Tax Day spin: Find refuge in the facts

It is quite possible there is no more heavily spun day on the calendar.

Mike Owen
Mike Owen

Today is, as we all know, “Tax Day,” the deadline for filing our federal individual income tax returns. It is quite possible there is no more heavily spun day on the calendar. You can’t even find refuge on the comics pages.

While the Tea Party folks and others have their spotlight today, take a few minutes to read this masterful year-old blog post from our friends at the Oklahoma Policy Institute: http://okpolicy.org/blog/taxes/classic-reruns-no-tax-day/

Beyond that perspective on the value of taxes in funding essential public services, other useful information also is worth considering today about who pays taxes. Citizens for Tax Justice, in a report this week about tax changes resulting from the recovery, or “stimulus,” legislation signed by President Obama last year, notes the following:

  • 99 percent of working families and individuals in Iowa benefited from at least one of the tax cuts signed into law by President Obama.
  • Working people in Iowa received $1,115, on average, from these breaks.
  • These tax breaks benefited working people at all income levels.

For the full report (3-page PDF) click here and for the Iowa-specific summary (4-page PDF) click here.

David Leonhardt of the New York Times and Ezra Klein of the Washington Post (whose blog links to Jon Stewart’s take of the situation on “The Daily Show”) illustrate that lower-income Americans pay taxes, even if others might not want to acknowledge it.

As Stewart suggests, actually getting the facts about who pays taxes — which also include federal payroll taxes and state and local taxes — might not fit the outrage being pushed at a given moment: “Knowing that doesn’t make you as mad, does it?”

Iowa Fiscal Partnership reports have shown state and local tax impacts are far greater as a proportion of income for low-income Iowans than for higher-income Iowans, while corporate-income-tax loopholes and other tax breaks are draining the state treasury with little accountability, and critical services are being cut.

All food for thought on this day.

Posted by Mike Owen, Assistant Director

Missing an opportunity for tax-credit reform?

Nothing is objectionable about proposed tax-credit reforms — but much more needs to be done.

Christine Ralston
Christine Ralston

Iowa is missing an opportunity to implement strong transparency measures and to recapture revenue that it has been allowing to slip away for years.

Legislation passed by the Senate and now before the House appears to make only small, cosmetic changes to a serious structural problem. Generous tax credits have been leaking revenue out of the state for many years. Considering the recent scandal in the film tax credit program and the fact that Iowa, like most other states, faces revenue shortfalls of historic proportions, the state very much needs meaningful reform.

The Governor’s Tax Credit Review Panel made promising recommendations, and the Governor supported those recommendations when he issued a call for action in his Condition of the State address. Yet, the legislative package falls far short of the panel’s recommendations. For example:

Table comparing tax-credit reform proposals

It is important to note that lowering a cap is not the same thing as “saving” money. When the sum of all business credit claims is not reaching that cap, then the state is only reducing its potential liability and not saving any actual dollars.

The proposal is also lacking in essential new transparency measures. No additional disclosures regarding tax credits and expenditures are proposed in the plan. Iowans should know who is getting their tax dollars.

And this bill is certainly not good news for the thousands of Iowans who are seeing important safety net programs and jobs disappear during this recession.

Does this bill do something? Yes. Does it do much? No. Nothing in this bill is objectionable when considering the principles of sound tax policy. That said, much more needs to be done to move Iowa forward and to solve Iowa’s budget problems using an approach that is truly balanced.

Posted by Christine Ralston, Research Associate

Stimulating Iowa’s economy with unemployment benefits

As these funds cycle through the economy, thousands of jobs are produced or saved, and economic activity benefits Iowans.

Andrew Cannon, research associate
Andrew Cannon

American Recovery and Reinvestment Act (ARRA) put millions of dollars into the hands of Iowans who needed money most —Iowa’s recently unemployed. It encouraged states to update their unemployment insurance eligibility (of which Iowa was the first), enabling part-time and low-wage workers to qualify for unemployment insurance (UI).

Unemployed Iowans benefited from ARRA in two key ways: they received an additional $25 per week and they had their eligibility for receiving UI extended significantly. Rather than having just 26 weeks of UI, ARRA extended workers’ eligibility for UI by 47 weeks, to 73 weeks total.

As a result of these two measures, the Iowa economy will have an additional $314.8 million ($82.6 million for the additional $25 in weekly payments and $232.2 million for the extension of benefits) injected into its economy in 2009 and 2010.

