No commercial tax relief until we see TIF reform

We must consider what tax breaks are already in place for commercial property.

Peter Fisher
Peter Fisher

Scare tactics about commercial property taxes in Iowa are nothing new. Legislators and governors of both parties have fanned that idea for years, appealing to businesses that pay tax on 100 percent of their property value, while residential homeowners pay on about half.

Of course we all want to retain and attract good jobs. But it is usually a mistake to simply look at one part of our tax code and make sweeping generalizations about the impact on business activity. Property taxes are just part of the overall system of state and local taxes, both for individuals and businesses.

Businesses that occupy commercial real estate are also taxed under the corporate or personal income tax. Iowa’s personal income tax level is about average, and the corporate income tax in Iowa is well below average. Research has shown that Iowa’s overall level of business taxation (including property taxes) is about average among the 50 states.

There are inequities in commercial property tax that we could fix — but we should do so strategically. And if we’re going to look at the rates, or consider rollbacks or other cuts, we must consider what breaks already are in place.

A good starting place: the out-of-control growth of tax abatements and subsidies through tax increment financing (TIF). While commercial property owners in general are expected to pay tax on the full assessed value of their property, TIF arrangements drastically reduce or eliminate commercial property taxes, but only for selected property owners. This creates a disparity, and equity issues within a community. One store pays little or no property tax; a competitor down the street pays the full rate.

Any substantial reductions in taxes on commercial property should also address the inequities and waste inherent in Iowa’s system of tax increment financing. There should be no commercial property tax relief without substantial TIF reform.

Posted by Peter Fisher, Research Director

Tax Day spin: Find refuge in the facts

It is quite possible there is no more heavily spun day on the calendar.

Mike Owen
Mike Owen

Today is, as we all know, “Tax Day,” the deadline for filing our federal individual income tax returns. It is quite possible there is no more heavily spun day on the calendar. You can’t even find refuge on the comics pages.

While the Tea Party folks and others have their spotlight today, take a few minutes to read this masterful year-old blog post from our friends at the Oklahoma Policy Institute: http://okpolicy.org/blog/taxes/classic-reruns-no-tax-day/

Beyond that perspective on the value of taxes in funding essential public services, other useful information also is worth considering today about who pays taxes. Citizens for Tax Justice, in a report this week about tax changes resulting from the recovery, or “stimulus,” legislation signed by President Obama last year, notes the following:

  • 99 percent of working families and individuals in Iowa benefited from at least one of the tax cuts signed into law by President Obama.
  • Working people in Iowa received $1,115, on average, from these breaks.
  • These tax breaks benefited working people at all income levels.

For the full report (3-page PDF) click here and for the Iowa-specific summary (4-page PDF) click here.

David Leonhardt of the New York Times and Ezra Klein of the Washington Post (whose blog links to Jon Stewart’s take of the situation on “The Daily Show”) illustrate that lower-income Americans pay taxes, even if others might not want to acknowledge it.

As Stewart suggests, actually getting the facts about who pays taxes — which also include federal payroll taxes and state and local taxes — might not fit the outrage being pushed at a given moment: “Knowing that doesn’t make you as mad, does it?”

Iowa Fiscal Partnership reports have shown state and local tax impacts are far greater as a proportion of income for low-income Iowans than for higher-income Iowans, while corporate-income-tax loopholes and other tax breaks are draining the state treasury with little accountability, and critical services are being cut.

All food for thought on this day.

Posted by Mike Owen, Assistant Director

Missing an opportunity for tax-credit reform?

Nothing is objectionable about proposed tax-credit reforms — but much more needs to be done.

Christine Ralston
Christine Ralston

Iowa is missing an opportunity to implement strong transparency measures and to recapture revenue that it has been allowing to slip away for years.

Legislation passed by the Senate and now before the House appears to make only small, cosmetic changes to a serious structural problem. Generous tax credits have been leaking revenue out of the state for many years. Considering the recent scandal in the film tax credit program and the fact that Iowa, like most other states, faces revenue shortfalls of historic proportions, the state very much needs meaningful reform.

The Governor’s Tax Credit Review Panel made promising recommendations, and the Governor supported those recommendations when he issued a call for action in his Condition of the State address. Yet, the legislative package falls far short of the panel’s recommendations. For example:

Table comparing tax-credit reform proposals

It is important to note that lowering a cap is not the same thing as “saving” money. When the sum of all business credit claims is not reaching that cap, then the state is only reducing its potential liability and not saving any actual dollars.

The proposal is also lacking in essential new transparency measures. No additional disclosures regarding tax credits and expenditures are proposed in the plan. Iowans should know who is getting their tax dollars.

And this bill is certainly not good news for the thousands of Iowans who are seeing important safety net programs and jobs disappear during this recession.

Does this bill do something? Yes. Does it do much? No. Nothing in this bill is objectionable when considering the principles of sound tax policy. That said, much more needs to be done to move Iowa forward and to solve Iowa’s budget problems using an approach that is truly balanced.

Posted by Christine Ralston, Research Associate

Watching your quarters — transparent state finances

Companies receive secret checks. That’s business as usual in Iowa, where corporate giveaways are out of control.

