‘Nothing to see here, folks,’ 2017 edition

What really drives state growth is the rate of new business formation. And what matters most for entrepreneurial vibrancy is the education level of the state’s residents.

slide_taxfoundation-cropBasic flaws remain in Tax Foundation business index

The Tax Foundation released the 14th edition of its State Business Tax Climate Index (SBTCI) today (Sept. 28). The basic flaws that have rendered it of little use as a guide to state economic policy remain. While a few methodological tweaks have been made, it is still a hodge-podge of over 100 different features of state tax law, mashed together into an index number. The components are weighted illogically, and the result is a ranking that bears little or no relation to the taxes businesses actually pay in one state versus another.

The Tax Foundation acknowledges that they are not measuring actual tax levels on business, but rather the states’ tax structure. But they provide no evidence that tax structure influences business decisions. If you were a business, what would you care more about: the bottom line amount you will pay, or whether there were three tax brackets or five tax brackets involved in the calculation that got you there? The Tax Foundation would have you count brackets, and ignore the dollars.

The SBTCI has separate components for the corporate income tax, the individual income tax, property taxes, etc. So let’s consider the corporate tax component. Even as a measure of “structure” somehow, it falls short because it leaves out two major determinants of corporate income tax liabilities — federal deductibility and the apportionment rule — while including numerous minor features. As a result, the corporate tax index is a meaningless number.

Furthermore, the corporate income tax is much less important than the property tax, for most businesses. According to the Council on State Taxation, the property tax accounted for 43 percent of all business taxes, the corporate income tax just 11 percent, in 2014. Yet in coming up with the overall state rankings, the latest Tax Foundation index weights the property tax 14.9 percent, the corporate income tax 19.7 percent. That makes states with high property taxes and low corporate income taxes look much better on the index than they really are, and penalizes the states with a robust corporate income tax, a high state share of education funding, and low property taxes.

To make matters worse, the index weights change every year. This makes it impossible to know if a change in a state’s rank from one year to the next is due to a change in tax law, or just a change in the weights.

More importantly, the whole focus on business tax competitiveness is misplaced. State and local taxes are a very small share of overall business costs. What really drives state growth is the rate of new business formation. And what matters most for entrepreneurial vibrancy is the education level of the state’s residents.

2010-PFw5464Editor’s Note: Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP), wrote this blog for GradingStates.org, IPP’s separate website devoted to promoting a better understanding of various state business climate rankings. For a look at components of state policies that can promote prosperity, see this page on the GradingStates.org site.

A new baseline: Drop in number of uninsured Iowans

The new census numbers set a baseline to evaluate the effects of Iowa’s move this year to privatize Medicaid. After sharp declines in Iowa’s uninsured population, it will be interesting to see if declines continue.

Nineteen out of 20 Iowans are now covered by health insurance, thanks in large part to the Affordable Care Act and Iowa’s Medicaid expansion. The latest census data, released today, show that the percent of Iowans who were uninsured dropped from 8.1 percent in 2013 to just 5.0 percent in 2015. While 248,000 Iowans were without insurance in 2013, by 2015 the number had dropped to 155,000.

Only four states have a lower percent of the population without health insurance: Massachusetts, Hawaii, Minnesota and Vermont, plus the District of Columbia.

Across the country, the gap has widened between states that expanded Medicaid and those that did not, as shown below. Twenty-eight states, including Iowa, chose to expand Medicaid eligibility in 2014 or 2015 to families with income up to 138 percent of the poverty level. The uninsured population has declined faster in the last two years in the states that chose to expand.

In Iowa, the 2015 census numbers establish a baseline for evaluating the effects of Iowa’s Medicaid privatization, which took place early this year. It will be interesting to see if the uninsured population continues to decline in 2016.

