Too far for a tax-cutter

Home to roost: An advocate for lower taxes in the state Senate, Larry McKibben as a Regent sees an “attack” on higher education funding that will drive tuition increases.

Editor’s Note: This piece ran in the Wednesday, June 13, 2018, Cedar Rapids Gazette as a guest opinion from IPP’s David Osterberg.

The attack on higher education funding by the governor and legislative leadership has gone too far for at least one longtime tax-cutter.

Former state Sen. Larry McKibben, a member of the Iowa Board of Regents, expressed his concern about state support of universities. The regents voted Thursday to raise university tuition rates at Iowa, Iowa State and Northern Iowa universities, following $40 million in state funding cuts.

McKibben was forthright in blaming the legislative session for an increase in tuition at the three state universities and the loss of professors to better positions after years of low salary increases. From The Gazette’s story on the regents’ meeting:

“We have lost great folks, and now we are going to have to raise tuition,” McKibben said, noting that will persist “as long as we continue what I believe is, in my time on the board, the worst state government attack on our three public universities that I can ever remember.”

In fairness, the groundwork has been laid for this latest attack over many years. An Iowa Fiscal Partnership report in 2012 showed how spending on the UI, ISU and UNI dropped from fiscal year 2000 through fiscal year 2012.

An Iowa Policy Project analysis by Brandon Borkovec showed that adjusting for inflation, state funding for Iowa public universities has declined since fiscal year 2001 by 40 percent at UI, 42 percent at ISU, and 28 percent at UNI.

As a percentage of university budgets, the state share dropped by almost half from fiscal years 2001 to 2016.

Some of this happened on McKibben’s watch as one of the Legislature’s most powerful lawmakers on tax policy — one who often looked for ways to cut taxes, as he did in 2003 with a proposed flat tax that would have cost more than $500 million.

He did not intervene to rein in the Research Activities Credit, which sends more than $40 million a year to profitable corporations that pay no income taxes to the state.

He turned the other way as corporations raided Iowa’s treasury through tax loopholes at a cost of $60 million to $100 million a year.

As Regent McKibben, his new concern is understandable and his advocacy for college students laudable. He wants Iowa voters to pay attention and ask what candidates will do about severe underfunding that he says will assure more tuition increases. From the story in The Gazette: “I look forward to hearing the candidates say that,” McKibben said. “What are you going to do about higher education and our three great universities?” And what are you going to do to bring them back to level?”

These same trends were happening when McKibben was a legislator. Now, it seems, the governor and state legislative leaders have gone too far, even for him.

David Osterberg is founder and former executive director of Iowa Policy Project in Iowa City. Comments: dosterberg@iowapolicyproject.org

15 yards, loss of revenue

Governor Reynolds’ remarks about her tax cuts for the wealthy fail any test of accuracy.

It’s time to throw the penalty flag on Governor Kim Reynolds. Her remarks about the tax cuts she signed into law Wednesday for the wealthy fail any test of accuracy. Iowans need to know the facts.

It would be different if she had acknowledged, and made a case for:

•  massive tax cuts for the wealthiest.
•  cutting revenues, assuring continued suppression of education and opportunity, public health and safety and investments in the future of Iowa.
•  continued massive corporate tax giveaways, as business tax credits have doubled in five years.

But those were not her messages — and those messages will not be repeated here. The Governor is (1) deceiving Iowans about some policies she has adopted, and (2) ignoring likely damage to the economy from these tax cuts.

She even put off some forward strides she had suggested but abandoned during the recent legislative session. The concept of “reform” is gone, as the bill does nothing to simplify taxes for at least four years, and leaves in place a system that already was heavily skewed to benefit the wealthy.

Here are a few critical realities:

  The income tax savings to a middle class family next year are only $3 to $4 a week (according to the Department of Revenue) — while the sales tax increase will offset such savings for many.
  Millionaires, on the other hand, will see on average an $18,773 cut for the year.
  Larger tax cuts scheduled to take place in five years might not happen because they are triggered by a revenue target that will be very difficult to meet. (But count on tax-cut proponents to campaign on them.)
  Instead of adjusting taxes in a way that cuts would be paid for, this legislation will actually take $300 to $400 million a year out of the budget. Those dollars could have gone to adequately fund education or public safety or mental health care.
  The bill makes $40 million in corporate income tax cuts.
•  The bill provides an unneeded tax break for wealthy earners of “pass-through” income from business.

Meanwhile, the bill fails to reform business tax credits, which have doubled in five years, to $400 million. And it also fails to raise the standard deduction or eliminate federal deductibility, both of which the Governor had proposed but compromised away.

As reviews and promotions of the tax bill proceed, keep these points in mind. And watch for more information, because the analysis will continue on a bill developed in secret, for signing at an invitation-only ceremony.

