Tax credits: Just review them!

Iowa lawmakers are making the issue of tax credit reform much more difficult than it needs to be.

Put another way, consider tax credit reform as a different task: If we were setting out to design the first wheel, no cars would be on the road today.

The latest foot-dragging came in late October, with the first meeting of a so-called “Tax Credit Review Committee,” which if not for the delay was a rare, promising nugget in an ill-conceived, expensive and inequitable income-tax cut bill in 2018.

It was 10 years ago this fall that a scandal in the Iowa Film Tax Credit program led Governor Chet Culver to order a review of all state tax credits. A special panel of state department heads went through the credits and offered a set of reforms in January 2010.

Virtually nothing was done in response. Tax credits, particularly those for business, have gone merrily along, rising to a projected $434 million for this budget year. Of that, about 7 out of every 10 dollars, or $314 million, is for businesses. State revenue analysts expect under current law for these numbers to be similar through FY2024.

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While the tax credits themselves can be complicated, the fundamental issues are not.

  • Tax credits are expensive.
  • Tax credits are regularly and extensively analyzed by the Department of Revenue, making plenty of information available.
  • Tax credits, like any spending of public money — and this is, in fact, spending ordered outside the budget process — demand accountability and a demonstration of a public benefit.
  • The Legislature creates these exceptions to our tax code; thus, it falls to the Legislature to review them to determine if they meet their expected purpose.
  • Even if a given credit may benefit the public, it must be shown to be a better public expenditure than something else, like education or health care services.

As it is, the 2020 legislative session will open without anything serious being done about a review ordered two years before.

Truly it is easier not to do anything, to keep the gravy train running for the corporate lobbyists who benefit from these credits. But if you’re going to talk the talk about accountability in public spending, you should walk the walk.

The low-hanging fruit that could start lawmakers on that path is the Research Activities Credit, or RAC. The RAC is a refundable credit, which means that if you have more credits than you owe in taxes, you get a check from the state for the balance. The annual cost of the RAC is about one-fifth of the cost of all business and family tax credits.

As we have shown repeatedly — using data from an annual state report by the Department of Revenue — most of the RAC is paid as so-called “refunds,” not of taxes owed, but of tax credits not needed, and most of the benefit goes to very large firms.

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DOR evaluations — here and here as examples — provide evidence that is at best sketchy on whether the RAC promotes significant new research in the state. Companies that benefit from the RAC have to do the research anyway, just to be in business, or they wouldn’t bother with it.

In the case of a small startup firm, a credit for some period of time might help the firm get established. For multinational corporations with hundreds of millions or billions in profit, good luck proving the need.

Think of it this way: You could reduce or even eliminate the refundability of the RAC and not raise taxes on a single company or individual. But you’d have $40 million more available to put into public schools, or clean water projects, or any number of public priorities.

Incoming House Speaker Pat Grassley said tax credit reform “is kind of a long process.” But if one never starts, one will never design that wheel.

These are budget choices, ultimately. Why are legislators so afraid to even start on them?

MMike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

Business tax rankings: Misinformation continues

Tax Foundation misrepresents Iowa once again.

The Tax Foundation is at it again. The corporate-funded think tank released their latest bogus measure of state tax competitiveness, the 2019 State Business Tax Climate Index (SBTCI), on October 22nd.  The major features of the SBTCI remain unchanged from earlier editions. The fundamental criticisms of their methodology remain as salient as ever.

The State Business Tax Climate Index purports to measure a state’s “tax competitiveness” but the index bears very little relationship to what businesses actually pay in taxes in one state versus another. Of the 10 supposedly “worst” states in terms of business taxation according to the latest Tax Foundation ranking, 6 (including Iowa) actually ranked among the 21 states with the lowest business taxes, including two among the lowest 10, according to of the Council on State Taxation.

The Tax Foundation ranking (they put Iowa as the 9th worst state) differs dramatically from more defensible analyses that simply measure the average effective corporate income tax rate. The Council on State Taxation produces periodic estimates of all business taxes as a share of private sector Gross State Product and has consistently found Iowa to be among a sizable group of states right in the middle. In fact, their latest report shows that only 17 states have a lower effective business tax rate than Iowa, while 30 states have a higher rate.

