KanOwaSin: Low-road neighbors, together?

Think carefully about snake-oil pitches to follow the lead of Kansas and Wisconsin, putting Iowa on a fast track to the bottom.

Here we sit in Iowa, nestled between two political petri dishes where experiments have gone wrong, and wondering if our elected leaders may let the mad scientists loose on us as well.

Some politicians would like to turn Iowa into another Kansas, another Wisconsin, where tax-cut zealotry already has driven down economic opportunity.

Welcome to KanOwaSin. In the anti-tax ideologues’ world, we’d all look the same. Why not ​share a name?


​Before someone squeezes another drop of anti-tax, anti-worker snake oil on us, let’s get out the microscope.Our friends in Wisconsin tell us: Don’t become Wisconsin. Our friends in Kansas tell us: Don’t become Kansas — and Kansans already are turning off the low road.A couple of researchers in Oklahoma are telling us: Listen to those folks. From the abstract of their working report:

“The recent fiscal austerity experiments undertaken in the states of Kansas and Wisconsin have generated considerable policy interest. … The overall conclusion from the paper is that the fiscal experiments did not spur growth, and if anything, harmed state economic performance.”

 

Their findings are among the latest exposing the folly of tax-cut magic, particularly with regard to Kansas, which IPP’s Peter Fisher has highlighted in his GradingStates.org analysis that ferrets out the faulty notions in ideological and politically oriented policies that tear down our public services and economic opportunity.

Iowa has long been ripe for tax reform, due to a long list of exemptions, credits and special-interest carve-outs in the income tax, sales tax and property tax. These stand in the way of having sufficient resources for our schools, public safety and environmental protection.

Each new break is used to sell Iowans on the idea that we can attract families and businesses by cutting  — something we’ve tried for years without success, as Iowa’s tortoise-like population growth has lagged the nation.

On balance, this arrangement favors the wealthy over the poor. The bottom 80 percent pay about 10 percent of their income in state and local taxes that are governed by state law. The top 1 percent pay only about 6 percent. Almost every tax proposal in the last two decades has compounded the inequities.

For the coming 2018 legislative session, and for the election campaigns later that year, we are being promised a focus on income tax. Keep in mind, anything that flattens the income tax — the only tax we have that expects a greater share of income from the rich than the poor — steepens the overall inequity of our regressive system.

Thus, as always, the devil is in the details of the notion of “reform.” If “reform” in 2017 and beyond means more breaks for the wealthy, and inadequate revenue for traditional, clearly recognized public responsibilities such as education and public health and safety, then it is not worthy of the name.

So, when you hear about the very real failures of the Kansas and Wisconsin experiments, stop and think about what you see on your own streets, and your own schools. Think about the snake oil pitches to follow their lead, and whether you want Iowa on a fast track to the bottom.

That is the promise of Kansas and Wisconsin for Iowa.

Or, if you prefer, KanOwaSin.

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Dan S. Rickman and Hongbo Wang, Oklahoma State University, “Tales of Two U.S. States: Regional Fiscal Austerity and Economic Performance.” March 19, 2017. https://mpra.ub.uni-muenchen.de/79615/1/MPRA_paper_79615.pdf
Posted by Mike Owen, Executive Director of the Iowa Policy Project
mikeowen@iowapolicyproject.org

Big ‘Oops’ for tax-cutters in school vetoes

Letting out-of-state millionaires choose to reduce their income tax is, at the very least, unsustainable.

Governor Branstad’s vetoes of “one-time” funding pose “ongoing” and “recurring” problems for a major and ill-advised proposal by his allies to restructure personal income taxes in Iowa.

And they should.

During the last session, while lawmakers and the Governor were telling schools the state could not afford more than a 1.25 percent increase in per-pupil school aid, a group in the House was pushing a plan to let individuals choose a “flat” income tax rate option. In other words, figure your taxes under the current rate structure, then compare it to the flat rate, and choose which one costs you less.

It benefits primarily the wealthy, and it costs big money. There is no upside.

We have seen such a proposal in the past, and we are virtually guaranteed to see it again in some form in 2016. Not only does it compound fairness issues in Iowa’s tax structure, but it loses hundreds of millions of dollars in revenue, year after year, that Iowa legislators and the Governor have been telling us we cannot afford to lose.

Its supporters cannot avoid that contradiction, given their obsession this year about not letting a surplus — and a sustained one at that — be used for “ongoing” or “recurring” expenses on grounds they were not “sustainable.” Those are the grounds for the Governor’s vetoes of one-time funds for local schools, community colleges and state universities.

For good analysis of the 2015 alternative flat-tax proposal, which was not presented on the House floor as some of these messaging contradictions quickly became clear, see this Iowa Fiscal Partnership backgrounder by Peter Fisher. As Fisher noted, the projected revenue loss was projected at nearly half a billion dollars — $482 million — for the new fiscal year and around $400 million for each of the next three.