Mike Owen is executive director of the nonpartisan Iowa Policy Project. Contact: mikeowen@iowapolicyproject.org

Tax bill: Know five points

The new tax plan abandons real tax reform for costly changes slanted heavily to the rich. It is more likely to hurt the Iowa economy than to help it.

Here are five things you need to know about the final version of the tax bill now scheduled for a vote in the Iowa Legislature this Saturday: (1) It is not income tax reform, (2) It is not a middle-class tax cut, (3) It is more skewed to the richest Iowans than previous bills, (4) It is very expensive and will force cuts in education, public safety and other services, and (5) It is more likely to hurt the Iowa economy than to help it.

As we have pointed out previously, real income tax reform would rein in expensive business tax credits that have little effectiveness, eliminate federal deductibility, increase recognition of the costs of raising a family, and raise the Iowa standard deduction — which would both simplify taxes for thousands of Iowans, and target tax cuts at lower and middle-income taxpayers. The tax bill does none of these things for the next four years.

Earlier versions of the House bill would have increased the standard deduction and eliminated federal deductibility, but those provisions were jettisoned in favor of $40 million in corporate tax cuts and more tax preferences for high-income business owners. The bill does little to reform business tax credits, which have doubled in five years. It adds a new and expensive loophole — a deduction for pass-through income from certain businesses.

For the next four tax years the bulk of the tax savings go to the most well off. In 2021, almost half of the tax cuts will go to the richest 2.5 percent of Iowa taxpayers, those making $250,000 or more. Their taxes are reduced by 18 percent, over twice the cut for those in the middle. For those making over a million dollars, the tax cut will average $24,636.

Meanwhile, those in the middle will see income tax cuts of $100 to $300 over the next four years, much of which will be taken back in increased sales taxes of $35 to $60.

All of this comes at a high cost to the state — over $400 million a year by 2021. With over half the budget going to education, this means the underfunding of our public schools and the rising tuition and debt for our community college and university students will continue.

The bill’s only “trigger” does nothing to guarantee fiscal sustainability, its purported purpose. The $400 million hit to the general fund will happen no matter how slow the Iowa economy, and state revenues, grow. We could hit a recession in the next two years, and those tax cuts will remain in place.

The only trigger governs an additional round of tax cuts for 2023. If the revenue target is met (and it would require growth rates of over 5 percent per year) then the annual cost of the bill jumps to $643 million. Only then would federal deductibility end, and the higher federal standard deduction come into play.

If the bill’s backers are counting on growth to come to the rescue, they are willfully ignoring all evidence to the contrary. The last major income tax cuts in Iowa, in 1997-98, not only failed to stimulate growth, but likely contributed to the subsequent slowing of the state’s economy. The tax cuts in Kansas led to slower growth.

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

Don’t emulate North Carolina, either

Tax and budget cuts are a formula for decline, not prosperity. Let’s hope Iowa does not follow either Kansas or North Carolina down the path of chronic budget crises and underfunding of education, health and public safety.

The ideologues advocating for large state income tax cuts haven’t given up defending the Kansas experiment, despite overwhelming evidence that it forced drastic budget cuts while doing nothing to stimulate growth. Now they would have us believe that North Carolina provides an even better example of the benefits of the tax-slashing strategy. It doesn’t.

Two recent analyses of the North Carolina tax cuts, which took effect in 2014, show pretty clearly that the cuts did not boost the economy, and that they will soon precipitate large budget shortfalls. Prior to the tax cuts, the state’s economy generally grew at a comparable rate to the surrounding states, despite North Carolina having higher personal income tax rates than its neighbors. And it outpaced the national economy, jobs in North Carolina growing at 5.8 percent from late 2001 through the end of 2013, compared to 4.2 percent for the nation.

Since the tax cuts took effect in 2014, has North Carolina’s economic performance become even more impressive? On the contrary; since 2014, North Carolina has lagged behind the nation in growth in jobs and GDP, and has also lagged behind neighboring Georgia and South Carolina.

The tax-cut advocates are fond of saying simply that since the tax cuts, North Carolina has experienced rapid growth. The state has certainly grown faster than Kansas, but nothing in the evidence suggests that the tax cuts boosted growth; in fact, relative to its neighbors and to the nation its performance declined after taxes were cut.

The North Carolina tax cuts were phased in from 2014 through 2019, and by next year will cost the state 15 percent of the general fund budget. Major fiscal challenges now loom on the horizon. The state’s budget analysts project a structural budget shortfall of $1.2 billion in 2020, with the shortfall rising after that.