2010-PFw5464Posted by Peter Fisher, Research Director

pfisher@iowapolicyproject.org

For more on this issue, see:
Census Data Show States Not Expanding Medicaid Falling Further Behind, by Matt Broaddus, Center on Budget and Policy Priorities

On Labor Day, don’t forget single workers

Hundreds of single workers — and millions nationally — are taxed into poverty because they do not have kids and do not qualify for the EITC. And problems with child care assistance are being used to oppose a minimum-wage increase, even though the vast majority of affected workers do not have children. On Labor Day, let’s not forget the needs of single workers.

Our focus at the Iowa Policy Project frequently emphasizes the impact of public policy on working families.

But the demand of meeting a household budget is faced by more than parents, whether in single- or married-couple families. Single workers without children also need to get by.

So, on Labor Day weekend, let’s make sure the spotlight hits those folks as well. Here are three areas:

•    the Earned Income Tax Credit (EITC);
•    the Cost of Living in Iowa; and
•    the minimum wage.

EITC
chuck_marr-5464A new report from the Center on Budget and Policy Priorities (CBPP) focuses on single working people who do not raise children and thus do not benefit from the Earned Income Tax Credit (EITC). Childless workers under age 25 are ineligible for that benefit, notes CBPP’s Chuck Marr, who states:

On Labor Day, many of these low-wage workers will be serving meals in restaurants, ringing up back-to-school supplies at the mall, or driving a truck down the highway. They deserve a decent day’s pay for a hard day’s work, but many of their paychecks are too small to make ends meet. An expanded EITC that targets this group would do more to help deliver a decent day’s pay.

There are bipartisan proposals on the table in Washington to extend the EITC to these workers, 7.5 million of whom are now “taxed into poverty,” Marr notes. The table below shows the Iowa impacts of these proposals.

CBPP has done much work on this issue. See this earlier report and another report by Marr and his colleagues at CBPP.

Cost of Living in Iowa
2010-PFw5464As IPP’s Peter Fisher shows in Part 2 of our “Cost of Living in Iowa” report for 2016, more than a quarter of working single persons statewide (27.5 percent) do not make enough at work to meet a basic-needs household budget. In fact, for those workers who fall short, they fall more than $10,000 short, on average. It is worth noting that this basic needs gap is even more severe for single parents, who fall almost $23,000 short, on average.

Minimum Wage
One of the efforts being used to stop or hold down local minimum wage increases in Iowa is the issue of “cliff effects” in work support programs — particularly Child Care Assistance — in which benefits abruptly drop for a worker if he/she gets slightly higher pay.

This is a very real issue for some workers, but not for the vast majority of workers who would benefit from a minimum wage increase statewide to $12 (phased in over five years), because they do not have children.

It makes no sense to block a wage increase for the three-fourths or more of workers who are not affected by the child care issue.

Rather, Iowa could raise the minimum wage and, separately, improve access to its Child Care Assistance program so that the cliff effects are eased or erased. There are ways to do so. See Fisher’s report with Lily French from 2014, Reducing Cliff Effects in Iowa Child Care Assistance.

owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project

mikeowen@iowapolicyproject.org

Fix both ‘cliff effect’ and low minimum wage

Past failures to improve both the minimum wage and child care eligibility should not end up as an excuse to fix neither.

As the debate over a Polk County minimum wage continues, the so-called “cliff effect” is being cited as a reason to limit the increase in the wage. This is unfortunate. Capping the wage at a low level would hurt thousands of families, including many with burdensome child care costs.

cliffs3The “cliff effect” results from the design of Iowa’s Child Care Assistance program (CCA), which pays a portion of the cost of care for low-income families. Iowa has one of the lowest eligibility ceilings in the country: 145 percent of poverty. When a family’s income hits that level ($29,120 for a single mother with two children), benefits disappear.

While most work support programs, such as food assistance, taper off gradually, with CCA you just fall off a financial cliff — the “cliff effect.”

We do need to fix that program. But the failure of state lawmakers and the governor to address the CCA cliff effect is not a good reason to forgo needed wage increases for thousands of working families. An estimated 60,000 workers would benefit from an increase to $12 an hour in Polk County; 88,000 by an increase to $15 (phased in over several years).

