When corporations write their own tax laws

As an IFP report noted, Iowa could put up signs: “Welcome, Multistate Corporations: Cheat on Your Taxes Here.”

Mike Owen
Mike Owen

Sunday’s New York Times asks a poignant question: What’s the record for shutting a loophole?

What caught the Times’ attention was about as brazen a move as we could expect from the shady-deal wings of corporate America: The tobacco industry, facing a 20-fold tax increase on roll-your-own cigarettes to help support the Children’s Health Insurance Program, just changed the label of a product to avoid the tax. Noted the Times:

Companies simply remarketed roll-your-own as “pipe tobacco,” which is taxed at one-tenth the rate and is not subject to any definitive distinction under the law. The result is that roll-your-own companies, while a small part of the cigarette industry, quintupled their output of pipe tobacco in just five months to 1.7 million pounds — enough to roll 42 million packs of cigarettes.

The evasion could cost the government more than $30 million a month in revenues, according to the Associated Press. But the potential cost to the public is far greater, since studies show higher cigarette taxes have proved to be an effective way to discourage children from smoking.

The new fear is that the gimmickry of rolling your own and using flavored (“pipe”) tobacco — now banned in packaged cigarettes — could prove irresistible for youngsters experimenting with life. And with death.

So, in one fell swoop, the industry effectively rewrote tax law on its own, without the help of Congress or the President, and not only defied the intent of Congress in finding a way to pay for better health for kids but found its own way to worsen kids’ health and drive up costs of health care.

There are lessons here for Iowa, not in terms of health policy so much as tax policy. Not that the Hawkeye State has ever been in any danger of setting records in the closing of tax loopholes. At this point, just shutting loopholes on the books for a generation would be nice, and beneficial to Iowa residents and small businesses.

For years, Iowa has allowed multistate corporations that do business here to effectively set their own tax rates. At the same time businesses complain about their income tax rate, most don’t pay it — because of legal but excessive tax breaks on the one hand and apparently legal shenanigans on the other, many businesses find ways to avoid taxes the law was designed to collect. As the cuts we’re seeing to critical public services attest, there is a cost to our generosity to big corporations.

As IPP’s Peter Fisher noted in the 2007 Iowa Fiscal Partnership report “Leveling the Playing Field,” we could just as easily put up signs at the borders: “Welcome, Multistate Corporations: Cheat on Your Taxes Here.”

By Mike Owen, Assistant Director

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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