A poisoned process

As early as today, a bill may be debated in the Iowa Senate to drastically slash revenue for public services — phased in at a cost of over $1 billion a year, or about one-seventh of the state’s General Fund.

The Senate bill, as does any legislation with a fiscal impact, comes with a “fiscal note.” This analysis by the Legislative Services Agency, using Department of Revenue data, was made available sometime late Tuesday. The legislation itself was introduced a week ago today, and passed out of subcommittee and full committee the following day.

The legislation is so complex that it took the state’s top fiscal analysts a week to put together their summary, which includes four pages of bullet points in addition to tables of data about various impacts. The nonpartisan analysis finds that the wealthiest individuals and most powerful corporations once again are the big winners.

The timing of the official fiscal analysis was only the latest example of cynical approach to public governing that has slapped brown paper over the windows of the gold-domed sausage factory in Des Moines.

This General Assembly was elected in 2016. It is an understatement to suggest that this legislation could easily have been developed through the 2017 legislative session or the months leading up to this session. The public who will be affected, and advocates across the political spectrum, could have weighed in, and independent fiscal analysis considered.

Many have tried to educate the public about what is at stake for Iowa — including the Iowa Fiscal Partnership, which among other activities brought in experts from Kansas last year to show what has happened there with similar tax slashing. IFP also offered a reminder in October of what real tax reform could include, and later about both open government and the folly of Kansas’ course. Last week, we warned about the fiscal cliff ahead.

Everyone knew the legislative leadership and Governor wanted to do something to cut taxes, but no specifics were available, just a couple of hints with no real context. The session opened in the second week of January, and it wasn’t until most had left the building on the second-to-last day of February that a fiscal analysis magically appeared.

With a more transparent and deliberate process, everyone — including and especially the legislators who will be voting on it — would have had a chance to get full information about its impacts.

Instead, it is being rammed through. Regardless of whether the legislation itself is good or bad, the process has poisoned it. And perhaps it has poisoned governance in Iowa for years to come.

There are elements of the commentary defending and opposing this legislation that show general agreement on two key points of what meaningful, responsible tax reform would entail. On both sides, there is recognition that:

•  removing Iowa’s costly and unusual federal tax deduction would enable a reduction of top tax rates that appear higher than they really are; and

•  corporate tax credits are out of control and costing the state millions outside the budget process, while education and human services suffer.

The process, however, has shielded from public view a clear understanding of how the specifics of this legislation would affect two principles central to good tax policy: (1) the purpose of raising adequate revenues for critical services, and (2) raising those revenues in a way that reflects ability to pay — basic fairness of taxation, where Iowa (like most states) has a system that shoves greater costs on low-income than high-income taxpayers.

It also has raised to the altar of absurdity a ridiculous image of the competitiveness of Iowa taxes, which independent business consultants’ analysis has shown to be lower than half the states and in the middle of a very large pack that differs little on the state and local business taxes governed by state policy. (chart below)

Ernst&YoungFY2016

As the process moves from the Senate to the House, these concepts of good governance need to be central to timely debate, not just fodder for editorial pages afterward.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project, and project director of the Iowa Fiscal Partnership, a joint initiative of IPP and the Child & Family Policy Center in Des Moines. mikeowen@iowapolicyproject.org

 

Monopoly power without regulation

With few watching, backroom efforts produce unforeseen blows to public utility oversight

Editor’s Note: This post updates a previous post by David Osterberg, “New blows to public accountability,” about features of a proposal to weaken regulation of Iowa electric utilities.

A version of this piece appeared as a guest opinion in The Gazette, Cedar Rapids

170118_capitol_170603-4x4A bill scheduled for debate the week of February 26th in the Iowa Senate would remove the public’s principal check on monopoly power of the state’s regulated electric utilities.

Utilities are permitted monopoly status for economic efficiency. It would be difficult, and expensive, to set up two or more competing electric or gas utilities to serve one community, with separate lines connecting homes and businesses. In exchange for a monopoly presence in a given area, privately owned utilities are subject to community scrutiny and state regulation of their rates and services.

Senate File 2311 would remove a significant share of oversight from electric utilities. Presently the Iowa Utilities Board (IUB) oversees MidAmerican Energy and Alliant Energy. This protects customers, who have no choice as to which company brings them electricity.

