Sales-tax break didn’t add jobs

Whatever can be said about the expensive new sales-tax break for business, creating jobs in manufacturing is not one of them.

Pushes for lower taxes on business routinely come with promises for more jobs. On that score, the more-costly-than-expected manufacturing sales-tax break has not produced for Iowans.

Since the start of the current fiscal year, when the new law took effect, Iowa manufacturing jobs are even lower than where they started. Clearly the new break did not cause the drop — a decline in manufacturing jobs started over two years ago after some recovery from the 2007-09 Great Recession. Iowa lost more than 30,000 manufacturing jobs from the peak in those years and never fully recovered. Manufacturing jobs dipped below 211,000 in April for the third time in six months, to nearly their lowest level in five years.

Thus, whatever can be said about the expensive new sales-tax break for business, creating jobs in manufacturing is not one of them.

It does appear the break is more costly than had been expected. An April memo from the Legislative Services Agency (LSA) has received significant attention in recent days, as sales-tax revenues are on pace to be down about $100 million from what was expected for the fiscal year ending June 30. The cost of the sales-tax break for an expanded list of items used in manufacturing had been projected at $21.3 million for the state.

The LSA analysis suggests that at least part of the unexpected revenue loss might be due to underestimated costs of that special sales-tax break.

It is true that the manufacturing sales-tax break was promoted on larger grounds than just job growth. In a break from its usual promotion of a hodgepodge of inequitable breaks creating a severely unbalanced playing field, the business lobby had promoted this as a fairness issue for businesses. That political strategy worked.

But increasing jobs was the steady drumbeat from Governor Branstad for his economic policies throughout the six years of his return to office in 2011, so it is reasonable to look for any job impacts.

In this case, none are immediately apparent. What we can see is that without the change, and with more careful budget projections, new Governor Kim Reynolds quite likely would not be facing the added revenue challenges she has before her.

owen-2013-57Posted by IPP Executive Director Mike Owen

mikeowen@iowapolicyproject.org

To fund water solutions, why not the obvious? Tax pollutants

Why not the obvious solution? Tax the chemicals that pollute Iowa waters.

Note: A version of this piece ran as a guest opinion in the Sunday, March 6, 2016, Cedar Rapids Gazette.

———

One answer to the issue of funding water-quality solutions is right in front of us: Tax the pollutants.

The pollutants are Nitrogen (N) and Phosphorus (P). This is well established by the Iowa Nutrient Reduction Strategy (NRS) that Governor Terry Branstad and the farm industry support. The NRS blames N and P for the pollution that harms Iowa waters and causes the hypoxic or dead zone at the bottom of the Mississippi River.

More than 90 percent of N and two-thirds of the P come from non-point sources, almost all agriculture, according to Iowa State University.

And there is a lot of it. The U.S. Department of Agriculture’s latest Census of Agriculture, for 2012, shows about $2.6 billion was spent on “commercial fertilizer, lime and soil conditioners” in that year in Iowa.

Yet, while debate proceeds on how to deal with the pollution caused by those chemicals, it is worth noting that normal Iowa sales tax does not apply to the N or P used in agriculture.

I stopped by my local hardware store to ask if I, a non-farmer, would pay tax on the standard Scotts 10-10-10 garden fertilizer they sell. I would. But farmers do not pay sales tax for theirs. (There is a small fee on chemicals, including N and P for groundwater protection programs, but no general sales tax.)

Since the debate about how to pay for cleaning our waters is in full swing it is time to propose the obvious. Since N and P are the culprits, let’s tax them at the same rate as, say, pickup trucks.

Farmers pay a 5 percent tax on the pickups they use on the farm and off, to pay for their impact on the roads we all use. Since their fertilizer is used on the farm but also flows into the rivers and streams and lakes we all use, costing us all, a similar tax on fertilizer makes sense.

