Cutting revenues, holding back schools

As the Senate goes low on school funding, the governor promotes a tax plan that would make improvements even more difficult.

It is worth noting that as the Iowa Senate passed an exceedingly meager 2.1 percent growth in per-pupil spending for Iowa’s K-12 public schools, Governor Reynolds’ tax bill offers a net reduction in revenue.

But even the governor has proposed more for FY2021 — 2.5 percent — than the Senate approved Monday. As shown below, the governor’s plan keeps Iowa on a long-term downward trendline (in red) for school funding growth. The Senate plan goes lower.

200115-SSA-shaded-roadmap6

 

The governor’s tax shift proposal trades a sales-tax increase for income-tax cuts: a bad deal both for tax fairness and adequate revenues. In doing so, she has chosen to pit education advocates against environmental advocates — who would see much less in funding for water quality and trails than voters directed in 2010 in a constitutional amendment. And, she would make our overall tax system tilted even more heavily to the wealthy than it is now.

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Poor and inequitable funding of public schools and other critical public services are directly related to an inequitable tax system that relieves those most able to pay — the wealthiest — of that responsibility.
The governor is demanding that the package of tax changes actually cause a net loss of revenue. This is not only a severe twisting of voters’ intent in 2010 in approving use of the next sales tax increase to raise funding for environmental and recreational enhancements, but a mathematical guarantee that other services will be held down or even cut.
If we are going to adequately fund programs to improve environmental quality and educational achievement, it starts with protecting all of those programs and promoting equity and fairness in how the revenues are raised.
M
Mike Owen is executive director of the nonpartisan Iowa Policy Project.
mikeowen@iowapolicyproject.org

Reining in business tax breaks

Real reform of Iowa business tax subsidies is needed now more than ever.

It has become a familiar story: Tax breaks and tax expenditures growing at a pace that spending on traditional state priorities cannot match. This growth continues on autopilot, year after year, with little scrutiny and often with weak justification.

The cost of business tax credits under the income tax grew from $214 million in Fiscal Year 2015 to $244 million in FY19, and is projected to be $287 million for FY20.[1] The commercial and industrial property tax cuts enacted in 2013 have added significantly more to that estimate. The business property tax credit enacted in that legislation, which will remain at $125 million every year, will bring the overall state cost of business tax credits to more than $400 million by FY20. In other words, business tax credits in total will have about doubled in six years. (See graph.)

Related business breaks would drive total spending on subsidies to business much higher.

      • Iowa in recent years has spent $152 million annually to backfill local public revenues lost when commercial and industrial property assessments were rolled back to 90 percent of actual value, a tax break to business.[2]
      • Revenue losses from the state’s failure to enact combined reporting to plug loopholes in the corporate income tax amount to an estimated $200 million.[3]
      • The state also spends nearly $60 million annually backfilling the loss of tax base to school districts as a result of city and county use of tax increment financing, much of which reduces the costs of business development.[4]

The total cost of business subsidies, in other words, approaches $800 million, even without other so-called tax expenditures, such as the state’s use of single-factor apportionment.

Tax credits have the same impact on the state’s bottom line as any other spending. Such spending comes outside the normal budget process where agencies, advocates and constituents make proposals that lawmakers vote up or down, on the record. Tax credits, with few exceptions, cause spending outside that competition.

State spending on business subsidies necessarily comes at the expense of other budgetary priorities, including education, health, and public safety. Investments in education and infrastructure, the building blocks of a strong economy, suffer when the annual budget debates start out with a billion dollars already committed to business incentives.

Real reform is needed now more than ever.

See our Roadmap for Opportunity two-pager on this topic.

 

 

 

[1] The following tax credits listed in the Iowa Department of Revenue Contingent Liabilities Reports are included in our analysis as business tax credits: Enterprise Zone Programs, High Quality Jobs Program, Historic Preservation, Industrial New Job Training Program (260E), Research Activities, Targeted Jobs, Venture Capital, Accelerated Career Education, Redevelopment, Renewable Chemical Production, Renewable Energy, Wind Energy Production, Biodiesel Blended Fuel, E15 Gasoline Promotion, E85 Gasoline Promotion, Ethanol Blended Gasoline, Ethanol Promotion. With the exception of Historic Preservation, this list is in line with credits classified as “business incentives” by the Iowa Department of Revenue in their most recent tax expenditure study. https://tax.iowa.gov/reports/2010-iowa-general-fund-tax-expenditures-excel.

