Tax cuts: Already tried, failed

Iowa’s coming tax-cut experiment has been tried before and failed. Research showed the tax cuts appear to have slowed growth, taking money out of the economy.

Former Iowa Department of Revenue official Michael Lipsman discusses tax issues at a public forum last week at the State Capitol as former Senator Charles Bruner, left, and Senators Joe Bolkcom, Janet Petersen and Amanda Ragan listen. The institutional memory of experts such as Lipsman has been lost as legislators have rushed into plans to overhaul Iowa’s tax system, with most discussions taking place outside public view and earshot.

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Twenty-one years ago the Iowa Legislature enacted an across-the-board 10 percent cut in state income tax rates. That tax cut not only failed to spur economic growth, but bears a share of the blame for the under-performance of the Iowa economy in the years following. And it led to recurring revenue shortfalls and budget cuts.

Some in the Iowa Senate aim to repeat the experiment, this time with an 8 percent cut. There is no reason to expect a different result.

A 2004 report by Michael Lipsman, then head of the Tax Research and Program Analysis Section of the Iowa Department of Revenue, explains why the tax cuts of 1997 and 1998 had a negative effect on the economy.[1] That legislation cut all income tax rates by 10 percent, expanded the exemption for capital gains income, increased the pension exclusion, and exempted lineal ascendants and descendants from the state inheritance tax.[2]

The tax cuts were expected to reduce state revenue by $318 million in 2019. But Lipsman estimates that the effect of all these tax provisions was a reduction in revenue exceeding $600 million a year by 2002. Why the larger number? Because not only did the state take a smaller share of Iowans’ income in taxes, but income grew more slowly than it would have without the tax cuts.

This runs counter to the ideology of supply-side economics, which predicts that tax cuts will always spur growth. But Lipsman’s point is that it depends on the nature of those cuts — how much goes to non-residents, how much to high-income residents, where savings are likely to be invested, and where goods are produced.

The Iowa tax rate cuts, the pension exclusion, and the capital gains preference all concentrated their benefits on higher income taxpayers, and over a third of the inheritance tax benefit went to non-residents. The 3 percent of Iowa taxpayers with over $100,000 income got 24 percent of the benefit from the rate cuts, and these are the taxpayers most likely to invest their tax cut rather than spend it locally. It is likely that much of the tax savings was invested outside the state. Furthermore, most of the high-value consumer goods purchased by upper-income Iowans are produced outside the state.

At the same time, the tax cuts reduced state and local revenue, and public-sector employment dropped as a result. State and local government payrolls in Iowa decreased 16 percent from 1997 to 2002, over twice the rate of decline for the country as a whole. And state and local governments spend primarily within the state of Iowa, helping to boost the state economy. Cuts in public sector spending hurt the state economy directly (reduced purchases from local suppliers) and indirectly (reduced local purchases by public sector workers).

The upshot is that the tax cuts appear to have slowed growth, taking money out of the economy that ultimately ended up invested elsewhere, or went directly to non-residents, or was spent on goods produced elsewhere, instead of supporting Iowa businesses. In the five years leading up to the tax cuts, the Iowa economy grew at a rate nearly identical to the national economy: 28 percent. In the five years following the cuts, Iowa’s growth fell to 22 percent, compared to the national rate of 27 percent.

The massive tax cutting experiment in Kansas produced similar results — the Kansas economy slowed rather than accelerated. The experiment was a failure, and was ended by the Legislature.

The latest House tax bill would shower three-fifths of its benefits on taxpayers with income over $100,000, much more skewed to the top than the 1997 legislation. The Senate bill is likely to be skewed as well; it includes a pass-through income loophole that would cost $100 million, four-fifths of that going to the richest 5 percent of taxpayers.

Doing the same thing and expecting a different result is not the definition of rational policy making.

[1] Michael A. Lipsman. The Economic Effects of 1997 and 1998 Iowa Tax Law Changes. Tax Research and Program Analysis Section, Iowa Department of Revenue, July 2004.