The SBTCI is a combination of 124 components of state tax systems, giving substantial emphasis to some components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes (single-factor apportionment and deduction of federal corporate income taxes). 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. These two features help explain why the Tax Foundation ranks us poorly while others show us with average, or lower than average, taxes on business.

There are a few changes in the 2020 version of the index. The Tax Foundation now penalizes states for attempting to rein in corporate tax avoidance in two ways. First, they penalize a state’s score if they conform to the Global Intangible Low Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, which are intended to reduce the incentive to shift corporate assets abroad. State conformity would in fact help states avoid some of the corporate tax avoidance that has been eroding state revenues, due to the ability of corporations to shift profits overseas. But restoring revenues in this way is a bad thing, according to the TF. The second new feature is a penalty for states that conform to the net interest limitation in TCJA. This provision limits the ability of corporations to deduct interest expense, but apparently the TF thinks the deduction should be unlimited.

Iowa has chosen to conform to both of those provisions, for which the state’s taxpayers should be thankful. That the Tax Foundation has penalized Iowa in the rankings for trying to close corporate loopholes is just another reason to ignore their rankings.

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

Full-time work not enough

Iowans are faced with limited economic opportunity despite their hard work.

Many Iowa families are unable to afford groceries, car maintenance or prescription refills, even though there is at least one full-time worker in the household. This presents a double bind, where Iowans are faced with limited economic opportunity despite their hard work.

The Iowa Policy Project’s 2019 Cost of Living report delves into these issues, finding work does not provide 1 in 5 Iowa working households enough to meet basic needs.

IPP constructs basic needs budgets that reflect a frugal standard of living — including food, health care, child care, household expenses, and transportation, then uses Census data to calculate the number of working households that make less than a wage that meets these basic requirements. These budgets leave no room for Netflix, student loan debt, vacations or eating at restaurants.

A majority of single-parent working households are unable to meet basic needs in Iowa. Our analysis shows that a wage of at nearly $20 per hour is needed just to afford basic expenses for single-parent families. This is consistent with research showing higher poverty rates among single-parent households, due to single incomes, child care expenses, generally lower educational attainment and low wages.

Evidence-based policymaking can address the reality that many working Iowans do not make enough to afford basic expenses. Policies that increase the minimum wage and adjust it to the cost of living, provide paid family leave, and boost Child Care Assistance will serve to ensure Iowans are able to just get by and hopefully get ahead.

Natalie Veldhouse is a research associate at the nonpartisan Iowa Policy Project. nveldhouse@iowapolicyproject.org

Science change and climate change

Science is ever changing. It is now possible to show that some of the increase in rainfall from storms and consequent flooding has a human fingerprint.

Science is getting better, and that is bad news for climate change deniers.

Only two years ago when I last taught a climate change course at the University of Iowa, I informed students that claiming any extreme weather event came from changes in the climate was too uncertain.

Now, that view needs revising. After working with Dr. James Boulter, professor of Chemistry in the Watershed Institute for Collaborative Environmental Studies at the University of Wisconsin–Eau Claire, I have learned more.

The Iowa Policy Project worked with the Environmental Defense Fund to have Professor Boulter produce a report on climate change and flooding in Iowa. Working on this paper, I read material from the last three years that that brought me up to date on science’s ability to attribute extreme weather events to greenhouse gas effects on the climate.

Here is one source for my new understanding of what is known as “event attribution.” It is a statement from a report of the state of science relating to climate change and its physical impacts, in the Fourth National Climate Assessment (NCA4), by the U.S. Global Change Research Program (USGCRP).[1]

“…(T)he science of event attribution is rapidly advancing, including the understanding of the mechanisms that produce extreme events and the rapid progress in development of methods used for event attribution.”

Attribution has also been a subject addressed in a recent report of the National Academies of Sciences, Engineering and Medicine.[2]

Science is ever changing. It is now possible to show that some of the increase in rainfall from storms and consequent flooding has a human fingerprint. We should not deny that, even as fossil-fuel supporters recklessly deny the existence of climate change or that we can already see its effects.

As Professor Boulter stated in his conclusion to the IPP report, “Now, as national politics begin to inundate Iowa’s media landscape — much as the floodwaters overran the physical landscape — it is crucial that science-informed discussions of policy responses to climate change be prominent in our personal conversations, candidates’ political statements and debates, and our community discussions across all forms of media.”