[2] Legislative Services Agency, Summary of the Governor’s Budget Recommendations FY2021. Jan. 16, 2020, page 212.

[3] Iowa Department of Revenue, 2017.

[4] Legislative Services Agency, FY 2018 Annual Urban Renewal Report, February 15, 2019, p. 24. About 15 percent of TIF erxpenditure in FY18 went directly for business projects; it is not known how much of the 63 percent that went to property acquisition, roads, bridges, utilities, and water or wastewater treatment plants was associated with business development.

Peter Fisher is research director of the nonpartisan Iowa Policy Project.

pfisher@iowapolicyproject.org

Anti-taxers don’t get ‘competitiveness’

Iowa is a low-tax state for business, and has been for some time. Two leading business consulting firms have demonstrated this.

slide_taxfoundation-cropHere we go again. Whenever Iowa legislators or lobbyists want to cut taxes for business, or for high-income individuals, they trot out the same myth about competitiveness.

The reality is pretty simple: Iowa is a low-tax state for business, and has been for some time. Late last year, the Council on State Taxation released its latest report on how much businesses pay in state and local taxes, prepared by the accounting firm Ernst and Young. Iowa was 18th lowest — only 17 states had a lower overall tax rate on business.[1] (See graph.) Another accounting firm, Anderson Economic Group, ranks Iowa’s business taxes even lower, at 14th — only 13 states have lower taxes.[2]

But why use real data when you can just cite some anti-tax, anti-government think tank that has cobbled together a “competitiveness index” that makes Iowa look bad?

So it is again in 2020. The governor cited the need to be competitive in her condition of the state address, and the Senate president repeated the theme. To support the claim, Senator Charles Schneider pointed to a bogus study by the Tax Foundation that ranked Iowa 42nd among the states in “business tax climate.” Only eight states were worse.

The Tax Foundation, it turns out, mashes together 124 components of state tax systems to produce an overall “index number” to rank the states. Their index is meaningless; it gives weight to components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes.[3]

The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. Both of these factors are completely ignored by the Tax Foundation. Instead, they focus on things like the number of tax brackets. Meanwhile, the sales taxation of food is a good thing, in their book; Iowa’s failure to tax food somehow makes us less competitive. This is nonsense.

Iowa is a slow growing state, but more tax cuts for those at the top will not help. They will further erode the state’s ability to invest in our roads and bridges, in our children and our workforce, the building blocks of a strong economy. Education, from early childhood through college, not only produces the skilled workforce businesses need, but makes it easier to attract workers from elsewhere, knowing their children will get a good education.

[1] Business taxes as a percent of GSP. Ernst & Young LLP, Total state and local business taxes, October 2019. Table 4, page 12. https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/1909-3269660_50-state-tax-2019-final.pdf

[2] Business taxes as a share of business pre-tax operating surplus. Anderson Economic Group LLC, June 2018. 2018 State Business Tax Burden Rankings, Exhibit I, page 17. https://www.andersoneconomicgroup.com/wp-content/uploads/AEGBusinessTaxBurdenStudy_2018_FINAL.pdf

[3] For a more detailed critique of the Tax Foundation’s ranking, and others, see “Grading the States: Business Climate Rankings and the Real Path to Prosperity.” http://www.gradingstates.org/

2010-PFw5464Peter Fisher, research director of the nonpartisan Iowa Policy Project in Iowa City, is professor emeritus in the University of Iowa School of Urban and Regional Planning. His widely cited Grading the States analysis is at gradingstates.org. pfisher@iowapolicyproject.org

Iowans: Act on CAFO moratorium

It is clear advocates for a CAFO moratorium have science, the future and the public on their side. Will that outweigh the wishes of industrial agriculture?

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Two years ago this week the Iowa Policy Project published our paper on industrial hog facilities: The Explosion of CAFOs in Iowa and Its Impact on Water Quality and Public Health.

We showed the industry’s Concentrated Animal Feeding Operations (CAFOs) were responsible for manure leaks and spills, fish kills, nitrate and ammonia pollution, antibiotic-hormone and bacterial contamination, algae blooms, impaired waterways and closed beaches.

Most important to both of us, as emeritus professors in Public Health, was that CAFO neighbors suffer increased childhood asthma and adult asthma, bronchitis, airway obstruction, nasal and eye irritation. Animal agriculture still consumes, largely for growth promotion, over 70 percent of medically important antibiotics. This practice promotes antibiotic resistant infections.