[2] These are the major provisions, accounting for 90 percent of the cost. The bills also increased the personal credits and the tuition and textbook credit.

Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

SNAP changes: Ignoring what works

EITC and child care more effective than drug tests and work requirements

Work requirements for public assistance seem to be all the rage — at both the national and state levels — when other policies would do more to encourage and support work.

President Trump signed an executive order April 10 enhancing enforcement of federal public assistance work requirement laws, evaluation of program effectiveness, and consolidation or elimination of “ineffective” programs.[1] The Trump administration also is considering drug tests for SNAP (Food Stamp) recipients.[2]

Similar legislation in Iowa (Senate File 2370) intended to expand regulations on and further monitor recipients of public assistance in Iowa, but appears to have stalled as the 2018 session nears an end. This included implementing work requirements, drug testing, quarterly reviews of eligibility, and a one-year residency requirement.[3]

The Farm Bill draft[4] released April 12 would reduce or eliminate SNAP benefits for 1 million households, or 2 million recipients, according to the Center on Budget and Policy Priorities (CBPP). Work requirements would force able-bodied adults without dependents to prove every month that they work or participate in a training program 20 hours per week. Severe sanctions for noncompliance would cut off benefits for one year the first time — three years the second.[5]

Recent research found recipients under work requirements for Temporary Assistance to Needy Families (TANF) continued to live below the federal poverty level, and that small increases in employment diminished over time and did not result in stable employment in most cases.[6] In the long term, programs that provide training, skill building, and educational opportunities to recipients are shown to be more successful than only implementing work requirements.[7]

Evidence shows that people in SNAP households who can work do work. More than 80 percent work during the year before or after receiving benefits.[8]

Drug testing public assistance recipients has proven to be costly and frivolous. States that have implemented drug testing found that applicants have lower drug usage rates than the general population. The state of Missouri spent $336,297 in 2015 to test 293 of 31,336 TANF applicants and found only 38 positive results.[9]

Eleven percent of Iowans received public assistance in February of 2018.[10] Already, able-bodied adult without dependents have work requirements to receive SNAP in the state of Iowa.[11]

By contrast, the Earned Income Tax Credit and Child Care Assistance (CCA) are policies that are effective in encouraging work. In addition, Iowa could make changes in work support programs, such as CCA,[12] to reduce what are known as “cliff effects” — when families with a pay raise or a new job are faced with a net loss because a reduction in benefits exceeds the new income.

Policies that support working families, not drug testing and work requirements, would do more to encourage work, raise family incomes, and boost local economies.

 

[1] The White House, “Executive Order Reducing Poverty in America by Promoting Opportunity and Economic Mobility.” April 2018. https://www.whitehouse.gov/presidential-actions/executive-order-reducing-poverty-america-promoting-opportunity-economic-mobility/

[2] Associated Press, “Drug testing plan considered for some food stamp recipients.” April 2018. https://www.apnews.com/6f5adff5efeb4f9a9075f76bf9cf5572

[3] IA Legis, “Senate File 2370” February 2018. https://www.legis.iowa.gov/legislation/BillBook?ga=87&ba=SF2370

[4] House Agriculture Committee “H.R. 2: the Agriculture and Nutrition Act of 2018.” April 2018. 115th Congress. https://agriculture.house.gov/uploadedfiles/agriculture_and_nutrition_act_of_2018.pdf

[5] Center on Budget and Policy Priorities, “Chairman Conaway’s Farm Bill Would Increase Food Insecurity and Hardship.” April 2018. https://www.cbpp.org/research/food-assistance/chairman-conaways-farm-bill-would-increase-food-insecurity-and-hardship#_ftn1

[6] Urban Institute, “Work Requirements in Social Safety Net Programs.” December 2017. https://www.urban.org/sites/default/files/publication/95566/work-requirements-in-social-safety-net-programs.pdf

[7] Center on Budget and Policy Priorities, “Work Requirements Don’t Cut Poverty, Evidence Shows.” June 2016. https://www.cbpp.org/research/poverty-and-inequality/work-requirements-dont-cut-poverty-evidence-shows

