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Tax cuts: Already tried, failed

Posted April 23rd, 2018 to Blog

Former Iowa Department of Revenue official Michael Lipsman discusses tax issues at a public forum last week at the State Capitol as former Senator Charles Bruner, left, and Senators Joe Bolkcom, Janet Petersen and Amanda Ragan listen. The institutional memory of experts such as Lipsman has been lost as legislators have rushed into plans to overhaul Iowa’s tax system, with most discussions taking place outside public view and earshot.

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Twenty-one years ago the Iowa Legislature enacted an across-the-board 10 percent cut in state income tax rates. That tax cut not only failed to spur economic growth, but bears a share of the blame for the under-performance of the Iowa economy in the years following. And it led to recurring revenue shortfalls and budget cuts.

Some in the Iowa Senate aim to repeat the experiment, this time with an 8 percent cut. There is no reason to expect a different result.

A 2004 report by Michael Lipsman, then head of the Tax Research and Program Analysis Section of the Iowa Department of Revenue, explains why the tax cuts of 1997 and 1998 had a negative effect on the economy.[1] That legislation cut all income tax rates by 10 percent, expanded the exemption for capital gains income, increased the pension exclusion, and exempted lineal ascendants and descendants from the state inheritance tax.[2]

The tax cuts were expected to reduce state revenue by $318 million in 2019. But Lipsman estimates that the effect of all these tax provisions was a reduction in revenue exceeding $600 million a year by 2002. Why the larger number? Because not only did the state take a smaller share of Iowans’ income in taxes, but income grew more slowly than it would have without the tax cuts.

This runs counter to the ideology of supply-side economics, which predicts that tax cuts will always spur growth. But Lipsman’s point is that it depends on the nature of those cuts — how much goes to non-residents, how much to high-income residents, where savings are likely to be invested, and where goods are produced.

The Iowa tax rate cuts, the pension exclusion, and the capital gains preference all concentrated their benefits on higher income taxpayers, and over a third of the inheritance tax benefit went to non-residents. The 3 percent of Iowa taxpayers with over $100,000 income got 24 percent of the benefit from the rate cuts, and these are the taxpayers most likely to invest their tax cut rather than spend it locally. It is likely that much of the tax savings was invested outside the state. Furthermore, most of the high-value consumer goods purchased by upper-income Iowans are produced outside the state.

At the same time, the tax cuts reduced state and local revenue, and public-sector employment dropped as a result. State and local government payrolls in Iowa decreased 16 percent from 1997 to 2002, over twice the rate of decline for the country as a whole. And state and local governments spend primarily within the state of Iowa, helping to boost the state economy. Cuts in public sector spending hurt the state economy directly (reduced purchases from local suppliers) and indirectly (reduced local purchases by public sector workers).

The upshot is that the tax cuts appear to have slowed growth, taking money out of the economy that ultimately ended up invested elsewhere, or went directly to non-residents, or was spent on goods produced elsewhere, instead of supporting Iowa businesses. In the five years leading up to the tax cuts, the Iowa economy grew at a rate nearly identical to the national economy: 28 percent. In the five years following the cuts, Iowa’s growth fell to 22 percent, compared to the national rate of 27 percent.

The massive tax cutting experiment in Kansas produced similar results — the Kansas economy slowed rather than accelerated. The experiment was a failure, and was ended by the Legislature.

The latest House tax bill would shower three-fifths of its benefits on taxpayers with income over $100,000, much more skewed to the top than the 1997 legislation. The Senate bill is likely to be skewed as well; it includes a pass-through income loophole that would cost $100 million, four-fifths of that going to the richest 5 percent of taxpayers.

Doing the same thing and expecting a different result is not the definition of rational policy making.

[1] Michael A. Lipsman. The Economic Effects of 1997 and 1998 Iowa Tax Law Changes. Tax Research and Program Analysis Section, Iowa Department of Revenue, July 2004.

[2] These are the major provisions, accounting for 90 percent of the cost. The bills also increased the personal credits and the tuition and textbook credit.

Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Enhancing tax fairness for families

•  Making household living costs part of the mix in Iowa tax policy  
•  How reforms can help Iowans support their families

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By Charles Bruner for the Iowa Fiscal Partnership

170118_capitol_170603-4x4Iowa takes only small steps but could do much more to recognize essential costs families face to support a household and raise children. The standard (or itemized) deduction, personal exemptions, and personal credits on the income tax all seek to recognize these costs. Such exemptions from taxable income (or credits applied to taxes owed) are based upon recognized tax principles of fairness — not taxing those essentials (food, housing, transportation, etc.) that are needed simply to get by. The standard deduction provides a basic recognition of this cost, while the option to itemize deductions enables tax filers to recognize higher costs of specific household expenses (primarily mortgage interest costs, taxes, high medical expenses, and charitable contributions).

Iowa’s current standard deduction already was very small in relation to the federal standard deduction, before changes in the new federal tax cut (Iowa’s for 2018 are $2,030 for a single filer and $5,000 for a married joint filer, compared with the federal deductions of $6,500 and $13,000 before the changes). Under the new federal law, standard deductions will increase to $12,000 for a single filer and $24,000 for a married couple filing jointly (although the current personal exemptions are eliminated).

As a result of the low standard deduction, Iowa also has one of the most complex state income tax systems in the country. At the federal level, even before the federal tax cut, 70 percent of tax filers claimed the standard deduction[1] (the figure is expected to rise to 85 percent with the expansion of the deduction). Only about half of Iowa tax filers do.[2] This means, for future tax years, if Iowa does not expand its standard deduction, about 4 in 10 Iowans who claim the federal standard deduction will have to go through the extra and often complicated process of calculating and claiming a state itemized deduction.

When it comes to the costs of raising children, the differences are even greater. Families with children have child-raising expenses that have been estimated at $13,000 per year for a middle-income family.[3] Previously, the federal tax code had provided a $1,000 credit plus a $4,050 personal exemption from income for each child. The federal tax cut legislation eliminated the personal exemption while doubling the child tax credit to $2,000. For a tax filer in a marginal tax bracket of 22 percent, often middle-income families, that credit is equivalent to a deduction of a little over $9,000, a substantial contribution to the $13,000 estimated cost of raising a child.

Iowa, however, has only a $40 credit for each child. For a filer in a 6 percent state income tax bracket, this is equivalent to a deduction of about $670. This is where[4] Iowa’s individual income taxes are most out-of-line with the federal income tax and taxes in many other states. A further complication and inequity is that many Iowa families with children and incomes below $50,000 owe Iowa income taxes, but do not owe (and even receive a refund) at the federal level. While the federal tax code works to support working families with children in making ends meet, the current Iowa tax code often does the opposite.

Both SF2383 and the Governor’s proposal make changes to Iowa’s standard deduction, but neither makes changes to Iowa’s personal credits for children.

SF2383 essentially adopts the new federal standard deductions ($12,000 for a single individual and $24,000 for a married couple filing jointly). The Governor’s proposal raises the standard deduction to $4,000 for a single individual and $8,000 for a married couple filling jointly. Neither, however, would change the personal credits. The Governor’s proposal also adds an additional deduction of $1,500 for elderly and blind individuals, which expands the already preferential tax treatment of seniors over working people.[5]

The increases in the standard deduction in both versions have very substantial costs, but also substantial contributions to tax fairness and simplicity in Iowa. In particular, they benefit moderate and middle-income tax filers, especially those who rent and do not have mortgage interest deductions that would increase the housing expense deduction they would claim if itemizing.

Both the Governor’s proposal and SF2383 begin to address inequities in Iowa’s tax code regarding essential household living costs through the standard deduction expansion. Neither, however, addresses the inequities related to the costs of raising children.

Given the expansion in the standard deduction, one way to better recognize children in the Iowa income tax would be to limit the provision of personal credits to dependents (primarily children) and redirect the cost of the current credits for adults to expand the child tax credit. Another is to ensure that other changes to Iowa’s personal income tax (closing loopholes, adjusting rates) make room to increase the dependent credit to better reflect the cost of raising children. Such reforms would enhance fairness in Iowa’s income tax.