CAFO neighbors also suffer odor-associated increases in stress, tension, depression, confusion, less vigor, and decreases in measures of quality-of-life and well-being. And, CAFO neighbor property values, depending on distance and prevailing winds, decrease 20-40 percent.

We called for a moratorium on new facilities, a position with growing support. The American Public Health Association’s Governing Council’s called in November 2019 for a national moratorium on new or expanded CAFOs, citing their “threat to air quality, drinking water and human health” and to “stop using medically important antibiotics in healthy animals.”

A poll from the Johns Hopkins Center for a Livable Future finds that a majority of registered Iowa voters support a moratorium.

  • Sixty-three percent (81 percent of Democrats, 60 percent of independents, and 51 percent of Republicans) deemed it important for the General Assembly to pass legislation to ban new CAFOs or expand existing CAFOs.
  • Eight in 10 of those surveyed expressed concern about the threat of water and/or air pollution on CAFO workers and nearby communities.
  • A majority (51 percent) agreed that CAFOs contribute a “significant amount” to water pollution, and 49 percent agreed that CAFOs contribute significantly to air pollution in nearby communities.

On Thursday, January 23, the Iowa Alliance for Responsible Agriculture (IARA) and other advocates for a moratorium on new or expanded CAFOs will be rallying at the State Capitol. It is clear they have science, the future and the public on their side. The General Assembly must decide if those constituencies outweigh the wishes of industrial agriculture.

2017-Merchant-095115James Merchant is Professor Emeritus of Public Health and Medicine and Founding Dean Emeritus of the College of Public Health.

 

 

osterberg_david_095115

David Osterberg is Professor Emeritus of Public Health and co-founder of the nonpartisan Iowa Policy Project.

 

 

Also see:

Work supports put Iowans ahead

Legislators are proposing costly, punitive rules for food and medical care that will fail to encourage work or boost health and financial security for low-income families.

Multiple bills moving through the Iowa Legislature attempt to take food and medical care away from Iowans. SF430 and HF2030 seek to impose harsh work requirements and a redundant eligibility verification system. Both of these costly proposals would needlessly expand bureaucracy while failing to enable work, financial security or health for Iowans.

Instead of promoting better circumstances for workers, work requirements do the opposite. They push families off of vital programs such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) — even though access to adequate medical care and food is important for finding and maintaining employment.

Analysis by the Legislature’s nonpartisan fiscal staff in 2019 estimated that imposing parental work requirements on SNAP participants would add $2.5 million in administrative costs in the year implemented, followed by an ongoing annual cost of half a million dollars per year.[1]

Pushing an additional eligibility verification system would have cost $25 million per year after an initial $16 million in FY2020 to hire more than 520 state employees to verify eligibility for Iowans on work support programs including Medicaid and SNAP, according to another 2019 Legislative Services Agency fiscal note.[2] 

The sole result of such bills, if enacted, will be to get Iowans off of work-support programs — not to encourage work. IPP’s latest “Cost of Living in Iowa” analysis found that work-support programs such as SNAP and Medicaid are instrumental in helping Iowa working families bridge the gap between take-home earnings and basic needs. With 1 in 5 Iowa working households unable to meet basic needs on income alone, promoting access to work supports is important.[3]

Policies that enable work and economic prosperity include raising the minimum wage, expanding eligibility for Child Care Assistance, expanding family leave, and investing in job skills training. SF430 and HF2030 would penalize Iowans that are having difficulty making ends meet, in an economy with many low-wage jobs and inadequate benefits.

Remember, taking away food, prescriptions and doctor’s visits from Iowans in no way promotes work.

[1] Jess Benson, “SF 430 – Supplemental Nutrition Assistance Program (SNAP), Parent Work Requirements” March 2019. Legislative Services Agency. https://www.legis.iowa.gov/docs/publications/FN/1039301.pdf

[2] Jess Benson, “Fiscal Note: SF 334 – Medicaid, Supplemental Nutrition Assistance Program (SNAP) Eligibility Verification.” February 2019. Iowa Legislative Services Agency. https://www.legis.iowa.gov/docs/publications/FN/1038439.pdf

[3] Peter Fisher and Natalie Veldhouse, “Strengthening Pathways to the Middle Class: The Role of Work Supports. The Cost of Living in Iowa 2019 Edition, Supplement.” January 2020. Iowa Policy Project. http://iowapolicyproject.org/2020docs/200108-COL2.pdf

2018-NV-6w_3497(1)Natalie Veldhouse is a research associate at the nonpartisan Iowa Policy Project.

nveldhouse@iowapolicyproject.org

 

 

How real Iowa tax reform would look

Don’t believe the anti-tax spinners driving Iowa to the low road with discredited “analysis” of our tax climate.