[8] Center on Budget and Policy Priorities, “Making SNAP Work Requirements Harsher Will Not Improve Outcomes for Low-Income People.” March 2018. https://www.cbpp.org/research/food-assistance/making-snap-work-requirements-harsher-will-not-improve-outcomes-for-low

[9] Center on Law and Social Policy, “Drug Testing SNAP Applicants is Ineffective and Perpetuates Stereotypes.” July 2017. https://www.clasp.org/sites/default/files/publications/2017/08/Drug-testing-SNAP-Applicants-is-Ineffective-Perpetuates-Stereotypes.pdf

[10] Iowa Department of Human Services, “Food Assistance Report Series F-1.” March 2018. http://publications.iowa.gov/27299/1/FA-F1-2016%202018-03.pdf

[11] Iowa Department of Human Services, “ABAWD Letter.” September 2017. https://dhs.iowa.gov/sites/default/files/470-3967.pdf

[12] Peter S. Fisher and Lily French, Iowa Policy Project: Reducing Cliff Effects in Iowa Child Care Assistance, March 2014. https://www.iowapolicyproject.org/2014docs/140313-CCA-cliffs.pdf

 

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

nveldhouse@iowapolicyproject.org

Big costs, few real breaks

Despite all the hoopla, the average taxpayer would hardly notice the effects of this bill — another $3 or $4 a month.

The latest tax bill to emerge from the Iowa House would take $90 million from the state budget, robbing the ability of the state to adequately fund education, mental health, and public safety. And yet Iowans will see so little in return that most will not even be able to tell they got a tax cut.

By the time the House bill’s provisions  are fully phased in (fiscal year 2021), the income tax cuts and sales tax modernization measures will result in about $90 million a year less revenue flowing to the state’s general fund than was projected before the federal tax bill was passed.[1] After years of revenue shortfalls and budget cuts, the House bill would guarantee that those problems will continue.

Iowa is one of only three states where you can deduct your federal income tax before computing your income subject to Iowa tax. As a result, the federal tax cut bill will reduce that deduction and increase your Iowa taxable income and your Iowa income tax. But that effect is tiny. If the state were to do nothing at all, taxpayers would still keep 94 to 98 percent of the federal tax cut (see table below).

House plan offers little break for individuals, at great cost to services
Combined effects of Iowa House tax plan and federal tax changes

ia_finalhousebill_results-2.jpg

Source: Institute on Taxation and Economic Policy, Washington, D.C.

The House bill goes beyond what would have been needed to restore the small tax increases due to federal deductibility. It makes a number of changes in the income tax, including an increase in the state standard deduction. Overall, it reduces income taxes for those in the middle three-fifths of Iowa taxpayers by about $100 to $155 a year. The bill also modernizes the state sales tax, and those measures would bring in about $73 million a year from Iowa residents, and cost the middle income taxpayer $37 to $60 a year.

The net effect of all of this is an average tax cut of just $29 to $53 a year for those in the middle three-fifths of Iowa taxpayers, and smaller amounts for others. In other words, despite all the hoopla, the average taxpayer is going to hardly notice the effects of this bill — another three or four dollars a month.

Let’s just walk that through for a household with income of $53,000, which would put them right in the middle of all Iowa households. They can expect to pay $860 less in federal taxes, with federal deductibility taking back just $26 of that in state income taxes — they get to keep 97 percent. Then they get a $122 income tax cut and a $47 sales tax increase from the House tax bill. Net effect: $860 less in federal taxes, $49 less in state taxes.

While the tax savings are insignificant — three or four dollars a month — the House bill will take all that back and much more for many Iowa families. Tuition at public universities and community colleges will continue to rise because public funding will not be able to keep up with costs. School districts will be forced to enact more cuts as state funding fails to keep pace with inflation. Mental health initiatives will remain underfunded.