Of those who would benefit from a higher minimum, 36 to 38 percent are in families with children. To put the CCA cliff in context, recognize:

•     Thousands have high child care costs and incomes below 145 percent of poverty but do not receive CCA. A 2007 study estimated that only about 1 in 3 Iowa families eligible for CCA were actually receiving it. The two-thirds with low wages but without assistance still need higher wages.

•     Second, a low wage cap would not help many families barely above 145 percent of poverty, but still facing child care costs of $4,000 to $5,000 a year per child. These families, in many cases married couples with one or both working at a low wage, can’t make ends meet.

•     Third, the other 62 to 64 percent of low-wage workers do not have children, and many families whose children are older do not need child care. A cap on the minimum wage hurts all of them.

Moreover, we need to keep in mind that the cliff is not as sudden as it appears. Because Iowa moved to one-year eligibility, a family whose income rises enough to push them above 145 percent of poverty can continue to receive assistance for another year. In that time, they may find ways to adjust, such as quitting the second or third job or reducing hours or overtime, to stay eligible for CCA but have more time with their children. This is surely a benefit from a higher minimum wage.

Policies that move families toward self-sufficiency are widely supported. We want workers to increase their earnings by furthering their education, finding higher paying jobs, gaining experience that earns them promotions — and have time to care for their families.

Yes, we should fix our child care assistance program, which can penalize all of those efforts. But we should also fix a minimum wage stuck at a level well below what even a single person needs to get by. Past failures to fix one problem should not end up as an excuse to fix neither.

2010-PFw5464Posted by Peter Fisher, Research Director of the Iowa Policy Project

pfisher@iowapolicyproject.org

Related:

“Reducing Cliff Effects in Child Care Assistance,” Peter Fisher and Lily French, Iowa Policy Project, March 2014, PDF

Ignore ideologues — IPERS sound, stronger

Time seems to be running out on those who do not want a stable, secure and sustainable retirement program for public employees. IPERS, the Iowa Public Employment Retirement System, is well on the way to recovery before its opponents can kill it. But they’re still trying.

The criticism this time comes in a Des Moines Register opinion piece, from a familiar source, the Public Interest Institute (PII) in Mount Pleasant.

In its latest ideological attack on IPERS, PII offers no data — not a single financial indicator — to demonstrate a problem. In fact, IPERS is rebounding from troubles brought on by the Great Recession and inadequate state contributions in the latter half of the last decade.

According to the latest IPERS annual report, IPERS’s ratio of funded actuarial assets to liabilities — which had dropped from 89.1 percent in FY2008 to a low of 79.9 percent in FY2011 — has continued to rebound, rising in FY2015 from 82.7 percent to 83.7 percent.

In an Iowa Policy Project report in late 2013, Imran Farooqi, Peter Fisher and David Osterberg showed that contrary to high-profile examples of public pension problems with the city of Detroit and the state of Illinois, the public employee pension systems in Iowa and most states were generally healthy and well-managed for the long term.

“Iowa’s public pension plans have sufficient assets to pay benefits now and well into the future. And recent improvement in the plans’ designs have already enabled them to begin recouping losses incurred during the recessionary stock market decline,” they wrote. Now, 2 1/2 years later, there is no indication of a change in that positive trend.

That report did recommend ways to strengthen IPERS and other public employee retirement plans in Iowa, such as increasing contributions and meeting actuarial recommendations for those contributions.

What we need to remember is that the purpose of IPERS is not to see how little we can pay public employees, but to attract good employees partly with a promise of a secure retirement. It is to “improve public employment within the state, reduce excessive personnel turnover, and offer suitable attraction to high-grade men and women to enter public service in the state.” This is the stated purpose of the law, Chapter 97B.2.

The biggest problem for PII is that IPERS may fully recover before PII gets the law changed to a less secure “defined contribution” system. A defined benefit system provides financial security by pooling risk in the group — more efficient than having everyone on their own based on defined contributions that they might outlive.