[1] Internal Revenue Service (2017). Individual Income Tax Returns, Preliminary Data, Tax Year 2015. 69.2 percent of returns claimed standard deduction.

[2] Iowa Department of Revenue. 2015 Iowa Individual Income Tax Annual Statistical Report. Tables 11 and 12. https://tax.iowa.gov/sites/files/idr/Individual Income Tax Report 2015 Revised.pdf

[3] United States Department of Agriculture (2017). Expenditures on Children by Famillies, 2015. 0-18 cost of raising child $233,000 = $13,000 per year.

[4] Iowa Fiscal Partnership, Resolving inequities in Iowa taxes, February 2012. http://www.iowafiscal.org/resolving-inequities-in-iowa-taxes/

[5] Iowa Fiscal Partnership, Tax reform and seniors: Better focusing on the real need, March 2018. http://www.iowafiscal.org/taxing-seniors-retirees-benefit-already/

 

Charles Bruner, Executive Director, CFPCCharles Bruner is director emeritus of the Child and Family Policy Center (CFPC) in Des Moines. CFPC and another nonpartisan, nonprofit organization, the Iowa Policy Project (IPP) in Iowa City. IPP and CFPC collaborate on state public policy issues as the Iowa Fiscal Partnership. Reports are available at www.iowafiscal.org.

Find IFP’s 2018 Tax Policy Kit here: http://www.iowafiscal.org/areas-of-research/ifps-2018-tax-policy-kit/

 

Taxing seniors: Retirees benefit already

Tax reform and seniors: Better focusing on the real need

Over age 65, Iowans already benefit without unneeded, unfair tax breaks

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By Peter Fisher and Charles Bruner

Tax bills in the Iowa Legislature offer substantial new tax breaks for seniors without any demonstration of need or recognition of existing preferences. Seniors have the lowest poverty rate of any age group in Iowa. Furthermore, tax preferences for those age 65 or older already mean that seniors collecting just an average Social Security benefit could pay no tax even with a total income of up to $40,000 for a single person, or up to $69,000 for a couple. Further tax breaks will only serve to benefit the most well-off seniors, who already pay substantially less in taxes than working families with the same income. 

Seniors are now the age group least likely to live in poverty and most likely to have substantial wealth, providing very ample revenue for the later years. Iowa’s seniors are half as likely to be in poverty as Iowa’s children, and almost four in ten have current incomes above 400 percent of the federal poverty level ($65,800 for a married couple living alone).

Moreover, Iowa has adopted a number of special provisions benefiting seniors. While the elderly and disabled property tax credit is available only for those with low income, the other tax preferences are not based on ability to pay:

  • All Social Security benefits are exempt from tax.
  • The first $6,000 in pension benefits per person ($12,000 per married couple) is exempt from tax.
  • Those age 65 or older receive an additional $20 personal credit.
  • While non-elderly taxpayers are exempt from tax on the first $9,000 of income, for those age 65 or older, the exemption rises to $24,000. For married couples, the threshold is $13,500 for the non-elderly, but $32,000 for seniors. [1]

The average annual Social Security benefit for retired workers in Iowa was  $16,360 as of December 2016. [2] However, the maximum amount possible (for those who earned very high incomes during their working years) is currently a little over $44,000.[3] In most instances, those receiving this maximum also have other pension income and earnings from investments. Assuming at least $6,000 in pension benefits, that means the first $22,360 in income for the average earner and the first $50,360 in income for the highest earner would not be taxed. This compares with working-age adults, who would be taxed on all their earnings.

In short, under current Iowa tax law, seniors get very substantial breaks. The table below shows what a single retiree or a retired couple could earn in Social Security and pension income without paying any Iowa income tax. As illustrated, a single retiree earning the average Social Security benefit could receive as much as $24,050 in pension income, for a total income of $40,410 — over three times the poverty level — and pay no Iowa income tax. A married couple, each with the average Social Security benefit, could have $36,220 in pension income, for a total income of almost $69,000 — over four times the poverty level — and still pay no Iowa income tax. 

In contrast, a family of four with both parents working and the same total income $68,940 entirely from wages and salaries would pay over $2,000 in Iowa income taxes.[4] For a retired couple with the maximum Social Security benefit, their combined income could reach $129,900 and still be tax exempt.