See IPP’s Roadmap for Opportunity piece on tax reform

Iowa is an average-tax state. Even before expensive tax cuts passed in 2018 to benefit the wealthiest, Iowans paid about 2.5 percent of their income toward income taxes, 2.4 percent for sales taxes, which earns us a rank of 20th and 21st, respectively, among the 50 states.[1] Business taxes in Iowa are actually below average according to recent studies by two accounting firms: one placed Iowa 31st, the other 36th.[2]

Basic RGBBut our tax system already failed the fairness test before those new tax cuts. The highest income Iowans pay a smaller share of their income to state and local taxes than lower and middle-income Iowans — our tax system is regressive. Those in the bottom fifth of Iowa households by income pay 12.4 percent of their income in state and local taxes, while those with incomes in the top 1 percent pay just 7.7 percent.[3] And hundreds of millions in tax revenue are lost every year to corporate loopholes and business tax credits that produce little or no public benefit. At the same time, the state struggles every year to adequately fund education, public safety, health care and other priorities.

Real tax reform, then, would mean three things: (1) ensuring adequate revenue, (2) reducing the regressivity of our tax system, and (3) reining in corporate tax credits and loopholes.

Iowa’s 2018 tax law fails the test, cutting back on both fairness and revenues

The legislation signed into law in 2018 does none of these things. It cuts revenue, makes the tax system more regressive by concentrating tax cuts on the rich, and fails to reform credits or loopholes.[4] The package had one true benefit: modernizing the sales tax to include online purchases and level the playing field for local and state-based businesses.

Under this legislation, however, the income tax savings to a middle-class family by 2021 amount to just $5 to $10 a week and much of that will be taken back by the sales-tax increase. Millionaires, on the other hand, will see on average a $24,636 cut for the year. Almost half of the tax cuts will go to the richest 2.5 percent of Iowa taxpayers, those making $250,000 or more.

The 2018 tax bill also piles $40 million in corporate tax cuts on top of commercial property tax cuts enacted several years ago that have cost local governments millions of dollars. A new special tax break for business owners who receive “pass-through” income will cost in excess of $65 million a year, with 60 percent of the benefit going to the top 2 percent of taxpayers.

Overall, the bill will take $300 to $400 million a year out of the budget that could have gone to adequately fund education or public safety or mental health care. Those revenue cuts will happen regardless of the state of the Iowa economy or the budget; no safeguards will prevent it, despite the bill’s much touted “triggers.”[5]

To add insult to injury, the tax bill is far more likely to hurt the Iowa economy than to help it. The tax cutting experiment in Kansas was a failure, harming the state economy rather than helping it.[6] And Iowa’s own experience with massive tax cutting, in the late 1990s, not only failed to stimulate growth, but likely contributed to the subsequent slowing of the state’s economy.[7] 

Policy Alternatives: The elements of real reform 

    • Ensure adequate funding for our schools, which have been underfunded for years, revenue failing to keep pace with costs. End cuts to state funding of Iowa’s public universities and community colleges, forcing higher tuition, and leaving students and families with rising debt.
    • Plug corporate tax loopholes that cost Iowa an estimated $200 million a year,[8] and rein in business tax credits that grew from $200 million to $423 million in six years.[9]
    • Make our tax system fairer, and better based on ability to pay. This should be done by providing enhanced recognition of the cost of raising a family by expanding the child tax credit and the child and dependent care credit, as well as the Earned Income Tax Credit. Less reliance on the sales tax, which has doubled since 1983 and is poised for another potential increase, or offsets to these increases can enhance opportunities for low- and moderate-income families now put at a disadvantage.

Rebalancing the tax code would reduce its current regressive nature, which imposes higher taxes as a share of income on lower- and middle-income Iowans than on the wealthy.

[1] Taxes as a percent of state personal income for the most recent five years available, 2013-2017, from the U.S. Census, Census of Government Finances.

