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Policy Points from Iowa Fiscal Partners

How to make Iowa’s tax system more unfair

Posted February 5th, 2013 to Blog
David Osterberg

David Osterberg

How odd that a new proposal to make Iowa’s tax system more regressive and unfair comes out just when new evidence shows it already is unfair. HF3 would make the Iowa income tax rate flat where it needs to reflect ability to pay. Since higher income people pay more in income tax, and because they are expected to pay a greater percentage as their income rises, moving to a flat or flatter income tax is a reward to them. It does not help low- and moderate-income people.

As shown in the recent “Who Pays?” report by the Institute on Taxation and Economic Policy (ITEP), the poorest pay the highest portion of their income in taxes. (See graph.) The sales tax is much steeper as a share of income from low-income Iowans than it is from high-income Iowans, and the property tax is marginally more expensive to low-income people as a share of income than it is to those with high incomes. The income tax is the only progressive element of Iowa’s state and local tax system.

graph of Who Pays Iowa taxesTo flatten the only progressive feature of Iowa’s tax system would make the overall tax system more regressive. That would be the inevitable effect of HF3.

The problem with Iowa’s tax system is not that it’s too progressive. In fact, it is regressive — taking a larger share of the income of people at low incomes and middle incomes than of people at the top. HF3 would compound this.

Posted by David Osterberg, Executive Director


Sound budgeting doesn’t include blanket tax credit

Posted January 28th, 2013 to Blog
Mike Owen

Mike Owen

This session of the Iowa Legislature offers a tremendous opportunity to move the state forward with a balanced approach — including responsible, fair tax reform and investments in critical needs that have gone unmet, in education at all levels, in environmental quality and public safety.

The proposal for a blanket $750 tax credit to couples, regardless of need and blind to the opportunity cost of even more lost investments, does not fit that approach. To compound a penchant to spend money on tax breaks is fiscally irresponsible to the needs of Iowa taxpayers, who will benefit from better services, and to the promise that we would return to proper investments when the economy turned up, as it has. Furthermore, to give away Iowa’s surplus when uncertainty remains about the impact of federal budget decisions on our state’s tax system and services is tremendously short-sighted.

As the Iowa Fiscal Partnership has established, cutbacks in higher education funding have caused costs and debt to rise for students and their families, not only at the Regents institutions but community colleges as well. While Iowa voters, through a statewide referendum, have expressly called for new revenues to go toward better environmental stewardship, lawmakers have not taken action. The surplus we now see should be used responsibly for the future of Iowans, who patiently endured budget austerity for the day when we could once again see support for critical services. This is no time to be forgetting our responsibilities.

Iowa can do better by returning to the basics of good budgeting, crafting budget and tax choices that keep a long-term focus on the needs of young and future generations, whose lives will be shaped by the foundations we leave them.

Posted by Mike Owen, Assistant Director


EITC boost would help families who need it — and economy

Posted January 17th, 2013 to Blog
Heather Gibney, Research Associate

Heather Gibney

If you imagine a packed Kinnick Stadium on game day you have an idea of how many Iowans were kept out of poverty from 2009 to 2011 thanks to two refundable tax credits.

A new state-by-state analysis from the Brookings Institution finds that the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 71,123 Iowans out of poverty, over half of them children.

The Governor’s Condition of the State speech Tuesday missed an opportunity to discuss the value of Iowa’s own Earned Income Tax Credit (EITC) to Iowa families and prospects for an expansion — something he has twice vetoed on grounds that he wanted more comprehensive tax reforms.

The Brookings analysis uses a new way of looking at poverty: the Supplemental Poverty Measure, an updated approach to the calculation of whether an Americans household is in poverty. So it’s a valuable look that we haven’t seen for state-level figures.

The EITC is designed to encourage work when low-income jobs don’t provide enough for a family to make ends meet. So, as a family earns more income, they become eligible for a larger credit; as their income approaches self-sufficiency the EITC gradually phases out.[1]

At the state level, Iowa families who are eligible for the federal EITC also qualify for the state EITC, which is set at 7 percent of the federal credit. Proposals in the past would take that higher, to 10 percent or even 20 percent. It can be an important break for lower-income working families because Iowa already taxes the income of many who don’t earn enough to pay federal income tax. Currently, a married couple with two incomes and two children who qualifies for the federal EITC doesn’t have to start paying federal income taxes until their incomes reach $45,400. That same family would have to pay Iowa income taxes when their incomes reached $22,600.[2]

The EITC is the the nation’s largest and most successful anti-poverty program, largely because it encourages and rewards working families. With Iowa’s 85th General Assembly under way, discussions about raising Iowa’s EITC above 7 percent may once again emerge after lawmakers failed to reach an agreement last year.