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Calculations are based on current law for the 2017 tax year. Households are assumed to own their homes outright and to claim the standard deduction. They pay annual Medicare Part B and Medicare Supplement Plan F premiums of $3,689 annually, which they deduct on line 18 of the Iowa return. Income is split evenly between the filer and spouse for couples. The low earner receives monthly Social Security benefits of $650, approximately the 10th percentile of benefits nationally in 2017. The average earner receives $16,360 per year, the average retiree benefit in Iowa in 2016. The Iowa tax free income levels vary because taxpayers will pay some federal income tax on Social Security benefits, and federal tax is deductible on the Iowa return. Also, low earners may benefit from the high retiree tax free threshold, the alternate tax calculation (married couples) or the income tax reduction (singles).  

Both the Governor’s proposal and SF2383 offer additional preferential treatment for seniors without regard to their overall income. The Governor’s proposal increases the standard deduction to $4,000 for an individual and $8,000 for a married couple, and then adds an additional $1,500 for seniors and the blind. The Senate bill, SF2383, doubles the pension income exclusion from $6,000 for an individual and $12,000 for a married couple to $12,000 for an individual and $24,000 for a married couple.  The cost of this provision for FY2023 may be in excess of $50 million annually.[5]

Because seniors already receive substantial preferential tax treatment under the Iowa income tax, most are not subject to any tax until their incomes are well above the poverty level. They also pay substantially less than individuals or couples with the same income, but from earnings. Moreover, many of the greatest benefits accrue to very high-income seniors, who have big Social Security checks and pension income in addition to other investment income and earnings.

To follow principles of tax fairness — ability to pay and equal treatment of people in similar economic circumstances — at least some of the current benefits and the exclusion of income from Social Security and pension income from tax should be phased out at high income levels. The Governor’s proposal, and to a greater degree SF2383, goes in the opposite direction.

By that standard, lawmakers would not offer additional tax benefits either through expanding the pension fund exemption or additional deductions solely for the reason of being over 65. Eliminating these additional preferences items would also prevent a further reduction of tax revenue that threatens the adequacy of Iowa General Fund revenue, which benefits programs that support all Iowans but especially those that support low-income Iowans at any age.



[1] The income used to determine whether this threshold is met is “modified adjusted gross income.”

[3] $44,376 ($3,698 per month) for the highest income earners retiring at age 70 in 2018 (Social Security Administration)

[4] Each earns $32,247, two school-age children (no child care expense), $4,445 in employee contributions to health insurance from a job, standard deduction, $5,071 in Federal taxes for 2017 deducted on Iowa return.

[5] The revenue estimate for the increase between the original bill and the amendment from $10,000 to $12,000 and $20,000 to $24,000 was over $16 million, with the increase from $6,000 and $12,000 at least 3 times that amount.

 

Peter Fisher is research director of the Iowa Policy Project (IPP) in Iowa City and Charles Bruner is director emeritus of the Child and Family Policy Center (CFPC) in Des Moines. IPP and CFPC are nonpartisan, nonprofit organizations that collaborate on public policy analysis as the Iowa Fiscal Partnership. Find reports at www.iowafiscal.org.

Passing through a special break

Passing through a special break for wealthiest filers

•  Individual filers with business income win with special deduction in Iowa tax proposals
•  Qualified Business Income Deduction (QBID) adds complexity, cost

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By Charles Bruner for the Iowa Fiscal Partnership

Basic RGBThe tax bill that recently passed the Iowa Senate included a provision from the recent federal tax cut bill that provides preferential tax treatment for certain kinds of business income earned mostly by the highest income taxpayers. The “Qualified Business Income Deduction” (QBID) provides a 20 percent exemption of that income from the personal income tax. This is one of the most complicated and least understood provisions in the federal legislation, and one of the most amenable to manipulation. It also is one of the costliest and is skewed to very high-income tax filers. It applies to income (known as pass-through income) from partnerships and other non-corporate businesses reported on the individual income tax. The federal QBID alone is estimated to account for over one-third of the total costs of the federal tax bill by 2023, and could be more as tax accountants and attorneys seek ways to maximize the QBID benefits.[1]

The pass-through deduction was included in the tax that bill passed the Iowa Senate on March 1 (SF2383) with the same 20 percent exemption from income that exists in the federal law. Governor Reynolds’ proposal (HSB671) provides for a 5 percent exemption.

