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

Why health reform matters — especially in rural Iowa

Iowa’s 1.2 million rural residents need increased access to affordable, quality health insurance

2009-AC
Andrew Cannon

On the eve of her marriage, Suzanne Castello, a Grinnell resident, looked forward to quitting her job at a community college and working the family farm with her husband full time.

Though Castello had enjoyed good health benefits at her off-farm job, her husband had been covered through an insurance plan purchased on the non-group, private market for a number of years, and they assumed that adding her to the plan would not be a problem.

Due to a previous miscarriage and a chronic jaw ailment, Castello was denied coverage. Around the same time, Castello and her husband learned that she was pregnant. The Castellos continued to search for an insurance plan that would cover her and had some luck, though the plans that would agree to cover her had a 10-month pre-existing condition exclusion — no insurer would cover the pregnancy.

Castello enrolled in COBRA — the federal legislation that allows workers to continue their job-based coverage for up to 18 months, COBRA enrollees must pay 102 percent of the premium cost.

“We were hemorrhaging money, but we didn’t qualify for Medicaid,” Castello said. “It really rankles me that we’re seeing something as fundamental as childbirth as kind of like, ‘Would you like dessert with that meal?’ There’s a double-standard between group policies and individual policies, which cover most farmers.”

Though the pregnancy was complication-free and Castello has enjoyed good health since then, finding affordable insurance is still a challenge for her.

“Right now, I have the flavor-aid version of an insurance policy – it’s high-deductible, high cost-sharing. It’s basically just coverage for catastrophic events, because the deductible is so high,” Castello said.

“It’s irksome that I’m a healthy person and I can’t get decent health insurance.”

———

Nearly 20 percent of America’s uninsured live in rural areas. Of those, if they do not have insurance through an employer-sponsored plan or public coverage, such as Medicaid, they have to buy a plan on the non-group market. This is especially expensive, as the costs are not spread across a larger group of employees and their families.

Nationally, only 8 percent of the population receives its insurance through the non-group market. In Iowa, up to 37 percent of rural residents get insurance this way, subjecting them to high premiums for less-regulated plans that can deny coverage for a pre-existing condition for up to 12 months.

Iowa’s 1.2 million rural residents need increased access to affordable, quality health insurance.

Posted by Andrew Cannon, Research Associate.

See Cannon’s IPP Snapshot: Health coverage in rural Iowa.

Workforce Education: Good investment for Iowa

No matter the indicator — unemployment rates, wages or poverty — it is undeniable that education pays for Iowans.

Lily French
Lily French

Investments in workforce education improve economic prospects for Iowa families, and in the process boost the state budget. We have found that investing in postsecondary education for low-income adults returns tax revenue more than double the state’s costs. In fact, the state can garner $3.70 in increased tax revenue for every dollar invested in an associate’s degree and $2.40 for every dollar invested in a bachelor’s degree for low-income adults. (See Education Pays in Iowa, Executive Summary; Full Report)

State investments in workforce education can also greatly improve the economic futures of Iowans struggling to support their families. No matter the indicator — unemployment rates, wages or poverty — it is undeniable that education pays for Iowans. In a state where wages are stagnating for less-educated workers, many Iowans were having a difficult time making ends meet even before the current recession began.

Further, a projected shortage of skilled labor combined with the rising cost to families for postsecondary education demands that Iowa invest in workforce education to address our state’s education gap. When low-income adults have access to increased education and training, their lifetime earnings increase substantially, generating tax revenue for the state that more than offsets the cost of investing in this access.

To garner the largest fiscal returns and set the state firmly on the path toward economic growth, Iowa should:

■ Expand financial aid to help low-income working adults pay for postsecondary education, by

  • creating a tuition scholarship program for low-income workers to pursue an associate or bachelor’s degree at one of Iowa’s public colleges;
  • fully funding Iowa Work-Study at its standing-limited appropriation of $2.75 million.

■ Promote education and training within Iowa’s TANF program, by

  • directing program administrators and case managers to promote education with Promise Job clients;
  • using American Recovery and Reinvestment Act (ARRA) TANF Emergency Contingency funds to support education and training for a greater number of TANF participants.

■ Modify Iowa’s WIA plan to enhance training provisions, by

  • setting local funds for training at minimum level required for eligibility to additional discretionary funds;
  • using discretionary funds to advance postsecondary educational opportunities.

Expanding access to education and training for low-wage workers is particularly important when economic prospects are dim. An investment in workforce skills would prepare Iowans for the future and contribute to rebuilding our economy.

Posted by Lily French, Research Associate/Outreach Coordinator

Excerpted from Lily’s written testimony to the Iowa legislative Job Training Needs Study Committee, Nov. 3, 2009. Also see the IPP backgrounder.

Don’t lose focus during film-credit probe

Hopefully the coming attractions will hold the attention of Iowa policymakers and the public as much as the feature now playing.

As the Iowa Fiscal Partnership (IFP) notes in a statement today, Iowans must follow more than the investigation of the state’s film-credit program and a report from a consultant about its operation over about six weeks.

Iowa’s entire tax-credit buffet for businesses demands scrutiny — especially when the Governor is anticipating budget cuts. Any considertion of spending cuts must put all spending on the table, including spending through the tax code. According to IFP:

These are terribly difficult budget times for the state of Iowa. Everything needs to be on the table, including indirect spending through the tax code. The film credit program needs every bit as much scrutiny as other spending, but so do all tax preferences to businesses. We have been heartened by the call of Governor Culver and others, including some of the state’s leading newspapers to seek a full review of more than just the film tax credit. The governor and state legislators must follow through to assure taxpayers are getting a good deal when we tell some firms that they need not pay taxes.