As the only source of income for many unemployed workers, UI benefits are spent quickly and locally. Apart from helping the unemployed meet basic needs, UI benefits also help the local economy, maintaining or even increasing the demand for goods and services. Providers of these goods and services end up using these funds to pay their workers’ wages, who in turn, spend their wages on their basic needs. The multiplier effect of the increase and extension of UI benefits, as well as other workforce- related provisions of ARRA produced almost $501.7 million in direct and indirect effects in 2009, and will produce over $314.6 million this year.

ARRA-UI jobs graph 2009-10
Source: David Swenson

As this money cycles through the economy, we estimate over 3,700 Iowa jobs were produced or saved last year, and over 2,200 this year, solely as a result of the UI measures of ARRA.

Clearly, UI benefits are no match for a steady job with a decent wage and benefits. But for the thousands of Iowans who have found themselves without such a job, ARRA has been a lifeline. Moreover, it has helped keep many other Iowans who, but for the stimulus, might have found themselves unemployed, too.

Posted by Andrew Cannon, Research Associate

Lessons from Oregon

Like Oregon voters, Iowa voters favor a balanced approach to budget challenges.

Christine Ralston
Christine Ralston

Iowa could learn something from Oregon voters about taking a balanced approach to budget challenges.

In a victory for fiscal prudence, Oregon voters recently passed two initiatives — Measures 66 and 67 — that upheld their legislature’s decision to use a balanced approach to their budget shortfall.

In Oregon’s case, lawmakers last session made cuts to the budget and raised income tax for the top 3 percent of filers. They also raised the corporate minimum tax from $10 and increased the corporate income tax rate for businesses netting over $10 million a year, and temporarily for most other businesses. As the Legislature already voted last session to use a balanced approach that included trimming the budget and raising revenue, this vote saves Oregonians from further cuts in important services. This is notable for two reasons:

■     Oregon is known for its opposition to raising taxes, having last voted to raise taxes about 80 years ago when it added a state income tax.
•     It is one of five states that does not have a state sales tax.*
•     It also has a statewide cap on property tax.
•     It has a “kicker” law that automatically sends money back to residents when revenues exceed forecasts. Oregon has no rainy day fund.
■    Given the opportunity for a direct vote, Oregon voters chose to retain a balanced approach and raise taxes on themselves rather than make additional cuts that would decrease funding for education, health care and other essential services.

Oregon’s voters truly understand the importance of a balance during difficult economic times.

So, what does this mean for Iowa? For one, the Oregon vote remarkably reflects the results of a survey of Iowa voters last fall.

That survey for the Iowa Fiscal Partnership found that Iowa voters favor a balanced approach to addressing further budget problems:

■     Six in 10 favor some increase in taxes and fees rather than making cuts alone.
■     By the same ratio, Iowa voters believe the wealthiest Iowans — those earning over $250,000 per year — and big corporations pay less than they should in taxes.

The situation is complicated, and Iowa voters recognize that using budget cuts or tax increases alone will not solve our balance problem.

Oregon’s unemployment rate is 11 percent, compared to Iowa’s 6.6 percent. Oregonians understand that a budget has two sides, and a balanced approach to spending and revenue assures a responsible way to protect critical services in difficult economic times.

Posted by Christine Ralston, Research Associate


* Federation of Tax Administrators website, http://www.taxadmin.org/fta/rate/sales.html (accessed on January 29, 2010). The other states are Alaska, Delaware, Montana and New Hampshire.

More transparency on biz handouts — eventually

Think opening the books on public business doesn’t bother corporations? Think again.

While transparency is good, and will result from a new law passed last year, lawmakers made a mistake in not having the new legislation take effect immediately.

Effect of transparency law
Research credit claims spike just ahead of disclosure law effective date

Lawmakers ordered annual public disclosure of recipients of the Research Activities Credit with claims exceeding $500,000.

Instead of an immediate effective date, the law carried a July 1 effective date. That gave companies two months to get their claims filed before the information gathering would begin — a temporary window to avoid disclosure. Some jumped through that loophole, to the tune of an estimated $25 million.

The Iowa Department of Revenue reported on this in its December Contingent Liabilities report for the Revenue Estimating Conference. After estimating RAC claims for FY2009 at $45.5 million and $46.1 million in August and October reports, that number spiked to $70.8 million in the December report.