 

[1] Fourth National Climate Assessment (NCA4), by the U.S. Global Change Research Program (USGCRP). https://science2017.globalchange.gov/chapter/3/

[2] National Academies of Sciences, Engineering and Medicine: “Attribution of Extreme Weather Events in the Context of Climate Change,” 2016. https://www.nap.edu/read/21852/chapter/1#x

David Osterberg is founder and former executive director of the nonpartisan Iowa Policy Project and is IPP’s lead researcher on the environment and energy issues. He is professor emeritus of occupational and environmental health at the University of Iowa.

dosterberg@iowapolicyproject.org

Illusory and elusive economic strength

The hard work of Iowans ought to be celebrated through public policy that raises wages to meet worker productivity and the cost of living, protects workers on the job, and ensures dignified retirement.

This Labor Day we celebrate the successes of the labor movement and workers across Iowa. In that spirit, let’s look at how our economy is doing a decade after the Great Recession. Why doesn’t this feel like an economic recovery? And, isn’t it a bit late to call this a recovery?

Wages

In terms of wage growth, only high-wage earners (making $41.53 hourly) have seen meaningful wage growth over the past 10 years. We see disparities in Midwest median wages by gender and race: Women make $4 less per hour than male peers, and Latino and African American workers make $5 less per hour than their white peers. As we will demonstrate in an upcoming report, these disparities are driven by structural factors like discrimination before and after hiring and the loss of unionized manufacturing jobs.

 

Jobs

Job growth in Iowa has been slow this year compared to monthly averages from 2011 to 2014. A low unemployment rate shrouds the reality that many Iowans have low-paying jobs without benefits, with some cobbling together multiple part-time jobs. We are almost 40,000 jobs short (graph below) of what is needed for a full recovery from the last recession when considering population growth.

Family Security

Many working Iowa households are unable to meet basic needs despite having one or more full-time worker in the house. For example, IPP’s Cost of Living in Iowa analysis shows 6 in 10 single-parent working households are unable to make ends meet on their earnings alone. When companies aren’t paying enough, these households need public assistance (work supports) for food, housing and other necessary items.

Taxes

Iowa’s tax system is upside down with low-income Iowans paying a larger share of their income in state and local taxes than the richest Iowans. Large corporations can reduce their state corporate income tax to zero and even receive a refund through Iowa’s Research Activities Credit. That results in so-called “refunds” — checks to companies that had more tax credits than they needed to pay their taxes — totaling $42 million in 2018 and $44 million in 2017. Those “refunds” to companies not paying Iowa corporate income taxes cost about the same as a 1 percent increase in State Supplemental Aid to public schools.

Public Investments

Iowa state and local spending as a share of personal income has remained virtually unchanged over the past 12 years, contrary to standard political rhetoric at the Capitol. State K-12 funding has not kept up with costs of educating children. Public spending on private schools continues to rise. The Iowa private scholarship subsidy cap doubled in nine years.

The hard work of Iowans ought to be celebrated through public policy that raises wages along with worker productivity. This would allow wages to keep up with the cost of living. Better public policy would protect workers on the job, and ensure a dignified retirement.

Natalie Veldhouse is a research associate for the nonpartisan Iowa Policy Project.

nveldhouse@iowapolicyproject.org

Transparency: Corporations see; we don’t

The transparency on tax breaks that we get in Iowa is merely a tease for the taxpayer, and for the folks who lobby the Legislature each year for their causes.

It’s not enough to really let Iowans compare the choices being made on the spending of public dollars.

Advocates for public-focused priorities push lawmakers to apply an adequate share of the state budget to real responsibilities: to educate children and young adults, care for those without the means to do so on their own, and to keep their natural environment clean and their streets safe.

They have to make a case, that a public investment is not only needed, but a responsible use of funds that benefits the greater good in Iowa.

Some in the lobby can afford to advocate differently. In the “We Got Ours” huddles of big-business advocates in the lobby, the high stakes business of protecting their special breaks, and expanding them, is often only evident in the results.

A Cedar Rapids Gazette story shows we can expect more of this for an expensive and unaccountable program long on the books, the Research Activities Credit, or RAC. The RAC, unlike most tax credits, often does not affect taxes at all, but is a straight and automatic subsidy provided to huge companies that pay little — and often nothing — in Iowa corporate income taxes. (Remember that next time you hear their  complaints about Iowa’s corporate tax rates.)

