Stimulus: A reminder of what it is, and isn’t

It’s easy to forget amid all the political talk about “stimulus” that it’s an economic concept, not a political one.

So, from the view of one of the country’s leading economists, Mark Zandi of Moody’sEconomy.com, here is an estimate of what $1 of public investment returns to the economy. The graph below shows the change in Gross Domestic Product (GDP) for each dollar invested by various federal actions.

As you can see, a dollar can return well over its value if invested well, and can return far less with other choices.

zandi3Relative Economic Impact of Different Federal Actions

Mr. Zandi made that analysis in written testimony to the U.S. House Committee on Small Business in July 2008.

Interestingly from this graph, Mr. Zandi’s analysis is that the four categories of spending in this list of 13 items provide the biggest bang for the taxpayer’s buck. At the top of the chart, a temporary increase in Food Stamps returns $1.73 for each dollar invested; extending unemployment benefits returns $1.64; raising infrastructure spending returns $1.59, and general aid to state governments returns $1.36.

By contrast, tax-cutting returns far less, in some cases far less than the $1 cost to start out.

Economists generally agree that effective economic stimulus initiatives follow the “three T” principle: policies must be TIMELY, TARGETED and TEMPORARY. These are important principles to remember as Iowa’s leaders decide how to use the federal stimulus dollars provided through the American Recovery and Reinvestment Act (ARRA) signed recently by President Obama.

Such a small change

David Osterberg
David Osterberg

Construction of big hog-producing facilities known as CAFOs is regulated by the Iowa Department of Natural Resources, but not very well. A few Iowa legislators have recognized that and are calling for a small change in the process to approve a CAFO and provide for disposing of the manure.

A study by the Iowa Policy Project last November demonstrated the legislatively imposed shortcomings of the present approval process. The proposed legislation, HSB168, would make a small improvement by shining more light on the process and allowing neighbors the ability to comment to their local county supervisors about shortcomings in plans for the proposed CAFO and its tons of manure.

The proposed bill would not allow the supervisors to stop a project but it would give more information to the Iowa DNR and its citizen bosses on the Environmental Protection Commission. That information might be used to modify plans for locating the facility and providing for manure disposal.

This small step would give neighbors another way to influence a change in their neighborhood.

Posted by David Osterberg, Executive Director

Help for 1.1 Million Iowans

Sorting out items in the American Recovery and Reinvestment Act — the economic recovery package signed by President Obama — one promises help to over 1.1 million Iowans.

The Making Work Pay Credit is a tax credit of up to $400 per worker. It is available to all workers earning up to $95,000 and married couples earning up to $190,000. There are other elements to it; the credit:

  • • phases in at the same rate as Social Security taxes
  • • is reduced by the amount (if any) of the family’s Economic Recovery Payment, a one-time payment of $250 for recipients of Social Security, SSI, and certain other benefits.
  • • doesn’t apply to workers claimed as dependents by other taxpayers.

According to the Brookings/Urban Tax Policy Center, 110.7 million taxpayers nationwide are eligible for the credit. In Iowa, this is estimated to cover 1,113,000 taxpayers.

The Making Work Pay Credit is not the only credit targeting help to working families at lower incomes. Some families — those with children and low or moderate incomes — also will receive help through expansions in the Earned Income Tax Credit and Child Tax Credit.

Source of data: Arloc Sherman, Center on Budget and Policy Priorities, “Tax Aid in Recovery Package Would Reach Large Numbers of Workers in Every State.” Updated Feb. 26, 2009. http://www.cbpp.org/1-21-09tax3.htm

New peek at secret checks

The Iowa Department of Revenue has released its 2006 Tax Credit Claims Report.

According to the report, during tax year 2006, Research Activity Credit (RAC) claims were $30.5 million — with 70 percent of that in so-called “refunds.” Important to note: These “refunds” don’t “refund” anything. Rather, they are what the state pays companies that can’t use all of their tax credits because they don’t owe enough tax.