The Iowa Department of Revenue (DOR) provided an estimate to the Iowa Legislative Services Agency (LSA) on the cost and distribution of this one change to Iowa’s income tax system.[2]  

That analysis shows the cost of the full 20 percent exemption to income tax revenues would be $106.7 million in FY2019, rising to $118.0 million in FY2020. In FY 2019, $54.9 million (51 percent) would go to the 5 percent of tax filers with adjusted gross incomes over $200,000 — extremely skewed toward very high-income individuals.

Since the Governor’s proposal offers a QBID or “pass-through,” of 5 percent, its impact would be about one-quarter of the Senate plan, but still over $25 million a year. Further, these estimates do not reflect any large growth in the size of such pass-through income, but some tax experts are concerned that the presence of the deduction will lead to substantially more transfer of income to pass-through income from income taxed at the standard rate.

The Institute on Taxation and Economic Policy (ITEP), which models the state and federal tax codes, came up with a similar estimate: $108 million. The table below shows ITEP’s estimates of the benefits of the QBID by household income for Iowa residents.[3]

Basic RGBThe primary rationale for this provision at the federal level is that the reduction in federal corporate income tax rates from 35 percent to 21 percent requires some adjustment in individual income tax rates for pass-through business income to provide a continuing benefit for those filing on income from a subchapter S corporation, limited partnership, or sole proprietorship through the individual income tax. (The top tax rate on the personal income tax is higher, remaining above 35 percent). In Iowa, however, the top corporate income tax rate remains above the individual income tax rate (and corporate income, unlike individual income, is taxed both through the corporate income tax and shareholder taxes on dividends). Thus, the federal rationale simply does not hold within Iowa’s tax system.

Other arguments made for the federal exemption are to provide incentives for entrepreneurship. Even these arguments, however, are harder to make when applied to Iowa’s income tax, as tax filers already will receive the substantial federal break, even without an additional but much smaller Iowa exemption. Further, a disproportionate share of the Iowa benefit is likely to accrue to wealthy, nonresident tax filers, who make a share of their profits in Iowa but don’t live in the state. Moreover, the state of Kansas abandoned its recent experiment exempting 100 percent of pass-through income after it failed to produce measurable increases in new business formation while costing the state millions in lost revenue.[4]

Adopting any QBID would reduce overall Iowa income tax revenue, disproportionately benefiting the wealthiest, and with considerable uncertainty surrounding its use (and misuse) in the future. More experience with the use of this break and and its costs at the federal level would give state lawmakers a better understanding of who benefits, how they benefit, and any public purpose.


[1] The Joint Committee on Taxation (which provides official fiscal notes on federal tax legislation) estimates the federal cost of the QBID provision is $47.1 billion for tax year 2019, or 24.9 percent of overall personal income tax costs of changes in the income tax code. This grows as a share of costs to 37.2 percent in tax year 2023. Joint Committee on Taxation. JCX-67-17 (December 18, 2017) Estimated Budget Effects of the Conference Agreement For H.R.1, “Tax Cuts And Jobs Act.” https://www.jct.gov/publications.html?func=startdown&id=5053
[2] Letter to Jeff Robinson and Legislative Services Agency from John Good, Iowa Department of Revenue
[3] The Iowa Department of Revenue also provided a distributional table, but for residents and non-residents combined, with married couples filing separately reported as separate tax filers instead of as a household, and by adjusted gross income rather than total family income. The ITEP estimates provide a more accurate view of how the benefits are distributed among residents by total household income.
[4] Michael Mazerov. “Kansas Provides Compelling Evidence of Failure of Supply Side Tax Cuts. Center on Budget and Policy Priorities, Jan. 22, 2018. https://www.cbpp.org/research/state-budget-and-tax/kansas-provides-compelling-evidence-of-failure-of-supply-side-tax-cuts

 

Charles Bruner, Executive Director, CFPCCharles Bruner is director emeritus of the Child and Family Policy Center (CFPC) in Des Moines. CFPC and another nonpartisan, nonprofit organization, the Iowa Policy Project (IPP) in Iowa City. IPP and CFPC collaborate on analysis of state public policy issues as the Iowa Fiscal Partnership. Reports are available at www.iowafiscal.org.

