Leveling the playing field

The more small-business owners understand how big businesses compete unfairly and do not contribute their fair share of state taxes, the more pressure can build for real reform.

Small business owners get it: They follow the rules, but preferential treatment for giant companies puts them at a disadvantage.

Case in point: Lora Fraracci, who had an excellent guest opinion in today’s Cedar Rapids Gazette about practices big companies use to avoid paying U.S. taxes. The problem is not exclusively an issue with the lax U.S. tax code. It is a big problem at the state level as well.

Ms. Fraracci runs a residential and commercial cleaning business. As she noted:

“As a small-business owner in Des Moines, I play by the rules and pay my taxes to support our American economy. I create jobs that will continue to support our local economy. When the playing field is so uneven it makes it hard to realize this dream.”

The issue has been receiving some national attention, but many may not realize the prevalence of this problem and its extension to state taxes. While Ms. Fraracci and other small businesses, or Iowa focused businesses, follow the rules, large companies they may serve can find a way to either (1) avoid the rules, or (2) block stronger rules.

The Iowa Fiscal Partnership has written about these issues for some time, and the reports are on our website.

The biggest Iowa breaks come in two ways: tax loopholes and tax credits.

Tax loopholes have been estimated to cost the state between $60 million and $100 million a year. Loosely written law is an invitation to big companies’ lawyers and accountants to find ways to lower their firms’ taxes. Multistate firms can shift profits to tax-haven states and avoid taxes they otherwise would be paying in Iowa. That creates the uneven playing field Ms. Fraracci sees.

Iowa could fix this by adopting something called “combined reporting,” which the business lobby has fought tooth and nail when proposed in the past by Governors Tom Vilsack and Chet Culver. Many states — including almost all our neighbors (Illinois, Wisconsin, Minnesota, Kansas and Nebraska) — already do this. See our 2007 report, which remains relevant because Iowa has refused to act.

Tax credits are particularly costly, rarely reviewed with any sense that they will be reformed. This is illustrated best with the Research Activities Credit, which provides a refundable credit to big companies to do something they are likely to anyway: research to keep their businesses relevant and competitive.

In 2013, that credit cost $53 million, with $36 million of that going to companies that paid no state income tax in Iowa. The default position must be that this is wasted money, because it is never reviewed in the regular budget process the way other spending is examined every year — on schools, law enforcement, worker protection and environmental quality. In Iowa, spending on tax credits is spending on autopilot.

Read here about Iowa’s accountability gap on tax-credit spending.

Looking ahead, as a new legislative session approaches and we hear repeatedly that things are tight, keep these points in mind to better understand the real fiscal picture facing Iowa. The more small-business owners understand this, the more likely pressure can build for real reform.

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

Hyperbole Alert: The drumbeat to cut corporate taxes in Iowa

Want to talk reform? Then recognize the real problems — we receive less in corporate tax than we used to, and don’t collect a lot because of the swiss-cheese nature of our tax code.

Mike Owen
Mike Owen

TWELVE PERCENT!

The figure practically screams at you, even when it’s not in all caps, when the conversation comes to corporate tax rates in Iowa.

Here’s the thing: It’s not a real number. Not really.

That is what is known as Iowa’s “top marginal rate” on corporate income tax. And it’s not a real number because it simply does not — cannot — reflect what a business pays on all its profits. Yet that is the implication when people (especially politicians) or corporations complain about it.

A top Iowa columnist, Todd Dorman of the Cedar Rapids Gazette, this week discussed the political battles over Iowa’s latest gigantic subsidies to Egyptian fertilizer company Orascom. In his piece he expressed a note of concern about the hyperbole in those battles. Then, he turned the discussion to Governor Branstad’s desire for cuts in corporate income taxes.

It is in that discussion where the hyperbole typically has been the strongest in Iowa. We are often told — as Dorman noted — that Iowa’s top corporate income tax rate is the nation’s highest. Note the emphasis added on “top.” More on that in a moment. Dorman also noted, accurately, that Iowa “has four brackets and a tangle of special interest credits.”

Because of the latter, any serious concern for our corporate friends should evaporate. Because they’re really being taken care of quite nicely, thank you, by their friends in the General Assembly and the Governor’s Office.

Now, about that “top rate.” It applies only to Iowa-taxable corporate profits above $250,000. Iowa doesn’t tax any profits from sales outside the state, so the rate doesn’t apply at all there, which for many businesses is a significant share of profits. For all taxable profits below $250,000, rates are lower — 6 percent on the first $25,000, 8 percent on the next $75,000 and 10 percent on the next $150,000.

Before these rates kick in, the business gets to deduct half its federal income tax from taxable income, and may have other deductions or ways to shelter income from state tax.