Much of the story offered weak defenses of this program by the state’s economic development director, Debi Durham, and a spokesperson for the biggest recipient of these subsidies. Neither of those two people offered a shred of evidence of a public return on the $60-plus million annual cost.

You see, we know the cost, because there is an annual report that lawmakers required for this program. (The lobby fought that requirement hard when it passed in 2009.) But what the report cannot show is how much of the subsidized research would have happened anyway.

RAC table ... large claims
The Research Activities Credit was set up to help small, entrepreneurial businesses get going. Instead, as official state reports have shown, very large companies with RAC claims above $500,000 account for between 80 and 90 percent of the cost every year.

In a deliberative budget process, everything is on the table — funds available, a clear and understandable process to apportion them, and the public benefit evident. But when $300 million in business credits are on autopilot, a large chunk of those funds is taken off the table before the rest of us even get to sit down.

Peter Fisher, IPP’s research director, notes in The Gazette story that the system gives all the advantages to the corporations.

“The corporations hold all the cards, which is why I think states and localities routinely spend way more than they need to,” Fisher told The Gazette. “It’s like playing poker where the other players know your hand but you don’t know theirs.”

To learn more about the RAC, see this Iowa Fiscal Partnership piece.

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Mike Owen is executive director of the nonpartisan Iowa Policy Project and director of the Iowa Fiscal Partnership.

mikeowen@iowapoicyproject.org

Nothing complicated about threatening food

Eliminating BBCE might sound confusing, from the alphabet soup of terms for public programs. But it’s not. It means taking away food from Iowans’ tables.

The Trump Administration aims to threaten important public supports for people who have trouble making ends meet.

The latest challenge is to Food Stamps (formally known as SNAP, the Supplemental Nutrition Assistance Program). The administration would eliminate something called broad-based categorical eligibility (BBCE). It’s not just more alphabet soup, but an effective tool that states can use to set less restrictive asset tests and streamline administration, which curbs costs.[1]

Forty states participate in BBCE, including Iowa, allowing them to set income limits and ensure something like owning a car doesn’t count against SNAP benefits. The Administration seeks to eliminate BBCE on its own, without legislative approval.[2] This would kick 3 million individuals off of SNAP nationwide, including working families, children, people with disabilities, and seniors.

SNAP is a proven work support program for Iowans. It reached nearly 320,000 Iowans in June of 2019, helping working families and those unable to work put food on the table.[3] The program works to improve child development, educational attainment, helps to prevent disease and increase lifetime earnings of Iowans.[4] It helps keep rural grocery stores open, and pumps $35 million into the state economy each month.[5]

These wonky rule changes take food off Iowa tables. The Administration seems to want to keep these changes below the radar. While some might not notice a purely administrative action, the impact of removing BBCE from SNAP — changing the alphabet soup — means real harm for families.

Natalie Veldhouse is a research associate at the nonpartisan Iowa Policy Project. 

nveldhouse@iowapolicyproject.org

[1] Dottie Rosen, “SNAP’s ‘Broad-Based Categorical Eligibility’ Supports Working Families and Those Saving for the Future.” Center on Budget and Policy Priorities. July 2019. https://www.cbpp.org/research/food-assistance/snaps-broad-based-categorical-eligibility-supports-working-families-and
[2] Federal Register, “Revision of Categorical Eligibility in the Supplemental Nutrition Assistance Program,” July 24, 2019, Vol. 84, No. 142, 35570-35581, https://www.federalregister.gov/documents/2019/07/24/2019-15670/revision-of-categorical-eligibility-in-the-supplemental-nutrition-assistance-program-snap.

[3] Iowa Department of Human Services, “F-1 Food Assistance Program State Summary – June 2019.” July 2019. http://publications.iowa.gov/30484/1/FA-F1-2016%202019-06.pdf

[4] Feeding America, “Child Food Insecurity: The Economic Impact on our Nation.” 2009. https://www.nokidhungry.org/sites/default/files/child-economy-study.pdf

[5] Iowa Department of Human Services, “F-1 Food Assistance Program State Summary – June 2019.” July 2019. http://publications.iowa.gov/30484/1/FA-F1-2016%202019-06.pdf