Cliff ahead: Learn from Kansas

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts, senators are moving a tax-cut bill forward without even an analysis of its impact.

The Iowa Senate is poised to move a massive tax cut bill out of committee today, in the belief that somehow what was a disaster in Kansas will be a big success in Iowa.

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts over the past two years, and the prospect of a tight budget for next year, Senate Republicans propose to cut $1 billion a year from the state budget. They are moving the bill forward without even an analysis of its impact.

Proponents claim this will make Iowa more competitive and boost the economy. There are two problems with this claim. First, two major accounting firms that rank states on their level of business taxation continue to put Iowa right in the middle of the pack, or even better. We are already competitive. Ernst & Young (below) ranks Iowa 29th, while Anderson Economic Group’s measure ranks Iowa 28th — in both cases, showing little difference across a broad middle range of the scale.

Second, there is good reason to expect the bill to have negative effects on the economy, not positive. When Kansas enacted major cuts to state income taxes in 2012 and 2013, the Governor and his friends at ALEC (the American Legislative Exchange Council) lauded this experiment — which five years later has proven to be a dramatic failure.

Abundant evidence shows the tax cuts failed to boost the Kansas economy. In the years since the tax cuts took effect Kansas has lagged most other states in the region and the country as a whole in terms of job growth, GDP growth, and new business formation.

When confronted with the Kansas failure, the bill’s proponents respond that the only problem in Kansas was that they failed to cut services sufficiently to balance their budget. But here’s the problem: Their constituents were up in arms over the cuts they did enact; they would not have stood for anything more drastic.

In order to bring the budget somewhat back in balance, Kansas borrowed from the future, using up reserves, postponing infrastructure projects, and missing contributions to the pension fund. Schools closed weeks early when state funding ran out. Had they cut spending further, that would have put a bigger dent in the economy, as recipients of government contracts were forced to retrench and workers laid off spent less in the local economy.

A supermajority of the Kansas Legislature voted to end the experiment last year, recognizing it as a failure and responding to the demands of Kansas citizens to restore funding to education, highways, and other state services they rely on. That decision no doubt saved the state economy from performing even worse in the years to come.

The Senate bill would harm Iowa in much the same way. Education accounts for over half of the state budget. Tax cuts of this magnitude would have very serious consequences for our public schools, and would force tuition up drastically at community colleges and regents institutions. Our court system would be forced into further personnel cuts, meaning long delays for those seeking justice. We would see more children suffer as family service workers face ever higher caseloads.

Proponents claim the Senate plan is “bold.” So is jumping off a cliff.

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

 

Related from Peter Fisher:

The Lessons of Kansas

The Problem with Tax Cutting as Economic Policy

Curtains for tax reform

If there’s anything we need less of this legislative session, it is back-room dealing where major changes in public policy are hatched.

If there’s anything we need less of this legislative session, it is back-room dealing where major changes in public policy are hatched, then rammed through the Legislature without sufficient public vetting.

Senate Majority Leader Bill Dix is quoted in media that a tax plan is coming in the next two weeks. It’s staying under wraps until then — a terrible disservice to the responsible setting of public policy. Senator Dix should pull back the curtains, right now.

But, since the senator is not going to let the rest of us in on his big secret tax plan, we should all go into this recognizing at least two major points at the start:

(1) Iowa taxes are in the middle of the pack or below average by any responsible measure, something the business lobby and far-right ideologues never want to acknowledge; and

(2) any discussion of tax changes should take a comprehensive approach that should be grounded in widely accepted principles of taxation.

Point 2 is something that is always a problem in Iowa. The typical approach is to target one tax, cut it, and move on to the next one. Meanwhile, the impact on the overall adequacy and fairness of the tax structure (two of the important tax principles), and on the critical public service that the tax system supports, is left to a “let the chips fall” mentality.

Take the curtains away, Senator Dix. It’s the business of all Iowans, right now. A late-session rush job to make a major overhaul of Iowa taxes is not only wrong from a civics-textbook standpoint, but it is bound to create problems that its authors cannot predict.

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

mikeowen@iowapolicyproject.org

Don’t compound Iowa tax inequity

The big winners would be those with the highest incomes.