Getting a handle on where corporate subsidies go can be slippery business.

When you put your money in, do you see where it goes?

It’s an important question for taxpayers, and it’s one the Iowa General Assembly may address further this spring.

The so-called “Research Activities Credit,” or RAC, has become an annual drain on the state Treasury of $30-40 million and is projected to reach past $60 million in a few years. But the biggest cost is not simply tax revenues lost to a credit against taxes owed. The biggest cost of the RAC is in its poorly named “refund” program. If a company can claim a credit larger than its taxes owed, it gets what’s called a “refund” — for taxes it never had to pay.

These “refunds” averaged about 92 percent of claims from 2000-05, and in 2005 averaged $3 million per recipient. That is money that never has to go through the regular budget process, scrutinized by legislative committees and weighed against the state’s priorities. If it were a grant, or a regular budget item, you would see where that money goes. But since it’s rewarded through the tax system, you don’t. The companies receive secret checks.

That’s business as usual in Iowa, where corporate giveaways are literally out of control.

Maybe this will start to change. A new law passed last year could be a critical first step toward transparency of subsidies to private corporations. Recipients of RAC claims above $500,000 will be named, with amounts received, in an upcoming report from the Department of Revenue.

You’ll be able to see where at least some of the money is going, and count your quarters — a half-million dollars at a time!

Posted by Mike Owen, Assistant Director

Iowa Fiscal Partnership supports suspension, investigation of film credit program

A critical problem with Iowa tax credits is a lack of transparency.

Governor Culver acted responsibly Friday by ordering a suspension of the state’s film tax-credit program pending further investigation of irregularities in the management of the program.

A critical problem with the film credit and many other economic development tax advantages offered to industry by the state of Iowa is a lack of transparency. State lawmakers and the public for the most part have no idea whether current tax breaks — which are typically granted as corporate entitlements — are actually performing as intended.

The initial investigation has exposed the film credits, as currently in place, as a boondoggle that is draining our state treasury. Further, this is coming at a time when our state leaders are anticipating budget cuts. All spending — including spending through the tax code — needs to be on the table when considering cuts to the budget.

Those taking advantage of apparent lax management of the film-credits program may indeed be ruining it for other filmmakers who have not done so. Nevertheless, there is no justification for continuing this program while all the problems with it are being sorted out, and while education and fundamental human services are threatened with budget cuts.

[The Iowa Fiscal Partnership is a joint budget and tax policy analysis initiative of two Iowa-based nonprofit, nonpartisan organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines.]

Federal deductibility: the reality

The word of the month in Iowa tax discussions is “federal deductibility.” It means you can deduct your federal income tax from your state income at filing time. Only a handful of states let their residents do it.

Iowa is one of only three states that permit taxpayers to deduct the full amount of federal income taxes paid.

Make no mistake: Federal deductibility is a benefit targeted for Iowa’s highest-income families. Some others benefit, but mostly, it is those at higher incomes.

The last, best analysis of this we have shows that the wealthiest 20 percent of Iowa taxpayers receive 80 percent of the tax benefit from federal deductibility (2002 figures). For the other 80 percent of Iowans, the tax cut amounted less than half of 1 percent of their income. Using those 2002 numbers, by the way, the dollar amount of the average tax cut for the top 1 percent of taxpayers was about $13,900 — more than the income of people in the bottom 20 percent.

To understand why wealthier people get the greatest benefits under federal deductibility, consider this: You have to pay federal income tax to get the Iowa deduction. Many Iowans at moderate and low incomes simply do not make enough money to pay income tax to the federal government — but Iowa law still makes them pay income tax. some provisions in the tax-reform bill in the Iowa Legislature make that situation better for low-income families.

Remember these perspectives when someone defends “federal deductibility” as something to help low- or middle-income working families. For most of them, it’s just not so.

Focus on Facts: Reform Lowers Rates

There’s a lot of confusion being promoted by some about the tax-reform plan before the Iowa Legislature.

There are three main points to it:

  • • It lowers Iowa’s tax rates, taking the top rate down by 2 percentage points.
  • • To enable the lower rates, it does away with federal deductibility.
  • • There are additional boosts in tax credits targeted to low- and moderate-income working families.

Iowa Fiscal Partnership analysts have — like others — been going through the figures provided by the nonpartisan Legislative Services Agency (LSA) about the effects of the total package. Those effects have been portrayed many ways. IFP considers the following to be the most important points to be understood from that LSA analysis:

  • • For both 2009 and 2010, 73 percent of households with incomes below $50,000 a year would see their taxes either stay the same or decrease under the reform proposal.
  • • During 2009, households earning below $50,000 would, on average, see a tax change of no more than $70 in either direction, as a cut or an increase.
  • • Overall, Iowans earning below $125,000 would, on average, see a tax cut or no change.

That last number is an important one. We’ve been hearing a lot in recent days about effects on small business. Many of the claims don’t hold water.

As our researchers have found, more than 70 percent of small business owners in the U.S. earn less than $125,000. Because many small-business owners report and pay their state income tax on individual returns, this plan obviously helps them, too.

This plan makes a small but positive change in the tax code.

Posted by David Osterberg, Executive Director