are unable to make ends meet on their earnings alone. When companies aren’t paying enough, these households need public assistance (work supports) for food, housing and other necessary items.

Taxes

Iowa’s tax system is upside down with low-income Iowans paying a larger share of their income in state and local taxes than the richest Iowans. Large corporations can reduce their state corporate income tax to zero and even receive a refund through Iowa’s Research Activities Credit. That results in so-called “refunds” — checks to companies that had more tax credits than they needed to pay their taxes — totaling $42 million in 2018 and $44 million in 2017. Those “refunds” to companies not paying Iowa corporate income taxes cost about the same as a 1 percent increase in State Supplemental Aid to public schools.

Public Investments

Iowa state and local spending as a share of personal income has remained virtually unchanged over the past 12 years, contrary to standard political rhetoric at the Capitol. State K-12 funding has not kept up with costs of educating children. Public spending on private schools continues to rise. The Iowa private scholarship subsidy cap doubled in nine years.

The hard work of Iowans ought to be celebrated through public policy that raises wages along with worker productivity. This would allow wages to keep up with the cost of living. Better public policy would protect workers on the job, and ensure a dignified retirement.

Natalie Veldhouse is a research associate for the nonpartisan Iowa Policy Project.

nveldhouse@iowapolicyproject.org