Common sense, stability in tax reform

Statement of Beth Pearson, Iowa Policy Project
Public Hearing on Income-Tax Reform • Iowa House Chamber • March 31, 2009

Beth Pearson
Beth Pearson

Thank you, and good evening. In my capacity as a researcher at the Iowa Policy Project, I evaluate potential budget and tax policies according to whether they make our overall fiscal system more sound and help support our shared public priorities.

In general, good changes to our tax system are ones that make it fairer, more competitive, more stable and secure, and easier to understand. We want a system that provides sufficient revenue to fund essential public services, but we want it to generate that revenue in a way that respects a taxpayer’s ability to pay a tax and doesn’t distort an individual’s private economic decisions.

The income tax reform proposal now before you goes a long way in moving Iowa’s overall tax system — comprised of income, sales, and property taxes — in the direction of these basic principles. Let me talk about just two of those principles: competitiveness and fairness.

First, competitiveness. When profits dip for a small business owner during a recession, their income tax bill goes down automatically. Even those small business owners lucky enough to have steady profits in these tough economic times will likely see a tax decrease as a result of this proposal. The Tax Policy Center, a project of the Urban Institute and the Brookings Institution, found that, nationwide, seventy percent of taxpayers with small business income earned less than $100,000 in 2009. Assuming the same distribution holds true for Iowa, that would mean that more than 70 percent of taxpayers with small business income in Iowa would see an average tax decrease under this proposal. I think that makes it a more competitive system.

Second, fairness. There’s no question that there are particular types of households who benefit the most under this package: low-income working families with children. In addition to seeing lower income tax rates, these families also stand to benefit from expansions in the Earned Income Tax Credit, which helps make work pay by targeting tax assistance to income earners with children, as well as expansions in the child and dependent care credit. So, yes, this package does offer a disproportionate share of its benefits to low-income families who are sending their kids to child care every day so that they can hold down a job in a tough economy. I think that makes it a fairer system.

Most tax changes made during the past 20 years in Iowa haven’t held up when scrutinized according to good budget and tax principles. But this proposal offers us an opportunity to take a step in the direction of common sense and fiscal stability, and I urge the Legislature to pass and the governor to sign this bill.

See the Iowa Fiscal Partnership analysis (3-page PDF) of the legislation, Iowa Income Tax Reform: An Emphasis Upon Sound Principles.

Iowa Uninsured: New — Startling — Numbers

Families USA today released a new report that crunches more numbers about uninsurance in Iowa. The numbers are startling.

Mike Owen
Mike Owen

According to the nonpartisan organization, about 686,000 Iowans — about 1 in 4 under age 65 — were without health insurance at some point during 2007-2008. We typically see figures for uninsurance in Iowa just under 300,000, but those figures are from Census data designed to reflect people uninsured for an entire year.

This new study looks at that Census data and other sources to determine how many people were without insurance for a portion of two years — and Families USA director Ron Pollack emphasized, the study took care not to duplicate anyone in the count.

The study found:

  • •  More than 1 in 4 (about 27 percent) of non-elderly Iowans were without insurance for some part of 2007-08.
  • •  Of the 686,000 uninsured Iowans in that period, about 70 percent went without insurance for six months or longer.
  • •  Most of the uninsured — about 85 percent — are members of working families.

This is as much about the insecurity caused in the current economy as anything.

It was of concern enough before to know of almost 300,000 Iowans being without insurance, whether it’s over a full year or for one or two months.

A lot can happen in a time of uninsurance that jeopardizes a family’s financial security — not to mention the overarching concern of assuring that people have access to quality health care when they need it.

As the Families USA report shows, people can be working and still not have access to health care.

Our own research has shown:

  • •  Job trends keep showing that growing sectors (which are few right now) are sectors that are less likely to pay well and are less likely to offer health-insurance benefits.
  • •  Those trends also show that declining sectors are the ones where pay and benefits have been better.
  • •  The combination of these trends means that it’s more difficult to get insurance through employment.

We had seen these trends backed by Census information in the past, as well as the clear evidence of the value of public health insurance in keeping the situation from getting worse.

The Families USA report is an important addition to the factual discussion on which sound public policy decisions may be made regarding health care. In the research community, we welcome these findings.

Posted by Mike Owen, Assistant Director

Change Iowa’s child care landscape

Child care assistance — a smart investment for Iowa’s economy and a boost for working families.

Lily French
Lily French

In the economic crisis Iowa’s families are facing, child care assistance can help. However, Iowa’s current program does not help families enough. We have one of the highest rates of working parents in the country — and also one of the most restrictive assistance policies. We are ranked 47th in country because our income eligibility limits are so low. As a result, too few low-income families are receiving support that will help them keep working.

Our new study, Strengthening Child Care Assistance in Iowa, found:

  • • Resources used to provide child care assistance returns money to the state budget.
  • • With program improvements where Iowa has some current weaknesses, it could be self-supporting or actually generate revenue in the future.

Two major weaknesses that could be addressed:

  • • We currently reach too few working families who are struggling with child care costs (they are facing costs for child care with is higher than a year’s tuition at a regent university).
  • • The current quality of subsidized care is lower than care for children without subsidies. We would generate more money back to the state budget and potentially make money for the state by improving the quality of care that subsidized children receive.

Regarding the state’s fiscal situation:

  • • We did not make these program investments three years ago when the economy was better — we can’t count on it happening once things are better again, maybe three years from now.
  • • Our current fiscal situation demands that we keep Iowans working and make smart investments with state dollars. Child care assistance does both.
  • • Right now we have federal stimulus targeted for child care improvements and expansions. This is an opportunity for Iowa.