An EITC increase would raise the threshold at which Iowa families start to owe income taxes — putting more money into the pockets of those who need it the most and encouraging them to spend that money in their local communities.

Posted by Heather Gibney, Research Associate


EITC boost would help families who need it — and economy

Posted January 17th, 2013 to Blog
Heather Gibney, Research Associate

Heather Gibney

If you imagine a packed Kinnick Stadium on game day you have an idea of how many Iowans were kept out of poverty from 2009 to 2011 thanks to two refundable tax credits.

A new state-by-state analysis from the Brookings Institution finds that the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 71,123 Iowans out of poverty, over half of them children.

The Governor’s Condition of the State speech Tuesday missed an opportunity to discuss the value of Iowa’s own Earned Income Tax Credit (EITC) to Iowa families and prospects for an expansion — something he has twice vetoed on grounds that he wanted more comprehensive tax reforms.

The Brookings analysis uses a new way of looking at poverty: the Supplemental Poverty Measure, an updated approach to the calculation of whether an Americans household is in poverty. So it’s a valuable look that we haven’t seen for state-level figures.

The EITC is designed to encourage work when low-income jobs don’t provide enough for a family to make ends meet. So, as a family earns more income, they become eligible for a larger credit; as their income approaches self-sufficiency the EITC gradually phases out.[1]

At the state level, Iowa families who are eligible for the federal EITC also qualify for the state EITC, which is set at 7 percent of the federal credit. Proposals in the past would take that higher, to 10 percent or even 20 percent. It can be an important break for lower-income working families because Iowa already taxes the income of many who don’t earn enough to pay federal income tax. Currently, a married couple with two incomes and two children who qualifies for the federal EITC doesn’t have to start paying federal income taxes until their incomes reach $45,400. That same family would have to pay Iowa income taxes when their incomes reached $22,600.[2]

The EITC is the the nation’s largest and most successful anti-poverty program, largely because it encourages and rewards working families. With Iowa’s 85th General Assembly under way, discussions about raising Iowa’s EITC above 7 percent may once again emerge after lawmakers failed to reach an agreement last year.

An EITC increase would raise the threshold at which Iowa families start to owe income taxes — putting more money into the pockets of those who need it the most and encouraging them to spend that money in their local communities.

Posted by Heather Gibney, Research Associate


Accountability is good for tax breaks, too

Posted January 4th, 2013 to Blog
Mike Owen

Mike Owen

The Des Moines Register has an interesting editorial today about the state’s voluntary preschool program. The Register is asking for accountability:

“Before lawmakers consider any new education reforms, they should ensure that the changes they made a few years ago are helping.”

Hard for anyone to argue with that. Advocates of preschool surely would not fear a legitimate review. And what better time to review and adjust a program than its early years?

Now, wouldn’t it be interesting to see the same concept applied to Iowa’s many tax breaks for corporations? Do they do any good? There is no evidence that they do for the most part, a fact ignored routinely by the Iowa General Assembly and our Governors past and present, but they just keep on going. The idea of a review of tax breaks only gets lip service from most lawmakers; there are no serious reviews and no teeth in state law to require them.

The Research Activities Credit alone is a program crying out for this kind of scrutiny, a point clear from the few details that are available (See http://www.iowafiscal.org/2012research/120221-IFP-RAC.html). Unlike the preschool program, in which 9 out of 10 Iowa school districts participate, the RAC is used by a relative handful of companies in Iowa, well under 200, and is dominated by less than 10.

The money is not all that different: $58 million in 2011-12 for preschool through the state formula vs. almost $48 million for the RAC in 2011 — with $45 million of that paid in “refund checks.” These are not refunds of taxes paid, and they don’t even reduce taxes. Instead, millions go to big corporations such as Rockwell Collins, Deere and DuPont that owe so little in income tax that their tax credits are far above the amount of taxes they owe.

What’s good for the goose of preschool is certainly good for the gander of tax breaks.

//EDITOR’S NOTE: The next annual report on the use of the Research Activities Credit is due Feb. 15 from the Iowa Department of Revenue. Stay tuned!//

Posted by Mike Owen, Assistant Director


Accountability is good for tax breaks, too

Posted January 4th, 2013 to Blog
Mike Owen

Mike Owen

The Des Moines Register has an interesting editorial today about the state’s voluntary preschool program. The Register is asking for accountability:

“Before lawmakers consider any new education reforms, they should ensure that the changes they made a few years ago are helping.”