It is ironic that legislators would threaten a structure that works and promotes economic development. Iowa has some of the lowest energy rates in the nation (third- or fourth- lowest depending on the year). At the same time, this state has been developing one of the strongest clean energy economies. These features make Iowa a big draw for certain industries — a far more attractive reason to locate here than the tax breaks offered by so many states.

Under the proposed bill, many policies that have led to Iowa’s cost-effective clean energy leadership would disappear, especially energy efficiency programs mandated almost 30 years ago by the Iowa Legislature, which require utilities to file energy efficiency plans every five years.

Without regulation, monopolies could profit by producing more power, rather than helping customers save energy. They could unfairly treat customer-generated solar and wind energy and discriminate in favor of their own energy generation.

Left to their own preferences, monopolies might charge the smallest users more. Alliant proved this in its last rate increase filing. The Alliant plan would have increased the cost of residential electricity by about 10 percent while increasing the mandatory fixed charge just to hook up by 30 percent. The plan was designed to put more costs on those who use less, including those with low-income, essentially penalizing customers who have used the utility rebates to buy efficient appliances or those who generate solar energy.

But because Alliant needed permission from the IUB to raise rates, this rate scheme was reviewed and ultimately not allowed. Instead, the energy charge and the mandatory fixed charge were allowed to increase by roughly the same percentage.

SF2311 would reduce this longstanding oversight on all utilities, shifting costs and risks to their customers. Alliant could discriminate against solar customers by putting them in a separate rate category so they could be assessed a higher fixed charge. This could shut down solar firms and cost many of the state’s 700 solar jobs. The changes threatening the energy efficiency industry endangers even more jobs — more than 20,000.

The forces behind this bill lessen public oversight and public accountability. They would change Iowa law in ways never promoted publicly in the last legislative campaigns.

160915-59170_dox35x45David Osterberg, a former state representative (1983-95), is professor emeritus of occupational and environmental health at the University of Iowa, and co-founder of the non-partisan Iowa Policy Project.

dosterberg@iowapolicyproject.org

The elephant and the gorilla

Both an elephant and a gorilla are in the small rooms where citizens are crowded out of the discussion on massive, radical tax policy changes in Iowa.

The elephant is an image of Iowa taxes on business concocted by corporate-funded lobbyists and organizations that make a mockery of the concept of independent research and sensible analysis. Most people know it’s nonsense and political spin and if they don’t, they should — rather than repeating it.

So, instead of the nonsense, look at these two charts, with data drawn from annual reports by national business consulting organizations, that offer a look at Iowa’s state and local taxes on business. Both are quite simple and sensible calculations, of taxes paid by businesses. They show how taxes differ across the states as a share of the states’ economies (Ernst & Young), or as a share of pre-tax profits (Anderson Economic Group).

Note: State and local taxes together are the key with what legislators are doing, because state law effectively governs all state and local tax policy.

Ernst&YoungFY2016

Anderson

As you can see, Iowa ranks only 28th highest in one measure and 29th highest on the other — and in both cases is part of a very large pack comprising the majority of states. In reality, state and local taxes on business really do not differ much.

If the rankings really mattered, Iowa lawmakers and the Governor would be boasting about those real measures, using them to attract business. As IPPs Peter Fisher describes on our GradingStates.org website, other things matter more than taxes. Meanwhile, “business climate” rankings matter little.

On that same IPP-sponsored site, you can learn about the birth of the elephant — a common reference is to Iowa’s ranking of 40th best, which is merely an arcane and bizarre mix of factors that the corporate-supported Tax Foundation cooks into a nonsensical business tax climate index.

Now for the gorilla. It’s one you’ve heard from the Iowa Policy Project and Iowa Fiscal Partnership for many years: massive spending on tax credits for corporations with little or no accountability (see chart), and Iowa lawmakers longtime refusal to close corporate tax loopholes that could gain the state $60 to $100 million a year.

170411-biz_credits

Now, the Governor, unlike the Senate leaders, says we cannot afford corporate tax “reform” this year, but also says we need to wait on tax-credit reform. She says we need to review the credits first.

Likewise, the Senate plan calls for a review of tax credits during the interim between this session and next, while making several immediate changes without any explanation before the new review.

The common thread: Both the Governor and legislative leaders recognize there is outrage about reckless tax credit spending when actual needs are held back. They pat that gorilla on the head, say, “We’ll get to you soon,” and if history is a guide, they never will — not on the credits already shown to be most in need of reform.

