Tax credit reform, yes — but what kind?

Optimism for tax-credit reform must be tempered. There is a great opportunity; there also are pitfalls.

Reform of business tax credits in Iowa is long overdue, so the natural instinct is to welcome with open arms the interest of state legislators in a review of Iowa’s runaway spending on tax credits.

Yet, optimism must be tempered. There is a great opportunity; there also are pitfalls.

Fooled us once

Iowa’s last look at tax-credit reform came in the wake of scandal in its film industry tax credit program. Despite a strong report with potentially game-changing recommendations from a special task force of state agency heads in 2010, not much came from the Legislature. As we noted then, legislators acted with fierce caution that no doubt sent the business lobbyists off to celebrate.

That time, the review resulted from a scandal of law and ethics. What remained, and remains today, is a scandal of fiscal ignorance and arrogance. Iowa’s spending on business tax breaks has soared in recent years, and this budget choice has been a contributing factor to the stagnant or declining commitment to public responsibilities: education, the environment, health and public safety.

Fool us twice?

Such skepticism should be understandable not only with the anti-bargaining and anti-worker legislation Iowans have seen in this session, but with comments by legislators. In one shot across the bow, Rep. Pat Grassley stressed legislators would put everything on the table, including the Earned Income Tax Credit (EITC), which benefits low- and moderate-income Iowans.

Past study already has shown that, unlike Iowa’s most lucrative business tax credit, the Research Activities Credit:

•   the EITC has obvious benefits to the economy and Iowa working families.

•   the EITC benefits only people who need the help, where RAC is unlimited and in fact benefits some of the most profitable companies in the country.

•   the EITC benefits people when Iowa’s regressive tax system is otherwise stacked against them, where the RAC benefits those who already do well by Iowa’s tax code.

Already we know that the individual state and local tax system in Iowa — all effectively governed by state law — demands that people at the bottom of the income scale (actually the bottom 80 percent) on average pay 10 percent of their income in tax. At the same time, the wealthiest and most well-connected pay much less — 6 percent at the very top.

Already we know that Iowa’s total state and local taxes on business — again, all effectively governed by state law — are below the national average and by one national business consultant’s measure are among the lowest in the nation.

In a nutshell, heading into this discussion, beware the false equivalencies and more of the same business-lobby spin that has produced the unaccountable and unfair system that makes it difficult to fund critical public services.

And be sure we do not lose some important pieces now in place, including the transparency we have on the RAC with annual reports from the Department of Revenue.

We have called for reform and better oversight for years. If legislators are serious about it, this could be a good thing. If it is merely cover to further burden the poor, reduce transparency, or heap new breaks on corporations that do not pay their fair share, it could be one more step in Iowa’s low-road march to the bottom.

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

mikeowen@iowapolicyproject.org

Today’s virtual House graphic: Iowa’s growing spending on tax credits

Growth in tax-credit spending by the state of Iowa has erupted over the last decade.

Editor’s Note: The Iowa House of Representatives voted Monday to deny the ability of lawmakers to use visual aids in debate on the floor. To help Iowans visualize what kinds of graphics might be useful in these debates to illustrate facts, we will offer examples. Here is today’s graphic, to illustrate state trends in spending on business tax credits.

170207-taxcredits-2007-21As the Iowa Policy Project and Iowa Fiscal Partnership have pointed out before, Iowa’s perceived budget shortfalls are largely self-inflicted. Iowa Department of Revenue reports provide a lot of data about tax credits, particularly in reports that are prepared for use by the Revenue Estimating Conference, which determines what revenue lawmakers have available to spend. These reports show the cost of those credits, which are also known as “tax expenditures,” because they effectively spend money through the tax code — revenues that otherwise would be available for fund schools and other public services.

Growth in tax-credit spending has erupted in Iowa over the last decade, tripling from $75 million in FY2007 to $237 million last year. They are projected by the Department of Revenue to reach $279 million in the current fiscal year, and to nearly $300 million in just four years.

For more information about Iowa spending on tax credits, see this page on the Iowa Fiscal Partnership website.