[1] Iowa Department of Revenue memo to Jeff Robinson, April 17, 2018. This is the net revenue loss compared to projected revenues before the federal tax bill was passed. The revenue loss compared to Iowa tax revenue including the windfall gain from federal deductibility ($178 million) would be $269 million in FY2021.

2010-PFw5464Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Public hearing: Public concerns distracted

Iowa can have responsible tax reform that does not lose money needed for traditional, critical public services that benefit all Iowans. Our focus should be there.

If the goal of a “tax reform” public hearing Monday was to distract Iowans from the massive impact the Governor’s $1.7 billion tax cut would have on their lives, it succeeded.

The media attention on the hearing in the old Supreme Court Chamber in the State Capitol focused heavily on the perennial fight between banks and credit unions — one that won’t be settled whatever happens in 2018, and not the most important issue to be settled in 2018. Therefore, we won’t link to those stories here and add to the distraction.

But, those folks on both sides of the bank-credit union fight took many of the limited speaking slots, so the media focus followed. For their part, House Ways and Means Committee members listened politely, asked no questions and let 30 or so people — including this writer — have their say in three-minute chunks.

It was the public’s only chance thus far to speak on a bill that was introduced two months ago … that may barely resemble what House leaders actually plan to pass … with no disclosure about which of the public speakers may be getting more than three minutes behind closed doors as well.
We should all have been brought to the table long before this, and attention directed to what is really on that table about the future of our state.

Iowans need to focus on the very real threat to public services, from education to law enforcement to water quality to human services that have gone lacking as our state has increasingly directed subsidies and tax breaks to corporations and the wealthy, neither of whom need help.

One good resource for all lawmakers, advocates and the public at-large is a series of concise, fact-based two-pagers in the 2018 Tax Policy Kit from the Iowa Fiscal Partnership. Find those pieces here.

If they were listening closely, lawmakers on Monday will have gleaned some important perspectives on the monumental tax changes that are being contemplated without sufficient review.

Lawmakers still have an opportunity to do this right — to steer Iowa’s tax system to a more stable, accountable and fair system that assures giant companies are paying their fair share and the poor are not penalized for their low incomes. Iowa can have responsible tax reform that does not lose money needed for traditional, critical public services that benefit all Iowans. Our focus should be there.

Mike Owen is executive director of the Iowa Policy Project. mikeowen@iowapolicyproject.org
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Tuition rising — is anyone surprised?

There is a price to families when the Legislature chooses not to fund higher education.

Today’s announcement of plans to raise tuition at Iowa universities should not surprise anyone. When the Legislature cuts back, the regents need to fill in the gaps. And that creates new gaps, in family budgets immediately, and beyond, with — student debt.

A recent feature in The Des Moines Register has delved into the issue of rising student debt. The Register story features testimonies from soon to be graduates as well as recently graduated students, who talk about how they will handle their student debt. Register reporter Kathy Bolton cites “worrisome signs that future students will be forced to borrow even more to get their degrees.”[1] An excerpt:

State legislatures are decreasing funding to public universities and community colleges. In Iowa, for instance, state funding to the three public universities is now less than in the 2015 fiscal year. Mid-year budget cuts are expected this spring and there’s uncertainty about next year’s state funding.”

The full picture is considerably more stark. Adjusting for inflation, state funding for public universities has declined since fiscal year 2001, by 40 percent at the University of Iowa, 42 percent at Iowa State University, and 28 percent at the University of Northern Iowa.[2]

And these calculations do not include the recent current-year budget cuts for FY2018 ordered by the Legislature and signed by the Governor that took a disproportionate share from the regent institutions — $11 million or about one-third of the total.