And, by the way, these payments are state secrets — secret checks to companies that don’t pay corporate income tax in Iowa. We only get to know the overall amount of them, but not who gets what. It would be different if these checks came from direct appropriations, through the regular budget process.

This is an example of spending through the tax code that is costing the state of Iowa many millions of dollars each year. By 2012, the RAC is expected to cost the state over $100 million – part of the growing problem of ballooning tax expenditures that have weakened Iowa’s revenue structure.

The new report from Revenue also notes that the supplemental RAC – separate awards provided by the Department of Economic Development – cost the state $13.4 million in 2006, with most of that ($13.1 million) in “refunds.” Governor Culver has proposed doing away with that spending to save the state $13 million in the FY2010 budget.

See the full Department of Revenue report.

Tighten loose belts on largest waists

It might surprise Iowans to learn that state general fund spending has declined as a share of the economy. That is the reality — even if it’s not the common rhetoric heard from the State Capitol.

But one area of state spending is spinning out of control: spending through the tax code on business development projects. Business tax credits have grown from $144 million in fiscal 2006 to $243 million last year. The Department of Revenue projects this figure to spike to $406 million next fiscal year.

These credits might not be reviewed by the Legislature as it builds its budget. This kind of spending is done through the tax code, not the regular appropriations process. Once enacted, these credits are not subject to annual reauthorization and can grow well beyond what anyone expected, and for activities not intended when they were passed.

Business tax credits in Iowa are on autopilot. We cannot afford this, and the current budget crisis offers a good time to address it.

See the new paper, “Iowa Budget Belt-Tightening: Fosusing on the Largest Waists,” from the Iowa Fiscal Partnership at http://tinyurl.com/d8rkm2.

Federal stimulus impacts on Iowa

Here is a look at some of the impacts of the American Recovery & Reinvestment Act in Iowa:

FMAP (Medicaid percentage increase) FY2009-11 — $550.0 million

State Fiscal Stabilization (Flexible block grant) — $ 86.0 million

Education/ Child Care:

State Fiscal Stabilization fund (education) FY2009-10$386.4 million

Title 1 (supplemental support) — $65.3 million

IDEA (special education state grants)—$120.9 million

Child Care & Development Block Grant FY2009-10 — $18.1 million

Child Support FY2009-10 — $27.2 million

Unemployment Insurance (UI):

UI Benefit Increase ($25/week) — 212,422 recipients

UI Emergency Extension to 12/09 — 27,600 new beneficiaries

Employment Services FY09:

Youth Services — $5.2 million

Dislocated Workers — $6.3 million

Adult Activities — $1.6 million

Making Work Pay Credit — 1,110,000 taxpayers

Food Stamps FY2009-13:

Benefit Increase — $161 million and 279,000 recipients

Administration — $2.7 million

Child Tax Credit (tax year 2009 — lowers threshold to make credit available to families at $3,000 earnings):

Number helped lowering $8,500 threshold — 133,000

Number helped lowering $12,550 threshold — 156,000

Emergency Shelter Grant Pgm FY091 Add’l Funds — $16.8 million and 4,500 households

It’s the revenues, Iowans

Iowa’s declining revenues are at the root of the state’s budget problems, leaving Iowa open to the impact of the recession. In fact, the Iowa Fiscal Partnership released a report today detailing the role of revenue changes in our state’s budget crisis.

Iowa’s general spending grew at the same rate as the economy in the 1990s, but after the 2001 recession, spending never caught up to the levels of the growing economy — even though it has increased slightly over the past three years.

State spending in 2008 was 5.45 percent of the economy, 16 percent lower than it was in the 1990s.

Beth Pearson, an Iowa Policy Project research associate who co-authored the report, said tax reductions between 1996 and 2004 have contributed to Iowa’s budget crisis. These breaks cost the state an estimated $650 million in forgone revenue in 2004 alone.

Iowa policy makers need to keep a long-term focus, and to consider all spending, including spending through the tax code.

For more information on the report, visit our website at: www.IowaPolicyProject.org, or find the report here. For timely updates, follow our IaPolicyProject Twitter account.