Oversight on the overseers of tax credits

These interim legislative meetings put a spotlight on spending choices being made outside the budget process.

You might have heard about a big meeting at the State Capitol today.

No, not that one, about whose portrait will hang in the Iowa House and Senate behind the presiding officer.

The meetings where there’s always some mystery are the annual reviews of selected tax credits. Only a few credits are reviewed each year by a panel of legislators. One meeting was in November; the other is today.

One tax giveaway — er, tax credit — on the agenda for today is the Research Activities Credit, or RAC.
No such review since these sessions started has produced meaningful reform, but the exercise does put information on the table and does put a spotlight on spending choices being made outside the budget process.

What we already know from previous evaluations and annual reports about the RAC is that it is costly — over $50 million a year — and that routinely at least two-thirds of the cost (and usually over four-fifths) goes to companies as so-called “refunds.” These are not refunds of taxes owed, but of tax credits the companies didn’t need because they owe so little, or no, corporate income tax.

Remember that when you hear the Iowa Taxpayers Association and others bleating about Iowa’s corporate taxes, which are actually low.
For perspective on the RAC, the $42 million given away in tax credit refunds under this program in 2015 would have paid for about 1 percent more in school aid, at the same time schools were told we didn’t have the money for it. Of course we did. Our legislators just chose to give it away, mainly to huge, profitable corporations.
In Room 103 of the State Capitol, 1:15 p.m., the public and legislators can hear from the Department of Revenue about the Research Activities Credit. And the session that follows at 2:15 on the Earned Income Tax Credit may be worth listening to as well, for contrast, as the EITC is a demonstrated boost to the economy while the RAC has never been demonstrated to be more than a drain on revenue.

You never know what legislators at the table will have to say about these issues, but we may get some insights.
As for that other meeting, we all now how it will come out.
owen-2013-57Posted by Mike Owen
Executive Director of the Iowa Policy Project
Project Director of the Iowa Fiscal Partnership
mikeowen@iowapolicyproject.org

An opportunity for a productive, fair agenda

A good place for the new governor to start is establishing transparency and accountability with reforms of tax credits and other tax expenditures.

Congratulations to Governor Terry Branstad on his nomination as ambassador to China and to Lieutenant Governor Kim Reynolds for her coming role as Governor of our state.

This is a tremendous opportunity for the new Governor to start marking her clean slate with a productive and fair agenda that advances opportunity for children and families, protects the vulnerable and enhances our quality-of-life assets of clean air, clean water, and cultural enrichment.

A good place to start is establishing a new regime of transparency and accountability in state spending with a reform agenda for tax credits and other tax expenditures — something she may embrace as a former county treasurer. Important decisions are being made in the shadows in the Iowa State Capitol. Our incoming Governor has an opportunity to bring them out into the open.

With this type of reform, we may find there are in fact adequate revenues to again cultivate Iowans’ long-held commitments to education, to our safety net, to our environment, and to fairness and safety in the workplace.

At the Iowa Policy Project, we welcome inquiries from the new Governor and her staff about our research. May they — like Iowans around the state — find it to be a credible and reliable resource to better understand our public policy choices.

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

Contact: mikeowen@iowapolicyproject.org

Watch tax spending more closely

The bottom line is this: Unless tax expenditures sunset, there is little incentive for legislative committees to take evaluations seriously.

Iowa is behind — not that we didn’t already know that.

A new report by the Center on Budget and Policy Priorities (CBPP) examines several aspects of what states do in budget planning. Particularly noteworthy in the report for Iowa is its poor attention to the impact of tax expenditures — spending through the tax code. When we have a tax break on the books, such as a credit or exemption, it has an impact on the budget bottom line the same as if the lost revenues were spent on the other side of the ledger.

Most of this spending, as the Iowa Fiscal Partnership has shown over the years, is on autopilot. These breaks exist year to year, never requiring renewal — unlike the kind of spending we do through direct appropriations, where critical services are subjected to annual scrutiny to exist or not for another year.