If Iowa policy makers seriously address the facts noted and challenges suggested by our report, they could change the landscape of child care in Iowa. This would be a big boost to working families who are struggling to get by.

Posted by Lily French, IPP Research Associate

Help economy, fix revenue problem

Today’s startling report from the Iowa Revenue Estimating Conference removes any doubt about the impact of the recession on top of routine tax-cutting: Iowa has a big revenue problem.

Now, more than ever, Iowa needs to put reality into the rhetoric that everything is on the table in this fiscal crisis, and that points to three immediate responses:

• Use stimulus money to restore funds already cut from the budget;

• Restore funding and avoid further cuts where possible to help the economic recovery and to keep services going at a critical time;

• Recognize that stimulus funds and tax reforms are necessary to bridge the revenue gap created by the recession.

Iowa needs to fight off the temptation to cut budgets further. Budget cuts can damage the Iowa economy, creating more layoffs, at the same time they deny needed public services when more Iowans are hurting.

REC projections today painted a more dire picture than the one that led the governor to slash spending across the board by 1.5 percent for this year and propose 6.5 percent cuts in many services for next budget year, beginning July 1.

The projections mean Iowa has a $130 million larger gap for this year, and a $270 million larger gap for fiscal year 2010. Besides addressing the current budget-year gap, the governor and legislators will have to put a fiscal 2010 budget in place assuming those REC projections.

Many Iowa Fiscal Partnership reports have detailed the revenue roots of Iowa’s current fiscal challenges. Of particular concern are the explosion in corporate tax expenditures, including many giveaways that provide no accountability to Iowa taxpayers that they money is being spent as intended, or that experience has validated that intent.

In the current situation, there can be no more excuses for ignoring the revenue side of Iowa’s budget problems. See IFP’s news release today.

Stimulus: A reminder of what it is, and isn’t

It’s easy to forget amid all the political talk about “stimulus” that it’s an economic concept, not a political one.

So, from the view of one of the country’s leading economists, Mark Zandi of Moody’sEconomy.com, here is an estimate of what $1 of public investment returns to the economy. The graph below shows the change in Gross Domestic Product (GDP) for each dollar invested by various federal actions.

As you can see, a dollar can return well over its value if invested well, and can return far less with other choices.

zandi3Relative Economic Impact of Different Federal Actions

Mr. Zandi made that analysis in written testimony to the U.S. House Committee on Small Business in July 2008.

Interestingly from this graph, Mr. Zandi’s analysis is that the four categories of spending in this list of 13 items provide the biggest bang for the taxpayer’s buck. At the top of the chart, a temporary increase in Food Stamps returns $1.73 for each dollar invested; extending unemployment benefits returns $1.64; raising infrastructure spending returns $1.59, and general aid to state governments returns $1.36.

By contrast, tax-cutting returns far less, in some cases far less than the $1 cost to start out.

Economists generally agree that effective economic stimulus initiatives follow the “three T” principle: policies must be TIMELY, TARGETED and TEMPORARY. These are important principles to remember as Iowa’s leaders decide how to use the federal stimulus dollars provided through the American Recovery and Reinvestment Act (ARRA) signed recently by President Obama.

Such a small change

David Osterberg
David Osterberg

Construction of big hog-producing facilities known as CAFOs is regulated by the Iowa Department of Natural Resources, but not very well. A few Iowa legislators have recognized that and are calling for a small change in the process to approve a CAFO and provide for disposing of the manure.

A study by the Iowa Policy Project last November demonstrated the legislatively imposed shortcomings of the present approval process. The proposed legislation, HSB168, would make a small improvement by shining more light on the process and allowing neighbors the ability to comment to their local county supervisors about shortcomings in plans for the proposed CAFO and its tons of manure.

The proposed bill would not allow the supervisors to stop a project but it would give more information to the Iowa DNR and its citizen bosses on the Environmental Protection Commission. That information might be used to modify plans for locating the facility and providing for manure disposal.

This small step would give neighbors another way to influence a change in their neighborhood.

Posted by David Osterberg, Executive Director

Help for 1.1 Million Iowans

Sorting out items in the American Recovery and Reinvestment Act — the economic recovery package signed by President Obama — one promises help to over 1.1 million Iowans.

The Making Work Pay Credit is a tax credit of up to $400 per worker. It is available to all workers earning up to $95,000 and married couples earning up to $190,000. There are other elements to it; the credit:

  • • phases in at the same rate as Social Security taxes
  • • is reduced by the amount (if any) of the family’s Economic Recovery Payment, a one-time payment of $250 for recipients of Social Security, SSI, and certain other benefits.
  • • doesn’t apply to workers claimed as dependents by other taxpayers.

According to the Brookings/Urban Tax Policy Center, 110.7 million taxpayers nationwide are eligible for the credit. In Iowa, this is estimated to cover 1,113,000 taxpayers.

The Making Work Pay Credit is not the only credit targeting help to working families at lower incomes. Some families — those with children and low or moderate incomes — also will receive help through expansions in the Earned Income Tax Credit and Child Tax Credit.

Source of data: Arloc Sherman, Center on Budget and Policy Priorities, “Tax Aid in Recovery Package Would Reach Large Numbers of Workers in Every State.” Updated Feb. 26, 2009. http://www.cbpp.org/1-21-09tax3.htm