A 5 percent tax on the $2.6 billion in annual farm fertilizer sales in Iowa would bring in roughly $129 million a year, close to the numbers being thrown about to address water quality in the state. It is roughly comparable to what would come from three-eighths of a cent on the general sales tax for the Natural Resource and Outdoor Recreation Trust Fund that Iowa taxpayers approved — but which legislators have refused to fund. Over the next 30 years the fertilizer fee would bring in something close to what the Governor wants to take from a tax designed for school infrastructure.

Why not the obvious solution? Tax the chemicals that pollute Iowa waters.

IPP-osterberg-75Posted by David Osterberg

David Osterberg co-founded the Iowa Policy Project in 2001 and was director of the organization for 12 years. He continues to lead IPP research on environmental and energy policy for IPP and is a professor in the Department of Occupational and Environmental Health at the University of Iowa. He served six terms as a member of the Iowa House of Representatives, and served as chair of the House Agriculture Committee. Contact: dosterberg@iowapolicyproject.org.

State aid up 13 percent — for business breaks

The early scorecard gives business tax breaks the big edge, a 13 percent increase to between 2 and 4 percent for schools.

What do you expect would be the outcry if Iowa’s public schools asked for 13 percent growth in state aid?

Yet few bat an eye when this happens with business tax breaks, as we can expect for FY2017.*

The early scorecard gives business tax breaks the big edge, a 13 percent increase, vs. between 2 and 4 percent for schools.

The Senate approved 4 percent for FY2017 (covering next school year), but the Iowa House on Monday approved 2 percent — even though schools have averaged less than 2 percent for six years, from FY2011-16.

In fact, the Iowa Association of School Boards this year did not even ask for a specific growth number, but rather, that it be set in a timely manner (it’s almost a year late already), and “at a rate that adequately supports local districts’ efforts to plan, create and sustain world-class schools.”

That hasn’t happened for some time. Over the last six budgets, per-pupil growth has been held to 2 percent or below in all but one year. Depending on enrollment trends, some districts even see less.

Basic RGB

Business tax breaks do not face the same budget constraints — ironic, since the cost of those breaks limits what lawmakers permit themselves to spend on services that their constituents demand, not the least of which is education. Other areas — environmental quality, child care, health care and public safety — also are constrained.

A much greater percentage increase in business tax breaks is set in place, as shown below. The total increase of $71 million from this budget year to the one lawmakers are working on now actually may be understated. The $35 million for a new sales-tax exemption for manufacturers is considered a conservative estimate. Even at $71 million overall, however, it represents a 13 percent increase.

160108-IFP-Budget-Fig2FB

Spending on business tax breaks is rarely burdened by the public scrutiny and debate that comes with spending on schools and water programs, which must be approved annually.

Most business tax breaks, once passed, are never touched again unless they are expanded. And as shown by the sales-tax break for manufacturers scheduled to begin this summer, a break may never receive legislative approval but still become law. The Governor is implementing this one on his own, with a split legislature unable to stop him.

Budget choices? Instead of that $35 million in FY2017 for the new sales-tax break, the Legislature could provide about 1 percent growth in per-pupil school funding. We can expect to find another 1 percent in what we’ll spend in checks to companies that do not pay any state income tax, but have more research tax credits than they owe in taxes.

Perhaps one day we will treat all spending the same, whether the spending comes before or after revenues reach the state treasury. Then the wealthy corporations can compete directly for their tax breaks against education for the skilled people they want to work for them.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
Mike Owen is a member of the school board in the West Branch Community School District, first elected in 2006.
* For more about Iowa tax breaks for business, see Peter Fisher’s report for the Iowa Fiscal Partnership, “Here a tax break, there a tax break, everywhere a tax break.” http://www.iowafiscal.org/here-a-tax-break-there-a-tax-break-everywhere-a-tax-break/

Reading, ’Rithmetic & Politics

Of course it’s a diversion. May future debate focus on whether the Governor’s proposed diversion is a good idea, not the fact that he has proposed it.

First, Governor Branstad challenged the bounds of basic math — miscounting jobs — and now it’s language arts.