Hard for anyone to argue with that. Advocates of preschool surely would not fear a legitimate review. And what better time to review and adjust a program than its early years?

Now, wouldn’t it be interesting to see the same concept applied to Iowa’s many tax breaks for corporations? Do they do any good? There is no evidence that they do for the most part, a fact ignored routinely by the Iowa General Assembly and our Governors past and present, but they just keep on going. The idea of a review of tax breaks only gets lip service from most lawmakers; there are no serious reviews and no teeth in state law to require them.

The Research Activities Credit alone is a program crying out for this kind of scrutiny, a point clear from the few details that are available (See http://www.iowafiscal.org/2012research/120221-IFP-RAC.html). Unlike the preschool program, in which 9 out of 10 Iowa school districts participate, the RAC is used by a relative handful of companies in Iowa, well under 200, and is dominated by less than 10.

The money is not all that different: $58 million in 2011-12 for preschool through the state formula vs. almost $48 million for the RAC in 2011 — with $45 million of that paid in “refund checks.” These are not refunds of taxes paid, and they don’t even reduce taxes. Instead, millions go to big corporations such as Rockwell Collins, Deere and DuPont that owe so little in income tax that their tax credits are far above the amount of taxes they owe.

What’s good for the goose of preschool is certainly good for the gander of tax breaks.

//EDITOR’S NOTE: The next annual report on the use of the Research Activities Credit is due Feb. 15 from the Iowa Department of Revenue. Stay tuned!//

Posted by Mike Owen, Assistant Director


Remaking ‘Blazing Saddles’

Posted December 13th, 2012 to Blog
Peter Fisher

Peter Fisher

Some of the arguments against raising tax rates on the richest 2 percent of Americans back to the level that prevailed during the boom years of the 1990s bring to mind Mel Brooks’ classic, Blazing Saddles. In the film, new Sheriff Bart is surrounded by an angry mob. He draws his gun, points it at his own head and warns he’ll shoot if someone makes a move. The mob freezes and Bart escapes to safety.

In the current remake of the film, Bart is being played by the wealthy businessmen claiming they will have to lay off workers if we raise the tax rate on their profits by 3.6 percentage points.

We can reasonably assume those workers are currently productive, earning enough for the owner to cover their wages and add something to the bottom line. If not, they would have been laid off long ago. So these owners would have us believe that an increase in the tax on profits would lead them to lay off these productive workers. That, in turn, would mean the business is producing less, earning less profit before taxes.

So the owners are actually saying, “If you raise my taxes, I will show you a thing or two — I’ll deliberately sabotage my business so you have less profit to tax.”

A business owner whose objective is to maximize after-tax profits will always be better off producing more, with more workers, and earning more before-tax profit, no matter what percent of those profits end up going to pay income taxes. On the other hand, making a political point may be so important to these owners that they are willing to shoot themselves in the foot, if not the head, to do it. If they are rich enough to afford that symbolic gesture, I guess we can’t stop them.

Fortunately, in the remake of Blazing Saddles, it appears that the angry mob is ready to call their bluff. They recognize that the “job-killing tax increase” is no such thing. It is simply an effort to reclaim for the average American a share of the increased wealth generated by workers in this economy in recent years that has been captured almost entirely by the richest among us.

Posted by Peter Fisher, Research Director


Remaking ‘Blazing Saddles’

Posted December 13th, 2012 to Blog
Peter Fisher

Peter Fisher

Some of the arguments against raising tax rates on the richest 2 percent of Americans back to the level that prevailed during the boom years of the 1990s bring to mind Mel Brooks’ classic, Blazing Saddles. In the film, new Sheriff Bart is surrounded by an angry mob. He draws his gun, points it at his own head and warns he’ll shoot if someone makes a move. The mob freezes and Bart escapes to safety.

In the current remake of the film, Bart is being played by the wealthy businessmen claiming they will have to lay off workers if we raise the tax rate on their profits by 3.6 percentage points.

We can reasonably assume those workers are currently productive, earning enough for the owner to cover their wages and add something to the bottom line. If not, they would have been laid off long ago. So these owners would have us believe that an increase in the tax on profits would lead them to lay off these productive workers. That, in turn, would mean the business is producing less, earning less profit before taxes.

So the owners are actually saying, “If you raise my taxes, I will show you a thing or two — I’ll deliberately sabotage my business so you have less profit to tax.”