These credits have been reviewed — and reviewed, and reviewed — by the nonpartisan staff of the Department of Revenue, which puts all the reports on its website for all to see. (Here and here.) Yet, the Governor and the Senate leadership demand a new review of tax credits.

Interestingly, no such review is demanded for the Senate tax plan itself, or was provided upon the introduction of the Governor’s plan, even though both would drastically alter our tax system. No data, little public input, ram it through, worry later about the consequences (or how to spin it).

In the end the question for our public leaders is whether they are focused on how we can provide essential public services better. You cannot provide them without revenue, and the Governor’s plan reduces and the Senate plan would gut revenues.

You can bet the folks running the kinds of businesses we want in Iowa know the difference between tax cuts that actually mean little to their business, and the value of smart policy that supports well-educated workers and a good quality of life for themselves, their families and their workers.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project and director of the Iowa Fiscal Partnership. mikeowen@iowapolicyproject.org

———

Full reports from national business consultants:

Ernst & Young, August 2017: Total state and local business taxes — state-by-state estimates for fiscal year 2016, page 12, Table 4, column 7 (TEBTR, taxes as a percent of gross state product).

Anderson Economic Group, Apri 2017: 2017 State Business Tax Burden Rankings, page 19, Exhibit III. State and local taxes paid by business, share of pre-tax gross operating surplus, 2015.

Related:

The Tax Foundation’s Waste of Time Index,” Peter Fisher, IowaPolicyPoints.org, October 17, 2017

Why do solar credits matter?

Editor’s Note: The proposed Senate overhaul of personal and corporate income taxes in Iowa includes elimination of the solar energy systems tax credit. This post by IPP co-founder David Osterberg offers a first-hand look at that credit in particular. The Senate bill would eliminate 11 tax credit programs, call for additions to four credits and changes to six others. Both the Senate bill and the Governor’s bill call for a review of tax credits between the 2018 and 2019 legislative sessions. See this page on the Department of Revenue website for evaluations of various Iowa tax credit programs.

Basic RGB

So, why is a repeal of the Iowa solar tax credit a big deal? It makes a big difference in someone’s decision to put up solar panels. Four years ago, I put just under two kilowatts of solar on my garage. At the time Alliant gave me a rebate for solar just like they still do for buying a more efficient heating and air conditioning system. My after-rebate cost for the panels was about $7,000. The Iowa tax credit allowed me to cut my Iowa taxes by about $1,000 because of my purchase.

The credit has helped many Iowans. Between 2012 and 2017, the credit was used for 3,395 projects. Over that period the credit provided $21.6 million in tax cuts for businesses and residents like me. Our total investment in solar during that time was more than $166 million.

There are limits to how much any project can receive. It is $5,000 for residents and $20,000 for a business. The total amount of credits in any year is also limited to $5 million. The credit is scheduled to phase out as a federal investment tax credits phases out and will be gone for residential projects by 2022.

Much of the cost of my project went to a local contractor who put the panels on my garage. Some went to import the panels but still, 700 Iowans have pretty good jobs because of this $5 million credit that is targeted for elimination in the Senate leadership bill. By contrast, Apple got $20 million from the state to build a server farm that will employ 50 people. What is wrong with this picture?

2016-osterberg_5464David Osterberg is co-founder and lead environment and energy researcher for the nonpartisan Iowa Policy Project. He served six terms in the Iowa House of Representatives from Mount Vernon from 1983-95. dosterberg@iowapolicyproject.org

How to steal $110 million from Iowa workers

No artifice of “regulatory relief” or concern for untipped workers can justify this theft.

In most states, tipped workers are paid a subminimum “tipped wage.” In Iowa the tipped wage is $4.35/hr. The gap between the tipped wage and the minimum wage (in Iowa, $7.25-$4.35 or $2.90) is called the “tip credit.” Tips are first used to satisfy this credit (bringing the hourly wage to the minimum); once the credit is satisfied, tips are an uneven addition.

Our state and national labor laws have long operated under the assumption that tips earned by waitresses or bartenders or manicurists belong to the worker who earned them. In 2011, the federal Department of Labor (DOL) clarified and codified this rule, underscoring that, regardless of the jurisdiction or local wage, “a tip is the sole property of the tipped employee.”