The Governor reportedly got a little testy last week at a Des Moines Register editorial board meeting. Among his complaints: references to a “diversion” of revenue from a state sales tax for school infrastructure to support water-quality improvements. From the Register:

Branstad, in particular, took issue with the idea that his proposal diverts money away from schools.

“I can’t see how you can possibly call it a diversion when schools are going to get at least $10 million more guaranteed every year, plus a 20-year extension,” he said. “They’re sharing a small portion of the growth.”

Well, here’s how you call it a diversion:

diversion
[dih-vur-zhuh n, -shuh n, dahy-]
noun
1. the act of diverting or turning aside, as from a course or purpose: a diversion of industry into the war effort.
dictionary.com

Under the Governor’s plan, there is a “diverting or turning aside” a share of sales-tax revenues from their currently authorized “course or purpose,” school infrastructure, from FY2017 beginning July 1 this year, to FY2029. This is illustrated by Governor’s own handout on the plan. See the one-page document his office provided the media on Jan. 5.  The graph at the bottom of that page (reproduced below), shows the diversion shaded in blue, beginning with the black vertical line and running to the red dotted line.

160105-water-school-graph
Of course it’s a diversion. In fact, the diversion continues if the tax — which would not exist before or after FY2029 without voters’ intent for its use in funding school infrastructure — is extended to FY2049.

May future debate focus on whether the Governor’s proposed diversion is a good idea, not the fact that he has proposed it.

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

 

 

New rule! Governor wants to make laws himself

We have entered a new world of executive authority in Iowa.

We all know the drill: The Legislature passes bills and the Governor signs or vetoes them, whereupon they become either laws, or nothing.

Not anymore, apparently.

The move by the Branstad administration to implement a new sales tax break worth an estimated $40 million a year — possibly more — is taking place outside the legislative session. If it succeeds, we have entered a new world of executive authority in Iowa.

Business lobbyists wanted the change, it could not pass the Legislature, and the administration thinks it has found a short cut: Change the longstanding interpretation of the existing law. Presto, tens of millions of dollars will be available for manufacturers. And those same tens of millions of dollars will not be available for schools.*

Consider a Des Moines Register guest opinion by Mike Ralston of the Iowa Association of Business and Industry, a lobbying group representing manufacturers who would benefit from the change:

Part of the change affects Iowa’s existing sales and use tax exemption for machinery and equipment used in the manufacturing process.  The change is sound policy.

If that’s the case Mr. Ralston wants to make, let him make it during the legislative session. This rules change skirts the legislative process, and Iowans are noticing. Jon Muller writes in an insightful piece on the Bleeding Heartland blog:

It’s easy to look at political discourse today and conclude everything is a battle between Democrats and Republicans, the left and the right, liberals and conservatives. But far more is going on with this issue. … A Democrat will surely be Governor again someday, and it would be a mistake to set a precedent that allows the Executive Branch to so drastically change the tax climate. If Republicans in the Legislature do not stand up against this unprecedented over-reach of power, they will almost certainly live to regret it.

James Larew, an Iowa City attorney who was general counsel to former Governor Chet Culver, served for four years as Culver’s appointee on the Administrative Rules Review Committee, a panel of legislators who have the authority to delay the rule change from taking effect. He advised the panel: “This is new territory. What is sauce for the goose eventually becomes sauce for the gander, too.” Larew went on:

The balance of political power changes from one election to the next.

The balance of constitutional power — the relationship between the Iowa General Assembly and executive departments of government — is more serious and more lasting.

Broad interpretive powers given up by the Legislature, in one moment of time, concerning one issue, are not easily, later recovered.

As the Cedar Rapids Gazette opined in an editorial, the change “breaks the rules of good government.” The Gazette wrote:

The Branstad administration should drop its rule change bid and make its case to the General Assembly, which is elected to craft a budget and write tax policy. If it’s truly a great idea that will create jobs, as the department contends, surely the sales job won’t be that difficult.