To fill the financial needs of the institutions, the regents have turned to increasing the annual tuition paid by students. Between fiscal year 2001 and 2016, tuition at the regent universities has increased between 72 percent and 75 percent. [3]

In fact, there has been a shift in the primary source of funding, from state appropriations to tuition and fees. In fiscal year 2001 the University of Iowa received 63 percent of its budget from the state. In fiscal year 2016 it had dropped to 34 percent. For the other universities the drop was: 68 percent to 35 percent at ISU, and 70 percent to 56 percent at UNI.[4]

As noted in the Register article:

“Lower-middle-class and working families don’t have big chunks of money sitting around to pay for their kids’ college education,” said (Chase) Lampe, a Pleasantville High School social studies teacher. “As costs go up, students are going to take out more loans — or not go to college at all.”

While university tuition and fees rise, wages of Iowans have not kept pace. As part of the Iowa College Student Aid Commission’s annual report for fiscal year 2016,[5] director Karen Misjak stated that “one very simple number tells the story:”

Of the 175,500 Iowans who filed a FAFSA for the 2014-15 academic year, more than 60,000 were found to have an Expected Family Contribution of zero. That means one in three families could not provide any financial support for a student in college.”

How much harder has it become to pay for a college education in Iowa? In fiscal year 2001 individuals working at the median wage in Iowa could pay for the average tuition at the regent universities by working for 36 days. That number had increased to 60 days in fiscal year 2016 — a two-thirds increase. For low-income individuals, those working at the 20th percentile of wages, the challenge is even greater: days of work required increased from 53 to 92 — a 75 percent increase.[6]

There is a price to families when the Legislature chooses not to fund higher education.

[1] Kathy A. Bolton, “Degrees of Debt,” The Des Moines Register. 2018, https://features.desmoinesregister.com/news/student-loan-debt-poised-increase/

[2] Adjusted for inflation using the Higher Education Price Index, 2016 dollars.

[3] Iowa Board of Regents data; adjusted for inflation using the Higher Education Price Index, 2016 dollars, tuition and fees rose by 72 percent from 2001-16 at ISU, 74 percent at UNI and 75 percent at UI.

[4] Iowa Board of Regents data.

[5] Iowa College Aid Commission Annual Report for FY2016, “A letter from the executive director,” https://www.iowacollegeaid.gov/content/executive-director

[6] Author’s calculation of work days needed to pay tuition and fees is the NCES average tuition and fees (adjusted) divided by Economic Policy Institute analysis of Current Population survey data of Iowa median and 20th percentile wages, divided by 8 (hours).

Brandon Borkovec is a Masters of Social Work student at St. Ambrose University, working this school year as an intern at the Iowa Policy Project on public policy analysis. 

Reality on Iowa teacher pay

Serious analysis shows Iowa doesn’t rank as high on teacher pay as the Governor and some media are reporting.

The experience of Wisconsin school districts in the years following Governor Walker’s gutting of collective bargaining for public workers does not bode well for Iowa. School districts are reportedly having difficulty finding teachers. Teachers have been leaving the state, not just for higher pay but because they want to work where their efforts are appreciated and they are respected.[1] Some left for Iowa, and are now wondering where they should go next, as Iowa repeats the folly of Wisconsin.

If we are to keep the best college grads in the state, and attract them here from elsewhere, a good starting salary is part of the picture, even though the prospect of raises down the road seems much dimmer with the end of serious collective bargaining here. So how does Iowa stand in terms of starting salary?

The average starting salary in Iowa for the 2016-17 school year was $35,776. That was good enough to rank Iowa near the middle of the pack — 32nd when compared with other states and the District of Columbia. But some have argued that Iowa has a low cost of living compared to other states, so we don’t need to pay as much. Fortunately, the U.S. Bureau of Economic Analysis (BEA) produces a cost of living index for each state. They recommend using that index to make wage comparisons across states, to reflect differences in purchasing power.