Leveling sales-tax playing field

Modernizing Iowa’s sales tax: Leveling the playing field 
•  Governor Reynolds’ plan would secure needed revenue from e-commerce and remote sales 
•  Further measures could ease regressive impact to lower- and moderate-income families

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By Charles Bruner for the Iowa Fiscal Partnership

IMG_3798Sales tax plays a core role in funding Iowa’s general fund budget, contributing about one-third of the revenue for Iowa’s current $7.2 billion budget.[1] One-sixth of Iowa’s 6 percent state sales tax is earmarked for a state fund for K-12 school infrastructure.[2] Cities and counties also receive sales tax with 1 percent local-option tax referendum votes, with revenues directed to specific projects.

Over the last several decades, Iowa’s and the nation’s economies have shifted toward greater purchases of services rather than goods and toward greater purchases online and through remote locations rather than direct, local sales. To retain revenue from the sales tax, either the sales tax needs to be raised in size or broadened and modernized to reflect these changes.

Iowa periodically has updated its sales tax to cover new services and has a fairly broad tax base in that respect. Until recently, however, Iowa has not had a viable way to collect sales tax from many out-of-state vendors who make sales in Iowa, particularly through e-commerce.

Despite efforts by states, including Iowa, the federal government has not enacted legislation to clarify how state sales taxes can be imposed on out-of-state retailers. Recently, however, Colorado and a growing number of states have adopted provisions that make such collections possible, and these have been upheld in federal court.[3] Not only do such actions increase sales tax revenue; they also create a level playing field for in-state businesses that must compete with out-of-state retailers and are at a competitive disadvantage when they must collect sales tax and remote sellers do not.

The Governor’s proposed tax package would expand the Iowa sales tax and the enforcement and collection of that tax, as some other states have done. SF2383 also contains similar provisions, although amendments adopted substantially reduce their scope and revenue generation. The Department of Revenue’s fiscal note on the Governor’s proposal focuses upon six key elements:

  • Digital Goods: Ending the exemption for goods purchased and delivered online, such as e-books, games, and phone apps. The exemption was enacted when the internet was new and few goods were delivered digitally.
  • Ride Sharing: Establishing taxation of all ride services including traditional taxi services and internet-based ride-sharing businesses such as Uber and Lyft.
  • Subscription Services: Expanding the sales and use tax to capture the change in consumption from tangible good purchases such as video game cartridges and CDs to subscription services including streaming audio and video and software as a service.
  • Online Sellers: Expanding the definition of sales tax nexus to include any retailer selling more than $100,000 of products or making more than 200 separate sales into the state, whether or not through an online marketplace.
  • Online Marketplaces: Expanding the definition of retailer to include any marketplace provider (Google Play Store is an example) that facilitates sales into the state, to rectify the current disadvantage faced by traditional retailers required to charge sales tax on in-person sales while retailers in online marketplaces claim to have no such requirement.
  • Online Travel Company Websites: Clarifying auto rental and hotel/motel tax obligations, in particular including online travel companies.

The Department of Revenue estimates these changes together will result in increased state sales tax revenues of $46.7 million in FY2019 growing to $137.5 million in FY2023. SF2383, as passed from the Ways and Means committee, had these six provisions but also included several new sales tax exemptions (for grain bins, agricultural consolidation, and construction equipment dealers), reducing its impact by about one-half. Adopted amendments further reduced the estimated revenue impact, to $1.1 million in FY2019, going up to $23.7 million in FY2023. 

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The full provisions in the Governor’s proposal help to cover a large share of the revenue reductions proposed in the state income tax, while the provisions in SF2383 do not even begin to cover the revenue reductions in its corporate tax cuts, let alone individual income tax cuts. The Governor’s proposal also, through LOST and SAVE, provides greater assistance to local government and school districts.