A business owner whose objective is to maximize after-tax profits will always be better off producing more, with more workers, and earning more before-tax profit, no matter what percent of those profits end up going to pay income taxes. On the other hand, making a political point may be so important to these owners that they are willing to shoot themselves in the foot, if not the head, to do it. If they are rich enough to afford that symbolic gesture, I guess we can’t stop them.

Fortunately, in the remake of Blazing Saddles, it appears that the angry mob is ready to call their bluff. They recognize that the “job-killing tax increase” is no such thing. It is simply an effort to reclaim for the average American a share of the increased wealth generated by workers in this economy in recent years that has been captured almost entirely by the richest among us.

Posted by Peter Fisher, Research Director


States should beware ALEC-brand snake oil

Posted November 29th, 2012 to Blog

Peter Fisher

Legislative sessions will be starting across the country after the first of the year, and with them, some very bad ideas for public policy.

The purveyor of many poor prescriptions is a very influential right-wing organization, the American Legislative Exchange Council, known as ALEC. The organization promotes policies to cut taxes and regulations in the disguise of promoting economic growth, but what they really do is reduce services, opportunity and accountability.

In short, the ALEC medicine show is a prescription for poor results, and states should beware.

Our new report, “Selling Snake Oil to the States,” examines ALEC’s proposals and the misinformed, primitive methodology behind the study that supports them. The new report, a joint project of the Iowa Policy Project in Iowa City and Good Jobs First in Washington, D.C., illustrates how ALEC’s prescriptions really offer stagnation and wage suppression.

In fact, we find that since ALEC first published its annual “Rich States, Poor States” study with its Economic Outlook Ranking in 2007, states that were rated better have actually done worse economically.

Find “Selling Snake Oil to the States” at http://www.goodjobsfirst.org/snakeoiltothestates.

We tested ALEC’s claims against actual economic results. We conclude that eliminating progressive taxes, suppressing wages, and cutting public services are actually a recipe for economic inequality, declining incomes, and undermining public infrastructure and education that really matter for long-term economic growth.

ALEC’s rankings are based on arguments and evidence that range from deeply flawed to nonexistent, consistently ignoring decades of peer-reviewed academic research.

What we know from research is that the composition of a state’s economy — whether it has disproportionate shares of high-growth or low-growth industries — is a far better predictor of a state’s relative success over the past five years. Public policy makers need to stick to the basics and recognize that public services that benefit all employers.

Posted by Peter Fisher, Research Director


A full table

Posted November 21st, 2012 to Blog
Mike Owen

Mike Owen

As the serving table groans and the plate runneth over for many Americans on Thanksgiving Day, the bounty of food they enjoy will not be so plentiful for all.

Many Iowans will face a challenge — as they often have — just to be able to provide enough for their family. They will be thankful that our nation does set aside enough to help them get by. It’s nothing extravagant, but it matters in keeping their children and themselves fed when times are tough. It comes in the form of what we have long known as “Food Stamps,” one of the most successful programs ever initiated by the federal government.

Against this backdrop, Congress holds the fate of the Farm Bill, legislation passed every five years. Three-fourths of the package is related to nutrition support, including Food Stamps — now SNAP, the Supplemental Nutrition Assistance Program. The outcome, as outlined by Michael Bruner in a recent brief for the Iowa Fiscal Partnership, Children and the Farm Bill, shows that decisions in the lame-duck session will have important implications for how well SNAP continues to meet the needs of struggling Americans.

Gridlock in Washington over the past year has left this issue hanging. As IPP’s Andrew Cannon noted a year ago in his report on public and private nutrition programs, A Secure Nutrition Network, “Even a robust private network of food banks and food pantries cannot fully cover the needs of food insecure Americans if federal nutrition programs lapse.”

As we celebrate the holidays and prepare for the year ahead, we should note that over 197,000 households in Iowa, representing over 419,000 people, received food assistance benefits in October totaling about $51 million. Is $51 million a lot of money? Yes — and it’s going into local economies across the state, while providing important help to families.

But there’s no one living extravagantly off that assistance. It works out to about $121 a month per person — about $3.89 per day, or $1.30 per meal. It is, as advertised, a “supplemental” benefit for, in many cases, working families.

The table is full of important issues, none more important than assuring that all Americans, particularly children, have enough to eat.

Posted by Mike Owen, Assistant Director

———

Other resources on this issue:

Check out the “Policy Basics” brief from the Center on Budget and Policy Priorities: http://www.cbpp.org/cms/index.cfm?fa=view&id=2226 and the latest food security report from USDA: http://www.ers.usda.gov/publications/err-economic-research-report/err141.aspx