In short, the flat-tax idea is not “sustainable.” No need to discuss in the 2016 session.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project

Keeping Ahead of the Kansans

Businesses need an educated workforce, and drastic cuts to education are likely to make it difficult to attract new workers, who care about their children’s schools at least as much as they care about taxes.

As state legislators consider drastic cuts in Iowa’s income tax, they would do well to consider the experience of our neighbor Kansas, which enacted a huge income tax cut in 2012, and cut taxes again in 2013. These cuts have dramatically reduced state funding for schools, health care, and other services.

It is instructive to consider as well the experience in Wisconsin, where a large personal income tax cut took effect at the start of 2013, with similar results: subsequent job growth of 3.4 percent, farther below the norm than Kansas’ 3.5 percent from the implementation of its tax cuts.

None of this should come as a surprise. Most major academic research studies have concluded that individual income tax cuts do not boost state economic growth; in fact, states that cut income taxes the most in the 1990s or in the early 2000s had slower growth in jobs and income than other states.

Businesses need an educated workforce, and drastic cuts to education are likely to make it difficult to attract new workers, who care about their children’s schools at least as much as they care about taxes.

2010-PFw5464Posted by Peter Fisher, Research Director, Iowa Policy Project

See Fisher’s Iowa Fiscal Partnership Policy Snapshot on this issue.

 

Basic RGB

Flat tax plan legalizes cheating on Iowa taxes

You could argue that if the Legislature makes it legal, it can’t be called cheating. But it sure smells like it.

Peter Fisher
Peter Fisher

The Iowa House of Representatives will soon take up a bill that would legalize cheating on your Iowa income taxes. While that isn’t the intent, it will certainly be the effect, at least for anyone who has an accountant or who can figure out how to do it on their own.

Officially, the bill is HF3, which would create an alternative flat tax of 4.5 percent. The taxpayer could choose between the current system and the flat rate. If you choose the flat rate, you get a standard deduction but cannot deduct federal income taxes, itemize deductions, or take any credits. But if you currently pay a higher rate than 4.5 percent, and don’t have a lot of deductions or federal income taxes, you might come out ahead picking the alternative flat rate.

To see how this opens the door to massive tax avoidance, you need to understand one important feature of Iowa’s income tax: federal deductibility.

Let’s say you earn $75,000 in Iowa adjusted gross income (AGI) for 2013 and you had $5,000 in federal income taxes deducted from your paycheck during the year. You can deduct the $5,000 from your AGI, leaving you with that much less income to pay tax on. But if you also got a refund check from the federal government in 2013 (because you had too much withheld during 2012, and deducted too much federal tax on your 2012 Iowa return), you have to add that back to your taxable income. This ensures that, over the years, you always end up deducting exactly what you actually paid in federal taxes.

HF3 changes the rules — and here’s how any taxpayer could game the system under HF3. Let’s call it, “Follow the 20,000.”

•  First stop, your W-4. During 2013 you file a W-4 to have five times as much federal income taxes withheld from your paycheck as you really need to. (Or, if you are self-employed, pay quarterly estimated taxes five times what is required.) So when you go to file your 2013 Iowa tax in April 2014, you can deduct $25,000 from your income instead of $5,000. This lowers your Iowa tax bill considerably. If you were in the top 8.98 percent bracket, the extra $20,000 deduction would save you $1,796 on your state income tax. So you choose to file under the current system instead of using the flat rate.

•  Why that’s a bad idea now. Under the current system, your strategy would bite you in the back the next year, because now the $20,000 excess withheld in 2013 comes back as a refund check in 2014. The $20,000 refund check from the feds in 2014 would have to be added back to your 2014 income. You have to pay state tax on it.

•  Flat tax changes the game. If you can take the alternative flat tax for 2014, you will see a huge break. While you would not be able to deduct federal taxes withheld during 2014 under that scheme, you don’t have to add back the $20,000 refund check either.

So for 2014, you pick the flat tax alternative, and pay 4.5 percent on “all” your income — but in the state’s eyes, it’s like that $20,000 never existed.

•  An endless payoff. By doing this, you magically avoid ever paying Iowa income taxes on that $20,000. You didn’t pay tax on it the year it was withheld, because that year you filed the old way and took federal deductibility. And you didn’t pay tax on it the next year, either, because that year you chose the flat tax alternative and didn’t have to add in the $20,000 refund check.

You could argue that if the Legislature makes it legal, it can’t be called cheating. But it sure smells like it. That’s a “tax avoidance” strategy useful only to those in the higher tax brackets.

And that strategy can be avoided if HF3 gets no further in the Iowa House.

Posted by Peter Fisher, Research Director

Everyone pays taxes

The federal income tax collects the most when you are in your prime earning years and can most afford it, and leaves you with all or most of your money when you are struggling and really need it. … That’s the way it ought to be.