[2] Iowa ranks 31st in business taxes as a percent of GSP according to Ernst & Young LLP, Total state and local business taxes, October 2019. Table 4, page 12. https://www.cost.org/globalassets/cost/stri/studies-and-reports/FY16-State-And-Local-Business-Tax-Burden-Study.pdf.pdf; Iowa ranks 36th (with #1 being the highest tax rate) in business taxes as a share of business pre-tax operating surplus by Anderson Economic Group LLC, June 2018. 2018 State Business Tax Burden Rankings, Exhibit I, page 17. https://www.andersoneconomicgroup.com/wp-content/uploads/AEGBusinessTaxBurdenStudy_2018_FINAL.pdf

[3] Institute on Taxation and Economic Policy. Who Pays? Sixth Edition. https://itep.org/whopays-map/

[4] See Charles Bruner and Peter Fisher, “Tax plan facts vs. spin.” Iowa Fiscal Partnership, May 5, 2018. http://www.iowafiscal.org/tax-plan-facts-vs-spin/

[5] All the triggers would do is save us from an even larger budget disaster in 2023 and beyond. The triggers are revenue targets; if the targets are not achieved, the last round of cuts will not take place as scheduled for tax year 2023.

[6] Michael Mazerov. “Kansas Provides Compelling Evidence of Failure of ‘Supply-Side’ Tax Cuts.” Center on Budget and Policy Priorities, January 22, 2018. https://www.cbpp.org/research/state-budget-and-tax/kansas-provides-compelling-evidence-of-failure-of-supply-side-tax-cuts

[7] Peter Fisher. “Tax cuts: Already tried, failed.” Iowa Policy Points, April 23, 2018. https://iowapolicypoints.org/2018/04/23/tax-cuts-already-tried-failed/

[8] Iowa Policy Project analysis of Iowa Department of Revenue estimates.

[9] “Growing cost, lax oversight of Iowa business tax credits.” Iowa Fiscal Partnership, March 16, 2018. http://www.iowafiscal.org/wp/wp-content/uploads/2018/03/180319-IFP-taxcredit-bgd.pdf

Lip service to utility transparency

Transparency — a critical aspect of good governance that applies to a rate-regulated monopoly — was a casualty in the Alliant/IPL rate decision, gaining impressive lip service but little action.

I agreed to be a witness in the recent proposed rate increase by Alliant Energy (officially, Interstate Power & Light or IPL). The decision by the Iowa Utilities Board (IUB) was announced today (January 9, 2020).

The Winneshiek Energy District partners with IPP on energy issues. They were able to get the City of Decorah, Luther College, a local hospital and large retirement home to join them in forming the Decorah Area Group (DAG), which intervened in the rate case. DAG hired witnesses and worked to change the amount the company was proposing in rates.

DAG and other intervenors made some headway in the case. The total amount of increase was cut from $204 million to $127 million. Alliant was not able to punish residential customers like me who have solar panels or large solar users like Luther College. That was good.

But transparency — a critical aspect of good governance that applies to a rate-regulated monopoly — was a casualty, gaining impressive lip service but little action.

DAG was the main intervenor group to call for punishment to the company for misrepresenting their future rate increase plans when the city of Decorah tried to form a municipal utility. The vote in 2018 went down to defeat by just four votes. It might have passed if customers knew that Alliant was about to propose a 25 percent increase in rates. The $127 increase amounted to only 15 percent but still, the company had promised the citizens of Decorah to increase rates by about one percent per year.

The IUB talked about this mischaracterization of the facts in a section on Management efficiency, finding:

“(T)he actions taken by IPL in opposition to the Decorah municipalization effort demonstrate a lack of management efficiency by withholding from and not providing to the citizens of Decorah accurate information about anticipated rate increases. Because a rate-regulated electric utility is a monopoly in its service territory, it has the duty to be transparent and to provide accurate information to customers and communities in that service territory. The evidence in this case regarding IPL’s behavior during the Decorah municipalization campaign shows that IPL did not fulfill this responsibility and failed to meet the expected standard of conduct for a regulated monopoly.”

Great words, right? But that was all. There was no punishment, no reduction in the rate increase (Revenue Requirement) below the $127 million. The company profit was not reduced.

That got under the skin of one of the three board members, Commissioner Richard Lozier, who in a dissent stated:

“The majority’s position is unacceptable. Instead, the Board should reduce the level of IPL’s profit or adjust the revenue requirement until IPL demonstrates it has corrected its inefficient operations.”

I agree with the Commissioner. Decorah can try to municipalize again in two years. When and if they do you can be sure Commissioner Lozier’s words will be used by the proponents who want to buy out IPL and run a more efficient electric company.

David Osterberg is founder, former executive director and lead researcher at the nonpartisan Iowa Policy Project.

dosterberg@iowapolicyproject.org

Also: Hear David Osterberg’s interview on “The Devine Intervention” with KVFD’s Mike Devine.