Many businesses, we often note at IPP and the Iowa Fiscal Partnership, already pay no income tax in Iowa, and they just had their property taxes slashed. The corporate appetite for tax cuts is insatiable. Guess who pays?

*  Note: The Department of Revenue estimate of the cost of this tax break to both the state and local governments is over $40 million for each of the first four full years of implementation, according to a document provided the Administrative Rules Review Committee. The Legislative Services Agency has told ARRC that it does not have enough information to determine the accuracy of that estimate. We have revised the initial version of this blog post to reflect this uncertainty, until state officials agree on an estimate.
Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project

 

Iowa’s holiday from taxes — and reality

Make no mistake, Iowans are being sold a bill of goods — but at least it’s tax-free!

Mike Owen
Mike Owen

Oh, boy! It’s sales-tax holiday weekend in Iowa.

We’re talking about a “7 percent off” sale, folks — on only a limited list of items. When’s the last time that brought you into a store? At any other time of year, it would not draw customers, but guffaws. Seven percent? Really?

As IPP’s Andrew Cannon pointed out last year at this time, these gimmicks “drain revenue, and feed unfairness in a state tax system.” They are found, according to the Iowa Department of Revenue (DOR), in 17 states, and take various forms.

Of course the folks in the malls will say they’re great — anything to get someone in the door. But think about it. We’re literally talking about a few bucks off a pair of jeans, about $5 off a $70 pair of shoes. You could do a heck of a lot better on a regular sale at a store even when you’re paying sales tax.

And when you’re paying the tax, you’re not stiffing the school that your child will be attending in a few weeks in new jeans and shoes.

There is a price to public services any time we chip away at revenues. Whether the cost is around $3 million — as this gimmick appears to cost, according to a 2009 report from the DOR — or $40 million in some business tax credit program, it all adds up. Money not brought in due to exceptions in the tax code costs the bottom line every bit as much as money spent by a state agency.

Make no mistake, Iowans are being sold a bill of goods — but at least it’s tax-free!

Posted by Mike Owen, Assistant Director

Folly of the sales-tax holiday

“How many stores promote a ‘7 Percent Off’ sale?”

Andrew Cannon photo
Andrew Cannon

The Institute on Taxation and Economic Policy (ITEP) hits the nail on the head with a two-page policy brief about sales-tax holidays. Typically scheduled for back-to-school shopping and used in 17 states, they drain revenue, and feed unfairness in a state tax system.

In “Sales Tax Holidays: A Boondoggle,” ITEP notes sales tax holidays “are costly. Revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through painful spending cuts or increasing other taxes.”

Iowa’s tax holiday is Friday and Saturday of this week. The timing for the holiday couldn’t be worse, as it comes right before the start of the first school year in which state lawmakers have frozen school districts’ per-pupil spending. Giving up that revenue for a “back to school” sales gimmick is ridiculous.

ITEP identifies the problems with all such “holidays,” including the Iowa break:
— they do not target sales-tax relief to low-income families that are most affected by sales taxes, but offer it to the wealthiest families as well;
— they do nothing to stimulate local economies, because the purchases would be made anyway; and
— for the other 363 days of the year, they leave a state tax system unchanged in its favoritism toward the wealthy.

“Regrettably,” ITEP states, “these holidays may lull lawmakers into believing that they have resolved the unfairness of sales taxes.”

Finally, beyond these standard tax-policy concerns, the sales-tax holiday raises consumer protection issues. It actually provides an incentive to businesses to charge customers more than they would have without the break.

Think about it. The holiday saves Iowans 7 percent on a sale of a clothing item. How many stores promote a “7 Percent Off” sale? But a “no tax” sale — watch the ads this week. Why offer 15 percent off, or 20 percent off, or half off, or 2 for 1, when the state is handing you this promotion?

A “holiday” should be something to celebrate. Fixing problems with Iowa’s sales-tax law could be accomplished in better ways than a two-day boondoggle.

Posted by Andrew Cannon, Research Associate