The DOR report itself attributed the spike in the estimate to the new transparency law:

There was also a dramatic increase in the amount of Research Activities Tax Credit claims in FY 2009. The majority of the increase in FY 2009 claims is a result of corporations filing claims early, before the July 1, 2010, effective date for a new disclosure requirement for Research Activities Tax Credit claims exceeding $500,000. As a result the estimate for FY 2010 was lowered to account for those claims moving forward a fiscal year. (emphasis added)

The graph above shows where the steady upward trend in RAC claims broke sharply with passage of the disclosure law, claims spiking just ahead of the law taking effect, and the projected one-year reduction before the trend returns.

Think opening the books on public business doesn’t bother corporations? Think again. When public business is tied too closely to private business, as we see with the RAC, taxpayer accountability suffers.

Posted by Mike Owen, Assistant Director

Watching your quarters — transparent state finances

Companies receive secret checks. That’s business as usual in Iowa, where corporate giveaways are out of control.

Getting a handle on where corporate subsidies go can be slippery business.

When you put your money in, do you see where it goes?

It’s an important question for taxpayers, and it’s one the Iowa General Assembly may address further this spring.

The so-called “Research Activities Credit,” or RAC, has become an annual drain on the state Treasury of $30-40 million and is projected to reach past $60 million in a few years. But the biggest cost is not simply tax revenues lost to a credit against taxes owed. The biggest cost of the RAC is in its poorly named “refund” program. If a company can claim a credit larger than its taxes owed, it gets what’s called a “refund” — for taxes it never had to pay.

These “refunds” averaged about 92 percent of claims from 2000-05, and in 2005 averaged $3 million per recipient. That is money that never has to go through the regular budget process, scrutinized by legislative committees and weighed against the state’s priorities. If it were a grant, or a regular budget item, you would see where that money goes. But since it’s rewarded through the tax system, you don’t. The companies receive secret checks.

That’s business as usual in Iowa, where corporate giveaways are literally out of control.

Maybe this will start to change. A new law passed last year could be a critical first step toward transparency of subsidies to private corporations. Recipients of RAC claims above $500,000 will be named, with amounts received, in an upcoming report from the Department of Revenue.

You’ll be able to see where at least some of the money is going, and count your quarters — a half-million dollars at a time!

Posted by Mike Owen, Assistant Director

Still good advice — accountability and balance

All tax credits, not just the film credit, demand scrutiny heretofore ignored.

It’s good to see more and more acceptance of the idea of accountability and balance to meet Iowa’s needs.

Everything must be on the table in budget decision-making, as Governor Culver insisted in his Condition of the State message earlier this year, and we have seen signs that this sensible, balanced approach could be taking hold in the Statehouse.

For many years, the budget hawks at the Iowa Fiscal Partnership have been making the pitch. One such report, in 2006, “Looking Behind the Curtain,” challenged Iowans to consider how to review the giant — and often secret — business subsidies that were draining the state of revenues needed to meet Iowans’ needs.

As noted then by the Des Moines Register, in a December 22, 2006, editorial:

Public dollars are the public’s business and should come with public accountability. Lawmakers should ensure that. They can get ideas about how to start by picking up a copy of the Iowa Fiscal Partnership report. [Click here for the executive summary of the report.

Late in the 2009 legislative session, lawmakers passed a measure to permit limited

Mike Owen
Mike Owen

public scrutiny of Iowa’s generous research subsidies that have allowed some of Iowa’s largest corporate operators not only to avoid income tax, but to receive state checks in the millions while school districts are facing cuts.

The scandal around the state’s film-credit program has contributed to the recognition by the Governor, legislative leaders and many in the media that all tax credits, not just the film credit, demand scrutiny heretofore ignored.

This has extended as well to business advocates. In fact, an economist for the business-oriented Tax Foundation succinctly made the point in a Register story on Sunday, that “the bottom line” is that these subsidies cost money.

“The big problem is that politicians and taxpayers tend to see them as a tax cut, but the correct way to look at them is that they are really government spending through the tax code.”

If a rose is a rose by any other name, a tax credit is spending whatever you call it. Like any spending, there should be a good reason for it, and with tax credits, it is not a given that they can be defended. It is long past time for review and reform.

The Governor has set up hearings for Tuesday in Cedar Rapids and Wednesday in Urbandale for advocates and experts to weigh in on the value — or lack of same — of many such subsidies. Click here for the agenda, time and location of each meeting.

Posted by Mike Owen, Assistant Director