Then, after the rates are computed and the taxes determined, the tax credits enter the picture — and state revenues exit. The state just expanded the potential for those credits by $50 million, raising the cap on a select group of credits. In the case of the Research Activities Credit, these credits not only erase all tax liability, but offer state checks for the remaining amount of the credit. Through that program in 2012, Iowa paid out almost $33 million to 130 firms that paid no income tax, because those companies had more credits than tax liability.

And you can bet the corporate execs and their accountants fully understand all these nooks and crannies in our tax code. But if you want to give them a free million or so, they’ll take it. They are smart folks, and they have proven themselves to be more skilled negotiators than Iowa’s economic development moguls.

Want to talk reform? Then recognize the real problems — that we receive less in corporate tax than we used to, and that a lot of corporate tax is not collected because of the swiss-cheese nature of our tax code. That gives us all something to talk about.

Just be ready for the hyperbole from those who don’t want to change that part of our system.

Posted by Mike Owen, Executive Director


For more information about Iowa business taxes, see these Iowa Fiscal Partnership reports:
— “Reducing Iowa Commercial Property Taxes,” by Heather Milway and Peter Fisher, April 24, 2013.
— “Amid Plans to Relax Limits, Business Tax Credits Grow,” by Heather Gibney, April 16, 2013.
— “Corporate Taxes and State Economic Growth,” by Peter Fisher, revised April 2013.
— “A $40 Million Budget Hole: Persistent and Growing,” IFP backgrounder, February 25, 2013.
— “Tax Credit Reform Glass Half-Full? Maybe Some Moisture,” IFP backgrounder, revised March 23, 2010.
— “Single Factor to Consider,” IFP backgrounder, April 2, 2008.

Asleep at the Switch in Iowa

Expedia, Orbitz and Priceline have caught us sleeping in Iowa.

Mike Owen
Mike Owen

Expedia, Orbitz and Priceline have caught us sleeping in Iowa.

Closing a loophole that lets those big online travel companies collect taxes on only part of sales taxes due on hotel room bookings is just one of four measures Iowa could take to lessen the drain of funds from state coffers before they are even collected.

A new paper by Michael Leachman and Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) notes the four options for states. Iowa is one of only 12 states that has failed to take any of those steps. Besides correcting the problem with revenue lost from hotel bookings, CBPP recommends:

  • Broadening the tax base to include more services. While Iowa has a fairly broad base subject to sales tax, there are many exceptions to the state’s sales tax that have been successfully achieved by the business lobby. In general terms, CBPP notes that household spending has been shifting from goods to services for decades, yet most states haven’t updated their sales taxes to reflect this fact, costing states tens of billions of dollars each year.
  • Enacting an “Amazon law” to require large online retailers to collect sales taxes. Purchases made through large online retailers such as Amazon or Overstock are subject to sales tax, but retailers aren’t required to collect them in Iowa and 33 other states, at a cost of over $20 billion a year. This puts Main Street businesses in Iowa at a price disadvantage vs. those multistate operations selling the same book, boots, chain saw or prom dress that caught an Iowa consumer’s eye.
  • Extending the sales tax to Internet downloads. As with the Amazon loophole, the sale of computer software, music, movies, and various other goods delivered on the Internet are not taxed in 23 states including Iowa — even though those states tax the same items when sold in physical stores. Lost revenue: roughly $300 million a year.

The CBPP paper is a good look at an issue Iowa lawmakers have been reluctant to address.

This is one more way research has exposed that Iowa is permitting businesses to take advantage of its residents, by pushing the costs of public services onto other taxpayers, or damming the state’s revenue stream to block funds from flowing to the state. The Iowa Fiscal Partnership already has shown how big multistate corporations avoid corporate income taxes because Iowa refuses to close corporate tax loopholes the way several neighboring states do, and how big companies benefit from the kind of property-tax breaks passed this year. The new piece by CBPP shows sales taxes also are an area where big business makes big money at Iowa taxpayers’ expense.

All of these areas remain good targets for better, more accountable tax policy in Iowa.

Posted by Mike Owen, Executive Director

Will outrage translate into policy?

The long and short of it: Iowa does not have to sit by while big companies drain the state’s coffers and push the bill to other taxpayers, both smaller business competitors and working families. And neither does the United States.

Mike Owen
Mike Owen

Oh, the outrage.

Apple Inc., is (gasp!) working the federal tax code to its advantage, exploiting loopholes in the code to legally avoid paying taxes. OK, but we’ve heard it all before.

Many are expressing outrage — not an unreasonable reaction. Senator Carl Levin of Michigan is leading hearings in Washington about the issue, noting, “Our purpose with these hearings is to shine a light on practices that have allowed U.S.-based multinational corporations to amass an estimated $1.9 trillion in profits in offshore tax havens, shielded from U.S. taxes.” He went on:

A recent study found that 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three year period. Zero. These corporations use multiple offshore loopholes that give them significant control over how much U.S. income they will report and how much tax, if any, they will pay.