060426-capitol-FB377

The first report by a self-proclaimed conservative think tank in Iowa is getting some attention today, and reviving dubious ideas about taxes.

First, we applaud the recognition from Engage Iowa that our state’s various tax rates are not as high as they appear at first blush, because of federal deductibility — which permits tax filers to reduce their state taxable income for federal taxes paid. Ending federal deductibility, which Engage Iowa proposes, is something Iowa should consider. That would allow lowering the top rate to around 7 percent and eliminate the perception problem the group is so concerned about.

Unfortunately, however, this is not a well-thought-out plan to improve fairness and simplicity in Iowa taxes, or to assure adequate revenues for schools and other critical services, which are the best way to promote economic growth.

It compounds the overall regressive nature of Iowa taxes — and does nothing to help low- to moderate-income working families. In fact, for many families it would destroy the most important recent advance — the Earned Income Tax Credit. Some 147,000 recipients making over $10,000 — 70 percent of all EITC recipients — would lose the EITC.

While raising low-income Iowans’ taxes, the plan would buy down income-tax rates for higher-income Iowans with a sales tax increase. This would compound existing inequities in Iowa’s state and local tax system, which taxes the bottom 80 percent of taxpayers at about 10 percent, and the highest earners only 6 percent. The big winners would be those with the highest incomes.

The report’s claims about taxes and migration fly in the face of much published academic research showing that in fact taxes have very little influence on interstate migration. The claims that the flat tax would result in substantial economic gains to the state are highly suspect.

Finally, the group’s argument rests on discredited assumptions about Iowa’s so-called “business climate” and ignores the fact that Iowa already is very — perhaps overly — friendly to business. The plan places a great deal of weight on the Tax Foundation rankings, which have been thoroughly debunked. The author could have consulted more credible rankings of business climate, such as the Anderson Economic Group (which places Iowa 20th best, with below-average business taxes) or Ernst and Young, which has Iowa 28th, with an effective rate equal to the national average.

In short, the plan focuses mostly on a perception about Iowa taxes, a perception that is inaccurate but is cultivated by anti-tax forces, rather than ways to improve the stability and sustainability of funding for the critical public services on which all Iowans depend.

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

 

Iowa Cannot Afford Another Wasteful Business Tax Break

Enacting a subsidy through administrative rules guarantees complete absence of evaluation and accountability

2010-PFw5464Statement by Peter Fisher, Research Director, The Iowa Policy Project, before the Administrative Rules Review Committee

October 13, 2015

The administration’s proposal to create new sales tax exemptions for Iowa businesses is unnecessary, expensive and counterproductive. The state can ill afford another tax break that will harm essential state services while producing little or no economic benefit.

Iowa business taxes are already quite competitive

  • The most recent study of state and local taxes on business as a percent of state GDP by Ernst and Young and the Council on State Taxation shows that Iowa taxes business at 4.7 percent of GDP, exactly the same as the national average. Iowa ranks right in the middle of the pack.
  • A study by Anderson Economic Group in 2015 calculated state and local taxes on business as a percent of pre-tax profits and found Iowa’s effective tax rate to be 8.7 percent, which placed it 32nd among the states, below the national average.

State and local taxes have little effect on business location decisions

  • State and local taxes are less than two percent of total costs for the average corporation. As a result, even large cuts in state taxes are unlikely to have an effect on the investment and location decisions of businesses, which are driven by more significant factors such as labor, transportation, and energy costs, and access to markets and suppliers.

Enacting a subsidy through administrative rules guarantees complete absence of evaluation and accountability

  • While the sales tax break has been promoted as an economic development incentive, creating it by administrative rule eliminates even the minimal level of accountability established by the Legislature for the periodic review of tax credits. There will be no review, no evaluation of its effectiveness, not even an annual accounting of its cost.

Tax breaks erode support for public investments in our future

  • The proliferation of tax incentives and business tax cuts over the past two decades has resulted in several hundred million dollars each year cut from the state budget. This has undermined the state’s ability to support quality education, from pre-school through public colleges and universities, which in the long run will have serious consequences for state economic growth and prosperity.