Iowa policy makers must recognize the problems with accountability that this investigation has exposed. We just don’t know enough about what state tax money is being used for, and that’s a problem with more than the film credit. As we have shown, and as Department of Revenue research has confirmed, Iowa hands millions of dollars every year to big corporations through the research activities credit. But the recipients, and the use of the money, have not received scrutiny from the legislators who have allowed this to happen.

We must not miss the overarching policy questions by limiting new oversight only to the film credit. All Iowa tax credits should be on the table with other spending choices, not just the film credit program.


“Follow-through” is the operative concept in the IFP statement. The Governor and the General Assembly took two important steps at the end of the last legislative session to promote better transparency and accountability for tax credits. They approved legislation to (1) cap a package of certain tax credits managed by the Department of Economic Development, including the film credit, at $185 million; and (2) to assure a public report on recipients of Research Activities Credit subsidies of more than $500,000, and amounts, to provide scrutiny while not hindering competitiveness for those recipients.

Taxpayers deserve to know how public money is being spent. Plans for a full review of tax credits is essential for sound fiscal decisionmaking.

Posted by Mike Owen, Assistant Director

Iowa Fiscal Partnership supports suspension, investigation of film credit program

A critical problem with Iowa tax credits is a lack of transparency.

Governor Culver acted responsibly Friday by ordering a suspension of the state’s film tax-credit program pending further investigation of irregularities in the management of the program.

A critical problem with the film credit and many other economic development tax advantages offered to industry by the state of Iowa is a lack of transparency. State lawmakers and the public for the most part have no idea whether current tax breaks — which are typically granted as corporate entitlements — are actually performing as intended.

The initial investigation has exposed the film credits, as currently in place, as a boondoggle that is draining our state treasury. Further, this is coming at a time when our state leaders are anticipating budget cuts. All spending — including spending through the tax code — needs to be on the table when considering cuts to the budget.

Those taking advantage of apparent lax management of the film-credits program may indeed be ruining it for other filmmakers who have not done so. Nevertheless, there is no justification for continuing this program while all the problems with it are being sorted out, and while education and fundamental human services are threatened with budget cuts.

[The Iowa Fiscal Partnership is a joint budget and tax policy analysis initiative of two Iowa-based nonprofit, nonpartisan organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines.]

A view of IPP research, from a researcher

Molly Fleming
Molly Fleming

As I begin my final year at the University of Iowa’s graduate program for Urban and Regional Planning, I have been fortunate to join the Iowa Policy Project as a part-time research assistant. This opportunity allows me to integrate my interest and experience in public policy with fact-based research and analysis. Given public confusion and misperception regarding such critical issues as health care, taxes and the environment, objective research is vital to ensure government accountability and citizen engagement. I am very pleased to be able to assist in this important work.

As a volunteer at the Iowa Policy Project last spring, I helped former research associate Beth Pearson to determine the benefits of home weatherization for low-income Iowans. Additionally, I helped to compare how alternative versions of climate change legislation could promote or harm public welfare. The research skills I gained from this experience have been invaluable, and I hope to build upon them throughout the coming year.

Under the guidance of Peter Fisher and other members of the wonderful IPP staff, I will look at the effects of the American Recovery and Reinvestment Act on Iowa’s economy. I also plan to take a hard look at Iowa’s budget allocations throughout the year and the rising cost of living within our state. It is my hope that this research will help to spark good ideas and influence important public policy. As the challenges and prospects facing Iowans evolve during this time of economic uncertainty, the Iowa Policy Project’s work is more important than ever. I am both honored and excited to be a part of the IPP at such an exciting time, and I look forward to my year here.

Posted by Molly Fleming, Research Assistant

Everything on the table? Really?

Back in January, Governor Culver asked lawmakers to “agree that everything’s on the table with respect to balancing the budget and finding cost savings in state government.”

Today, on Ryan Schlader’s WMT-AM radio talk show, State Rep. Nick Wagner, responding to a question about state employee retirement benefits, opined that “I don’t think we should just write anything off the table.”

Both quotes sound good. Do they mean it?

The evidence may come during the next legislative session. Budget policy fell short of the concept in 2009. Otherwise, abuses of Iowa’s tax code would not have been allowed to continue when lawmakers were choosing among services to be cut as revenues declined.

This is not a partisan thing — or it should not be.

Can’t all Iowans agree that any spending by state and local government should (1) carry a demonstrable public benefit, and (2) be subject to regular scrutiny to allow legislators and the public to determine that it does have that benefit?

The Legislature took a small but important first step in 2009 by passing legislation toward the transparency that would allow scrutiny of one of Iowa’s most wasteful programs: the Research Activities Credit (RAC). The RAC is a virtually open-ended business entitlement that results in multimillion-dollar secret checks being sent to big companies that don’t pay any income tax in Iowa.

Ultimately, the law passed this year may begin that process toward better scrutiny.

That’s why the Big Business lobby in Iowa will continue to fight transparency and protect its sweetheart tax breaks while lawmakers make other budget choices that will cut teachers in classrooms, drive up tuitions in community colleges and state universities, and continue to shortchange public safety, environmental quality and recreational assets.

If everything is on the table, it has to include wasteful spending on special-interest tax breaks for companies that don’t pay income taxes.

By Mike Owen, Assistant Director