In December of last year, the Trump Administration announced its attention to repeal this rule (after already announcing its intention to cease enforcement of the rule last July). Under the new regime, employers of tipped workers could retain any tips in excess of those needed to satisfy the tip credit. Forcing tipped workers to pool or kick back tips to the house has always been considered a form of wage theft. The new rule would make this wage theft perfectly legal.

The new rule, the brainchild of the National Restaurant Association, rests on the thin logic that employers would share tips with “back of the house” staff. But nothing in the rule requires them to do so, and research on wage theft in various jurisdictions suggests that tip stealing by management is already widespread. Indeed, the DOL punctured its own logic with an internal study finding that the rule would result in huge losses to tipped staff, and then — in defiance of any semblance of good government and transparency — buried the study.

Fortunately, the Economic Policy Institute (whose crack research staff includes the DOL’s former chief economist) has stepped in with its own look at the dismal impact of this rule. Using a combination of W-2 (tax) and industry data, EPI estimates a base of about $36.4 billion annually in tips (a conservative estimate, since a substantial share of tips go unreported as income). Since some of that $36 billion must be used to satisfy the tip credit, the share of that “at risk” is a little lower, about $26 billion.

Grade school economics, in turn, would suggest that almost all of that $26 billion would be pocketed by employers: There is no need or incentive, after all, to share tip revenues with bussers and dishwashers, whose wages (and willingness to work) are already established by local labor markets. Fortunately, many state labor laws offer further protection or regulations of tipped wages that would not be affected or pre-empted by the new federal rule. This brings the take of this heist down to just under $6 billion. In Iowa alone (where no state laws supplement federal rules and standards on tipped work), the annual loss would be about $110 million.

Looking at this on a smaller scale drives home the avarice and the injustice. Consider Francesca, a waitress at a mid-price, full service restaurant. Her base wage is $4.35. On a typical four-hour dinner shift, she serves eight tables. The average bill for those tables is $25.00, and the average tip is 15 percent or $3.75 — making her take home pay $47.40 ($17.40 in base wages and $30 in tips), or just under $12/hour. Under the new rule, Francesca would keep only enough of that $30 in tips to bring her wage — the base wage plus the tip credit — to the federal and Iowa minimum wage of $7.25. She takes home $29. If we follow EPI’s assumption, about half of the remaining tips would go to other employees, and about half would go in the employer’s pocket.

No artifice of “regulatory relief” or concern for untipped workers can justify this theft. The new rule, as Christine Owens of the National Employment Law Project notes, is “nothing more than robber barons masquerading as Robin Hood.”

Colin Gordon, professor of history at the University of Iowa, is senior research consultant at the nonpartisan Iowa Policy Project. He has authored or co-authored many IPP reports on jobs, wages and wage theft issues including The State of Working Iowa. cgordonipp@gmail.com

More from IPP on wage theft:
Wage Theft in Iowa by Colin Gordon, Matthew Glasson, Jennifer Sherer and Robin Clark-Bennett, August 2012
Stolen Chances: Low-Wage Work and Wage Theft in Iowa by Colin Gordon, September 2015

Cliff ahead: Learn from Kansas

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts, senators are moving a tax-cut bill forward without even an analysis of its impact.

The Iowa Senate is poised to move a massive tax cut bill out of committee today, in the belief that somehow what was a disaster in Kansas will be a big success in Iowa.

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts over the past two years, and the prospect of a tight budget for next year, Senate Republicans propose to cut $1 billion a year from the state budget. They are moving the bill forward without even an analysis of its impact.

Proponents claim this will make Iowa more competitive and boost the economy. There are two problems with this claim. First, two major accounting firms that rank states on their level of business taxation continue to put Iowa right in the middle of the pack, or even better. We are already competitive. Ernst & Young (below) ranks Iowa 29th, while Anderson Economic Group’s measure ranks Iowa 28th — in both cases, showing little difference across a broad middle range of the scale.

Second, there is good reason to expect the bill to have negative effects on the economy, not positive. When Kansas enacted major cuts to state income taxes in 2012 and 2013, the Governor and his friends at ALEC (the American Legislative Exchange Council) lauded this experiment — which five years later has proven to be a dramatic failure.

Abundant evidence shows the tax cuts failed to boost the Kansas economy. In the years since the tax cuts took effect Kansas has lagged most other states in the region and the country as a whole in terms of job growth, GDP growth, and new business formation.