Tax and budget cuts are a formula for decline, not prosperity. Over the past decade, North Carolina has cut per student funding for education — K-12 by 7.9 percent, higher education by 15.9 percent, when adjusted for inflation — and the tax cuts will make it difficult, if not impossible, to restore those funds, no less to increase its investments in the state’s children. They are putting the long-term prosperity of the state at risk.

These results are not surprising. Tax cuts have budget consequences; they do not pay for themselves through growth. In fact, the preponderance of serious research finds that the effects of state income taxes on state growth are negligible.

Let’s hope Iowa does not follow either Kansas or North Carolina down the path of chronic budget crises and underfunding of the state’s responsibilities for education, health and public safety.

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

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

What happened to infrastructure plans?

Already, federal help to improve drinking water and wastewater systems has been on the decline. How much appetite will there be for necessary construction when taxes to pay for it are being cut?

At the beginning of this year there was talk of possible bipartisan legislation to repair America’s crumbling infrastructure.

Both candidates for president had promised a new emphasis on repairing the nation’s roads, rails, sewage treatment plants and airports. The number kicked around during the campaign was often $500 billion. After President Trump won, he pushed up the rhetoric and spoke of a $1 trillion plan.

If Congress passes the tax bill now being considered, there will be little room in the budget to pay for present services, as we have emphasized here at IPP. How can this nation also invest in the things that will certainly produce jobs and make the nation more competitive?

The chances for implementing an ambitious infrastructure spending plan seem remote, as Congress is on course to add $1.4 trillion or even more in deficit spending over the next 10 years.

Already, federal help to improve drinking water and wastewater systems has been on the decline. How much appetite will there be spend more on what most agree is necessary construction when taxes to pay for those expenditures decrease so drastically?

When there is no appetite for spending, state governments sometimes resort to tax credits. That seems unwieldy in this case and, in the next few weeks, tax credits will lose much of their value anyway. When taxes are lower, there is less to gain by giving credits.

The new tax cut will give a benefit just for being a corporation or for being wealthy. Why invest in something productive when you are given a reward simply for “being?”

David Osterberg co-founded the nonpartisan Iowa Policy Project and remains its lead environment and energy researcher. dosterberg@iowapolicyproject.org

Rosy forecasts bring thorny budgets

Odd that Governor Branstad, burned so early in his tenure by overly rosy revenue estimates, would let this happen to his very own lieutenant governor as she took office.

Capitol-DSC_0119-7inA memo from the Legislative Services Agency (LSA) indicates a higher-than-anticipated cost of a special-interest sales-tax break primarily for manufacturers.

We could not afford it when Governor Terry Branstad attempted to implement it by rule in 2015, or when a scaled-back version passed in 2016, and we cannot afford it now.

But it appears likely that the new break is at least part of the reason sales-and-use taxes are flattening out, putting fresh pressure on the budget even after FY2017 cuts and continued reliance of state policy makers to push tax breaks that divert millions from critical services such as education.

There is great irony in this report coming as Governor Branstad was turning over the keys to Kim Reynolds, especially given this comment in the LSA piece by senior fiscal legislative analyst Jeff Robinson:

One potential explanation for the recent sales/use tax downturn is an underestimated fiscal impact of the sales/use tax exemption for manufacturing supplies and replacement parts. For proposed legislation in previous years, estimates of the impact of exempting manufacturing supplies and replacement parts from the State sales/use tax had been much higher.

As Robinson suggests, there was ample reason to think the cost would be “much higher” and that should have been taken into account in revenue estimates and crafting the FY17 budget.

Likewise, the four of us were present in the Iowa House chamber in 1983 when new Governor Branstad proposed a sales-tax increase, just a few months after bludgeoning his election opponent, Roxanne Conlin, with a “tax and spend” refrain. The new Governor inherited a budget shortfall right out of the gate, a product of overly rosy revenue projections by the Ray administration.

To be fair to Governor Ray, the farm crisis was unfolding back then, and the landscape was not necessarily as clear.

This time, the continuing revenue problem is due principally to out-of-control tax giveaways, which have accelerated long since Governor Ray left office. Just this one perk for manufacturing was expected to cost $21.3 million from the state budget.* However, the latest LSA analysis suggests, the cost to the state may be two or three times what was expected.

Odd that Governor Branstad, burned so early in his tenure by optimistic revenue estimates, would let this happen to his very own successor as she took office. Maybe he just forgot.

We did not forget.

 

* That cost figure grows to $25.6 million when including the dedicated revenue for local school infrastructure, and $29.2 million when including lost local-option tax revenue.

Posted by IPP Executive Director Mike Owen, IPP Founder David Osterberg, IPP Board President Janet Carl, and IPP Board Member Lyle Krewson. Owen was the Statehouse correspondent for the Quad-City Times and Osterberg, Carl and Krewson were state representatives from Mount Vernon, Grinnell and Urbandale, respectively — in 1983.