So let’s be clear: Shifting from a defined benefit plan like IPERS to a defined contribution plan, such as a 401(k), is a way to cut benefits and reduce retirement security.

We can spend our time better addressing real concerns to assure our public employees can deliver on public education, overseeing human services, policing our streets and guarding prisoners — and making sure they can retire securely when they are done working for us.

owen-2013-57Posted by Mike Owen, Executive Director of the nonpartisan Iowa Policy Project
mikeowen@iowapolicyproject.org

A squeaky wheel is heard — but not fixed​

The weak House attempt to satisfy Davenport on school funding inequities is a sign that a squeaky wheel is being heard. But the whole statewide axle is rusty.

Davenport has been the squeaky wheel on school funding inequity in Iowa, and the Iowa House this week tried to apply a drop of oil. Problem is, the whole axle is rusty, and cracked.

By law, 164 school districts — about half of Iowa’s 330 districts — are held $175 below the maximum per-pupil spending amount used to set local school budgets. In fact, almost 84 percent of school districts in the state are $100 or more below the maximum (graph below).

Basic RGB

On Tuesday, the House passed an amendment, H8291, that dealt only with the squeakiest wheel — Davenport — and only for a one-year fix.

Davenport is not buying. In a Quad-City Times story, Davenport lawmakers were not happy. Their school superintendent, Art Tate, called it “no help at all,” and for good measure, put the focus where it needs to be.

Wrote Tate in an email to the Times: “It does not address the moral imperative to make every student worth the same in Iowa.”

The larger question, given that moral imperative, is why more districts aren’t more active on this issue. One reason could be that Iowa’s inequities, while real, do not rise to the level of what might be found in other states.

Another reason might be that just fighting for basic school funding is hard enough, when the Legislature is setting a seven-year pace of funding growth below 2 percent despite faster growth in district costs, strong state revenues and approval of more business tax breaks.

160324-AG-SSA-history

We’re in the closing days, perhaps the closing hours, of the 2016 legislative session, with exceedingly few successes for education and working families. It’s too late in this session to expect real reform of the school funding system, pleas for which have come for many years — and focus on more than the per-pupil cost. There are other equity problems, the largest of which is in funding transportation services.

The weak House attempt at a one-year fix for Davenport, however, is a sign that the squeaky wheel is being heard. Think of what might happen if more wheels squeaked.

Owen-2013-57Posted by Mike Owen, Executive Director of the nonpartisan Iowa Policy Project.
mikeowen@iowapolicyproject.org

Wrong again: ALEC can’t pick its own ‘winners’ among states

The 20 states that performed best on the four measures of income actually score much worse on ALEC’s ranking than the 20 states with the lowest income.

ALEC — the American Legislative Exchange Council — persists in peddling “research” that knocks down its own policy ideas.

In its latest edition of Rich States, Poor States, just released, ALEC’s Economic Outlook Ranking scores states on 15 measures reflecting ALEC’s preferred policies towards business. Our Grading the States analysis has exposed the flawed methodology of ALEC’s report, but the authors have not changed it for the 9th edition.

ALEC’s dilemma: The index purports to predict which state economies will perform the best, but in fact there is no relation between a state’s score and how well the economy grows subsequently.

Since the first edition in 2007, it remains the case that ALEC’s “best” states — the ones with the highest rankings — are actually poorer on several measures than the supposedly “worst” states. The graph below has been updated to reflect the 9th edition rankings and the latest income data.

Basic RGB

The 20 states that performed best on the four measures of income (the actual rich states) actually score much worse on ALEC’s ranking than the 20 states with the lowest income (the actual poor states).

In its fervent anti-government bias, the report offers a package of policies — for fiscal austerity, suppressing wages and imposing proportionately higher taxes on low-income people — with a promise of economic growth, when it really is a recipe for economic inequality, declining incomes for most citizens, and starving public infrastructure and education systems of needed revenue.

2010-PFw5464Posted by Peter Fisher, Research Director of the nonpartisan Iowa Policy Project and developer of IPP’s Grading the States website, GradingStates.org.