Senator Levin is indeed shining a light on a serious issue, but you can already see the excuses coming.

As a New York Times story notes:

While Apple’s strategy is unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say. At the same time, it shows how difficult it will be for Washington to overhaul the tax system.

In Iowa alone, as we showed many years ago, this also happens with some big, multistate companies, which use gimmicks to get out of paying state corporate income tax. Instead of shifting profits to phantom companies in Ireland to avoid U.S. tax, these companies shift Iowa profits to shell companies in Delaware, where they go untaxed by either Delaware or Iowa. And it could be fixed, but Iowa lawmakers simply have chosen not to. Not acting, after all, is the easiest course.

Tell lawmakers privately about what’s happening and if it’s new to them, they express outrage. Wait a few weeks, and for many the outrage is gone. Frequently, the view changes to either (1) it’s something we need to accept so companies won’t move away, or (2) the issue is just too big to address.

Of course both arguments are what big business lobbyists want everyone to believe. And both are wrong.

The business lobby has obscured the fact that there would be no reason under Iowa tax law for these companies to move away if the state were to pass legislation to plug loopholes — and lawmakers certainly can do so, with a device called “combined reporting.” Read about it here.

The long and short of it: Iowa does not have to sit by while big companies drain the state’s coffers and push the bill to other taxpayers, both smaller business competitors and working families. And neither does the United States.

Posted by Mike Owen, Assistant Director

Is what Wal-Mart wants for Amazon also good for Wal-Mart?

“Leveling the playing field” — does Wal-Mart always want it?

Mike Owen
Mike Owen

An interesting column by Liz Peek on TheFiscalTimes.com notes Wal-Mart and other retail giants are banding together behind legislation to require Amazon.com to collect and pay state sales taxes rightfully owed on purchases made online.

OK, but why does Wal-Mart take advantage of its own wide reach to shield profits from state taxation?

As the Peek column notes:

Overall, retail sales over the Internet grew nearly 15% last year in the U.S., and totaled $165.4 billion.

Industry analysts are expecting that figure to swell to more than $188 billion this year. That presents quite a dual challenge to states unable to collect sales taxes on those purchases, and to traditional stores that are losing market share. Consequently, large retailers, and thousands of others across the country, have banded together to demand the playing field be leveled. (emphasis added)

So, Wal-Mart is demanding “the playing field be leveled.” Admirable, perhaps, but ironic, to be sure.

In an April 2007 report for the Iowa Fiscal Partnership, “Leveling the Playing Field,” Peter Fisher illustrates how Wal-Mart has gone to great trouble in tilting the field in its favor on corporate income tax. Wal-Mart created a multilayered, multistate structure to shift at least some profits where they are taxable to states where they are not. In a nutshell, Wal-Mart found a way to charge itself rent to reduce taxable profits.

All done by the book as the book has been written. But it creates an advantage for one retail giant that its small competitors who sell shoes, tires, clothes, office supplies, groceries, etc., cannot take. And Wal-Mart’s strategy is not the only one being used by large, multistate corporations to dodge tax responsibility. Many corporations do so by exploiting loopholes, the seams in tax law that companies use to defeat legislators’ intent.

Iowa could fix this — and level the playing field — with a simple solution already adopted by five neighboring states: Nebraska, Kansas, Illinois, Minnesota and Wisconsin. That solution is corporate combined reporting, supported by Iowa’s last two governors, but not once debated on the floor of the Iowa House or Senate.

When the solution not only could raise money for the state and make the playing field more fair for small businesses, this debate is long overdue.

Posted by Mike Owen, Assistant Director

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‘Shared sacrifice’ — for real?

Will “shared sacrifice” include the kind of balance we need in sustainable budget decisions that reflect Iowa values?

Mike Owen
Mike Owen

Our incoming governor is talking about “shared sacrifice.” It’s an interesting choice of words, because it implies “balance” in the tough choices, disappointing people across the board, or more positively, expecting much from all.

But will that happen? As we saw with 10 percent state budget cuts back in 2009, “across the board” is not always as advertised. Spending on clearly stated priorities, such as education, law enforcement and environmental quality, is cut, while spending in the shadows is not.

Too easily left out of the equation is the spending Iowa does through the tax code. This kind of spending is in the form of tax credits, and also money lost through tax loopholes, the loose seams in the tax code through which big corporations shield profits from rightful taxation in our state. It is spending on autopilot, often behind a veil of secrecy, with little or no oversight — let alone review and approval — by our elected lawmakers.

So, will “shared sacrifice” in 2011 include that kind of spending — the kind of spending that actually reduces resources before elected officials get a chance to make decisions on whether, or how, to spend the funds?

This is one of the most critical decisions to be made as a new General Assembly convenes and the new governor is inaugurated.

Posted by Mike Owen, Assistant Director