Here’s why it matters, according to the executive summary of the CBPP report:

When recessions occur, states must scrutinize all forms of spending.  An important tool for this is oversight of various tax expenditures (tax credits, deductions, and exemptions that reduce state revenue), which in many ways function as spending through the tax code. This will enable states to make sound choices between the most essential tax expenditures and those the state can forgo. For example, states can regularly publish tax expenditure reports that list each tax break and its cost. And states can enact sunset provisions so that tax breaks expire in a specified number of years unless policymakers choose to extend them.

The problem in Iowa is not a lack of analysis or data. The Iowa Department of Revenue (DOR) has produced solid tax expenditure studies in 2000, 2005 and 2010. They are found here on the DOR website. And there is considerable information outside those formal studies that illustrate overall costs — primarily a so-called “tax credit contingent liabilities report” offered three-to-four times a year by DOR for use by the Revenue Estimating Conference. Furthermore, a number of important tax expenditures have been the subject of in-depth reports to the legislative committee charged with reviewing tax credits.

So in what way is Iowa behind the curve? The CBPP report lists 10 ways states can better budget for the future, including one on the tax-expenditure oversight issue:

Oversight of tax expenditures:  expiration dates for tax expenditures after a set number of years to subject them to regular scrutiny of their cost and effectiveness, in addition to tax expenditure reports that list the costs of individual tax breaks.

Such expiration dates are called “sunsets.” A special Tax Credit Review Panel appointed by then-Governor Culver in the wake of the 2009 film-credit scandal produced a set of strong recommendations for reform, among them a five-year sunset on all credits. This proposal was ignored.

Furthermore, a review of tax credits on a five-year rotation set up by lawmakers in response to that panel’s recommendations has produced no apparent policy change; this perhaps is not surprising since the committee that reviews the credits has not issued findings that the credits are meeting the intent of policy, or producing a return on the taxpayers’ investment.

The bottom line is this: Unless tax expenditures sunset, there is little incentive for legislative committees to take evaluations seriously.

Mike OwenPosted by Mike Owen, Executive Director

The limits of transparency

Despite the PIRG grade, problems with Iowa’s tax spending transparency tell more about Iowa.

Peter Fisher
Peter Fisher

You can’t fix problems you can’t find. That’s why transparency is so important in public policy and especially spending through the tax code.

You would never find some of this information just going to the Iowa Economic Development Authority website — you have to know where to look. And even then, there are limitations on what is available from the state for its citizens to see.

The Iowa Policy Project and Iowa Fiscal Partnership have long argued for greater transparency with regard to the state’s expenditures on economic development through the tax code. We are happy to see a new report from the Iowa Public Interest Research Group that brings attention to this issue, properly including business tax credits and other tax expenditures among the categories of state spending that citizens have a right to know about.

But it’s very important to look at the deficiencies that remain in Iowa. In our view, those problems tell far more about the state’s interest in transparency than the items that are given a favorable rating by PIRG.

While the PIRG report gives Iowa credit for having a website that allows a citizen to find economic development subsidies awarded by company name (including the amount, the jobs promised, the jobs created, and the location), two problems in particular should be addressed in the future.

  • First, only tax credits that must be awarded are listed; similar information should be available for all economic development tax credits, including those that are automatic.
  • Second, the database of subsidies is buried deep in the website of the Iowa Economic Development Authority (for those interested it is here: http://www.iowaeconomicdevelopment.com/annualrpt/?cmd=default&rptyear=2011). It’s hard for the public to find. A link to this database should be posted on the state’s DataShare website, where only aggregate information on tax credits is available.

The Legislature did pass a notable transparency improvement in 2009 that requires the state to identify by name the recipients of Research Activities Credits in excess of $500,000. The bill failed, however, to require identification of how much of a company’s credit was in the form of a refund check. Taxpayers have a right to know how much of their tax dollars are going to subsidize corporations that are paying no state income tax.

It should be clear by now that the disclosure of company-specific subsidy information does no harm to the company or to the state’s economic development efforts; there is no excuse not to make all of our business tax subsidies transparent.

Posted by Peter S. Fisher, Research Director