When confronted with the Kansas failure, the bill’s proponents respond that the only problem in Kansas was that they failed to cut services sufficiently to balance their budget. But here’s the problem: Their constituents were up in arms over the cuts they did enact; they would not have stood for anything more drastic.

In order to bring the budget somewhat back in balance, Kansas borrowed from the future, using up reserves, postponing infrastructure projects, and missing contributions to the pension fund. Schools closed weeks early when state funding ran out. Had they cut spending further, that would have put a bigger dent in the economy, as recipients of government contracts were forced to retrench and workers laid off spent less in the local economy.

A supermajority of the Kansas Legislature voted to end the experiment last year, recognizing it as a failure and responding to the demands of Kansas citizens to restore funding to education, highways, and other state services they rely on. That decision no doubt saved the state economy from performing even worse in the years to come.

The Senate bill would harm Iowa in much the same way. Education accounts for over half of the state budget. Tax cuts of this magnitude would have very serious consequences for our public schools, and would force tuition up drastically at community colleges and regents institutions. Our court system would be forced into further personnel cuts, meaning long delays for those seeking justice. We would see more children suffer as family service workers face ever higher caseloads.

Proponents claim the Senate plan is “bold.” So is jumping off a cliff.

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

 

Related from Peter Fisher:

The Lessons of Kansas

The Problem with Tax Cutting as Economic Policy

Triggers to drive Iowa down

If you thought it was obvious that our state can ill afford more tax cuts, you were right.

DSCN5662-detail240200In the midst of yet another episode of mid-year budget slashing, and with the prospect of further cuts for next year, a reasonable person might conclude that the state cannot afford any more tax cutting. But that is what Governor Reynolds has proposed, in a bill that would reduce state revenues by over $1 billion over five years.

But not to worry, the governor’s press release assures us: “The plan will also include revenue targets (or “triggers”) that will act as a safeguard in the event of a downturn in the economy.”

A better description of these triggers is a set of one-way ratchets that will force revenues down and leave the state with perennial budget shortfalls on into the future.

The bill sets forth five sets of rates. Each year, the growth in revenues over the previous year is compared to a target, and if the target is met, a further set of rate cuts go into effect.

Here’s the rub: There is no trigger for the first set of rate cuts. They will go into effect for tax year 2019 regardless, and they are far and away the largest of the rate cuts.

Furthermore, the standard deduction is doubled that year. The revenue losses from these measures will be offset to an extent by a reduction in federal deductibility from 100 to 25 percent and by sales tax increases, but the net effect is still a $129 million cut in state revenues for fiscal year 2019, the budget the legislature will be enacting in the next few weeks.

After tax year 2019, further reductions in rates are tied to the attainment of revenue targets. Those targets will not be difficult to meet. Assuming the most recent revenue forecast for FY2019 (4.2 percent growth over 2018) is not too far off, revenue growth of 2.9 percent or less in the following two years, and 3.2 percent in the third, will be enough to trigger all of the remaining rate cuts by fiscal year 2022. These target revenue increases are well under the 3.6 percent per year forecast used by the department of revenue.

At that point, the state will be locked into a set of tax cuts that will drain $300 million from the state budget each year. There is no going back. Income tax revenues will be 10 percent lower than under current law. Sluggish growth, or the next recession, will leave the state once again forced to cut services already pared down drastically from the past few years of service cutting.

Consider what would happen in a recession. If we experienced a downturn in the economy next year, it is possible none of the revenue targets would be met, since they are all expressed in dollar levels of revenue, not growth rates from the previous year. A decline in revenue next year would make it harder to grow sufficiently to attain those dollar targets in future years. But the first year rate cuts, averaging well over 10 percent, already would have done damage to the ability to provide services in a downturn, when some are most needed.

Let’s remember what a real safeguard looks like. It is called a rainy day fund. When the economy is doing well, the rainy day funds are filled. When growth turns sluggish or a recession hits, the rainy day fund can be drawn down to maintain services. That is how we keep our public schools from having to cut programs and increase class sizes, how we keep the court system functioning without year-long delays in justice, how we keep our state parks open, how we keep family social service workers from becoming so burdened that children fall through the cracks.

If you thought it was obvious that our state can ill afford more tax cuts, you were right.

2010-PFw5464Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org