The BEA index for Iowa was 90.3 in 2015, the most recent year available. That means it costs Iowans 9.7 percent less than the national average to live. The starting salary of $35,776 would then be equivalent to $39,608 in a state with an average cost of living. Comparing all states in terms of the starting salary properly adjusted for cost of living differences, Iowa ranks 21st.[2]

What about the overall average salary? Unfortunately, the Governor has been citing a bad statistic. A recent NPR report focused on how states ranked on teacher pay when you take into account the cost of living in each state. But they did it wrong. Instead of using the standard cost of living index produced by the BEA, NPR asked a company called EdBuild to do the analysis, and EdBuild used a proprietary index — the Cost of Living Index produced by the Center for Community and Economic Research (C2ER) — that is not reliable and produces sometimes dramatically different cost of living indexes. For example, their index for 2013 (according to EdBuild) had Iowa with an above-average cost of living[2], while for 2015 it was 11 percent below the national average.

What happens if we use the correct adjustment for the cost of living? Iowa’s average teacher salary ranks 15th in the nation[3], not eighth as EdBuild calculated and as NPR reported. NPR is looking into the issue; we await their correction.

[1] David Madland and Alex Rowell. “Attacks on Public-Sector Unions Harm States: How Act 10 Has Affected Education in Wisconsin.” November 15, 2017. Center for American Progress.
https://www.americanprogressaction.org/issues/economy/reports/2017/11/15/169146/attacks-public-sector-unions-harm-states-act-10-affected-education-wisconsin/

[2] IPP calculations using the National Education Association starting salary data for 2016-17 and the BEA Regional Price Parities for 2015.
[3] Average starting pay of $33,226 was adjusted downward to $33,120, meaning that the cost of living in Iowa was lower than average. http://viz.edbuild.org/maps/2016/cola/states/#salary
[4] IPP calculations using the average salary data for 2015-16 cited in the NPR report and the BEA Regional Price Parities for 2015.

Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Don’t emulate North Carolina, either

Tax and budget cuts are a formula for decline, not prosperity. Let’s hope Iowa does not follow either Kansas or North Carolina down the path of chronic budget crises and underfunding of education, health and public safety.

The ideologues advocating for large state income tax cuts haven’t given up defending the Kansas experiment, despite overwhelming evidence that it forced drastic budget cuts while doing nothing to stimulate growth. Now they would have us believe that North Carolina provides an even better example of the benefits of the tax-slashing strategy. It doesn’t.

Two recent analyses of the North Carolina tax cuts, which took effect in 2014, show pretty clearly that the cuts did not boost the economy, and that they will soon precipitate large budget shortfalls. Prior to the tax cuts, the state’s economy generally grew at a comparable rate to the surrounding states, despite North Carolina having higher personal income tax rates than its neighbors. And it outpaced the national economy, jobs in North Carolina growing at 5.8 percent from late 2001 through the end of 2013, compared to 4.2 percent for the nation.

Since the tax cuts took effect in 2014, has North Carolina’s economic performance become even more impressive? On the contrary; since 2014, North Carolina has lagged behind the nation in growth in jobs and GDP, and has also lagged behind neighboring Georgia and South Carolina.

The tax-cut advocates are fond of saying simply that since the tax cuts, North Carolina has experienced rapid growth. The state has certainly grown faster than Kansas, but nothing in the evidence suggests that the tax cuts boosted growth; in fact, relative to its neighbors and to the nation its performance declined after taxes were cut.

The North Carolina tax cuts were phased in from 2014 through 2019, and by next year will cost the state 15 percent of the general fund budget. Major fiscal challenges now loom on the horizon. The state’s budget analysts project a structural budget shortfall of $1.2 billion in 2020, with the shortfall rising after that.

Tax and budget cuts are a formula for decline, not prosperity. Over the past decade, North Carolina has cut per student funding for education — K-12 by 7.9 percent, higher education by 15.9 percent, when adjusted for inflation — and the tax cuts will make it difficult, if not impossible, to restore those funds, no less to increase its investments in the state’s children. They are putting the long-term prosperity of the state at risk.

These results are not surprising. Tax cuts have budget consequences; they do not pay for themselves through growth. In fact, the preponderance of serious research finds that the effects of state income taxes on state growth are negligible.

Let’s hope Iowa does not follow either Kansas or North Carolina down the path of chronic budget crises and underfunding of the state’s responsibilities for education, health and public safety.

Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org