Peter Fisher
Peter Fisher

Let’s get one thing straight. Everyone pays taxes.

Even the lowest-income one-fifth of Americans pay about 16 percent of their income in taxes; they pay gas taxes if they drive, part of their rent goes to pay property taxes, they pay sales taxes when they go to the store, some pay state income taxes.[1] There is no such thing as a class of people who pay no taxes.

Some would like to focus the debate just on the federal income tax, and have succeeded in creating the impression that there is a large, permanent class of people who never pay federal income taxes. But they ignore the fact that most of those paying no income taxes this year will pay plenty of taxes later in life, or already paid a substantial share. They may be paying no taxes this year because they are young, starting out in a low-paying job, have young kids, and therefore need every penny they earn to pay for child care and to get by until they move up the career ladder.

Or perhaps they are old, living mostly on Social Security, and are done paying taxes, which they did for most of their working lives. Many pay no income taxes because they are out of work through no fault of their own, or because they are sick or disabled and unable to work.

All this is not mere speculation. Of those who will pay no income tax this year, half owe no tax because subsistence level income is untaxed and because of deductions for dependents. Of the remainder, nearly three-fourths pay no tax because they are seniors, or because of tax credits for children and the working poor.[2]

Imagine that when you first left home and faced a lifetime of supporting yourself and perhaps a family, you could choose what kind of tax system you would be under for the rest of your life. For most people, thinking about life’s uncertainties and risks, something like our federal income tax would be the logical choice. Why? It is based on the principle of ability to pay. The federal income tax collects the most when you are in your prime earning years and can most afford it, and leaves you with all or most of your money when you are struggling and really need it. And it is small business friendly as well. If you are just starting your own business, or the recession wipes out this year’s profits, you owe little or no tax, but if the business does well, you will pay your share.

That’s the way it ought to be. And if the result is that this year, when so many people are facing economic hardship, nearly half pay no federal income tax, remember who those people are. All of them are paying state and local taxes to support our schools and fire departments and roads. And they will have their time to contribute to federal income taxes as well, as many already have.

By Peter S. Fisher, Research Director


[1] Citizens for Tax Justice, America’s Tax System Is Not as Progressive as You Think, April 15, 2011. http://ctj.org/ctjreports/2011/04/americas_tax_system_is_not_as_progressive_as_you_think.php

[2] Rachel Johnson et al, Why Some Tax Units Pay No Income Tax, the Urban-Brookings Tax Policy Center, July, 2011. http://www.taxpolicycenter.org/UploadedPDF/1001547-Why-No-Income-Tax.pdf

Common sense, stability in tax reform

Statement of Beth Pearson, Iowa Policy Project
Public Hearing on Income-Tax Reform • Iowa House Chamber • March 31, 2009

Beth Pearson
Beth Pearson

Thank you, and good evening. In my capacity as a researcher at the Iowa Policy Project, I evaluate potential budget and tax policies according to whether they make our overall fiscal system more sound and help support our shared public priorities.

In general, good changes to our tax system are ones that make it fairer, more competitive, more stable and secure, and easier to understand. We want a system that provides sufficient revenue to fund essential public services, but we want it to generate that revenue in a way that respects a taxpayer’s ability to pay a tax and doesn’t distort an individual’s private economic decisions.

The income tax reform proposal now before you goes a long way in moving Iowa’s overall tax system — comprised of income, sales, and property taxes — in the direction of these basic principles. Let me talk about just two of those principles: competitiveness and fairness.

First, competitiveness. When profits dip for a small business owner during a recession, their income tax bill goes down automatically. Even those small business owners lucky enough to have steady profits in these tough economic times will likely see a tax decrease as a result of this proposal. The Tax Policy Center, a project of the Urban Institute and the Brookings Institution, found that, nationwide, seventy percent of taxpayers with small business income earned less than $100,000 in 2009. Assuming the same distribution holds true for Iowa, that would mean that more than 70 percent of taxpayers with small business income in Iowa would see an average tax decrease under this proposal. I think that makes it a more competitive system.

Second, fairness. There’s no question that there are particular types of households who benefit the most under this package: low-income working families with children. In addition to seeing lower income tax rates, these families also stand to benefit from expansions in the Earned Income Tax Credit, which helps make work pay by targeting tax assistance to income earners with children, as well as expansions in the child and dependent care credit. So, yes, this package does offer a disproportionate share of its benefits to low-income families who are sending their kids to child care every day so that they can hold down a job in a tough economy. I think that makes it a fairer system.

Most tax changes made during the past 20 years in Iowa haven’t held up when scrutinized according to good budget and tax principles. But this proposal offers us an opportunity to take a step in the direction of common sense and fiscal stability, and I urge the Legislature to pass and the governor to sign this bill.

See the Iowa Fiscal Partnership analysis (3-page PDF) of the legislation, Iowa Income Tax Reform: An Emphasis Upon Sound Principles.