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.

Smokey and the Jobs

We’re not going to say it can’t be done. But we’ve got a long way to go, and a short time to get there.

The controversy over speeding by the Governor’s SUV prompted one columnist [1] to tinker with the lyrics for the theme song from Smokey and the Bandit (the Burt Reynolds film in which a couple of lead-footed drivers set out on a multistate beer run through the South beating the law at every turn): “Gov. Terry Branstad’s SUV was apparently westbound and down, loaded up and truckin.’”

This naturally leads to a discussion about the Governor’s job goals, because of the next lines from the same song: “We gonna do what they say can’t be done. We’ve got a long way to go, and a short time to get there….”

Governor Branstad set out to produce 200,000 jobs in five years, a lofty goal and one all Iowans should want to see happen. But to do that, we need to average a net increase of about 3,300 jobs a month for that whole span. A pace like that has never come easily in Iowa. In the last two decades we have reached it only once, in 1994, over an entire calendar year.

And, through the first 28 months of his term, tracking we do for IPP’s monthly JobWatch shows we have a net gain of 48,000 jobs — a pace of 1,700 new jobs per month. That leaves 32 months at a pace of 4,800 jobs per month to gain the remaining 152,000. So the Governor has set an aggressive goal for one year, let alone five.

As the graph below indicates, the Iowa economy has just about caught up with both the state’s peak level of jobs and peak before the 2007-09 recession, while falling well short not only of the Governor’s goal but also the number of jobs needed to keep up with population growth.

Basic RGB

Another 152,000 jobs over 32 months?

We’re not going to say it can’t be done. But we’ve got a long way to go, and a short time to get there.

Posted by Mike Owen, Executive Director

[1] Todd Dorman, The Gazette, Cedar Rapids, “Smokey and the Branstad,” updated July 3, 2013 — http://thegazette.com/2013/07/03/smokey-and-the-branstad/