Like most sales tax measures, the proposed increases are somewhat regressive, taking a larger share of income from moderate and middle-income Iowans than from high-income Iowans. This, however, can be offset by other changes (particularly in the individual income tax) that are progressive. Other IFP backgrounders examine this aspect with respect to the Governor’s proposal and SF2383.

Overall, the Governor’s proposal, if retained in its current form, does modernize Iowa’s sales tax and makes it fairer to Iowa retailers. It better assures the sales tax will maintain its role in financing the General Fund and supporting, in a small but significant way, schools and local jurisdictions with a local option sales tax.


[1] Governor’s Budget in Brief, FY2019. The current year general fund budget of $7.2 billion has been adjusted and is further being adjusted during the 2018 legislative session due to projected shortfalls. The Governor has proposed a $7.4 billion general fund budget for FY19. About $3 billion, or 33 percent, of projected general fund revenues come from sales tax.

[2] This is known as the Secure an Advanced Vision for Education fund, or SAVE. This revenue source began as local-option tax authority, later merged into a statewide tax and pooled for more equitable distribution statewide.

[3] While currently upheld, the Supreme Court may rule further on this case.

 

Charles Bruner, Executive Director, CFPCCharles Bruner is director emeritus of the Child and Family Policy Center in Des Moines. CFPC and another nonpartisan, nonprofit organization, the Iowa Policy Project in Iowa City, together form the Iowa Fiscal Partnership.

 

Senate bill: Short of rhetoric

Posted November 28th, 2017 to Blog

GUEST BLOG
Despite Child Tax Credit change, Senate Tax Bill Doesn’t Live Up to Rhetoric in Supporting Families with Children

One of the few provisions in the proposed Senate tax bill that has bipartisan support is increasing the Child Tax Credit (CTC), which has been designed to better reflect the costs of raising children. It has been cited as a major benefit to working and middle-class families with children.

Like other provisions, however, this change is done in ways that provide almost no help to working low- and moderate-income families, while providing huge breaks for very wealthy ones. For middle-income families, the gains from a higher child tax credit are mostly offset by losses in personal exemptions, and some middle-class families would actually pay more under the proposals than under current law.

The Senate and House versions both provide information needed to calculate the taxes different tax filers would pay on their 2018 income (the year the changes go into effect) and to then compare these with the taxes they would pay under current law.

In the Senate version, the partially refundable portion of the CTC is unchanged, except that it would be indexed for inflation going forward, increasing to $1,100 in 2018. The nonrefundable credit is increased by $1,000 per child, making a maximum credit per child of $2,000 (the House version provides only an additional $600 credit, in addition to also indexing the partially refundable portion to $1,100). Both bills extend eligibility for higher income families (from a current phaseout beginning for married joint filers at $110,000 of adjusted gross income to $500,000 in the Senate version and an even higher level in the House version).

Performing the comparison of what tax filers in 2018 would experience from the CTC increase, a single mother with two children working full time and making a little above the minimum wage, $16,000 per year, gets no benefit under the House version and only $75 under the Senate version, compared with current tax law. A married couple with two children making $29,600 only receives the additional $100 per child of the refundable credit under the Senate and House versions. That the CTC provisions largely leave behind low and moderate-income families is particularly unfortunate, as these are the families that live paycheck to paycheck and could most benefit from additional support in raising their children.

Meanwhile, a married couple with two children making $300,000 per year gets the full benefit of the tax credits, $4,000 for the two children under the Senate version. This is on top of a tax cut from other changes in the tax code of at least $8,639 (which would be more if the family has extensive itemized deductions or tax-exempt income). Overall, this family is at least $12,639 better off after doing its taxes, compared with current law, $4,000 due to its new eligibility for the CTC.

For simplicity, these examples assume that all income is earned income and that the filers all take the standard deduction. If, because of buying a home, paying state and local taxes or a combination of the two, middle-income taxpayers now itemize their deductions, the increase in the standard deduction may not help at all and the loss of personal exemptions may mean they pay more taxes.

A married couple starting out with a young child and $60,000 of income, for instance, who now claims $24,000 as an itemized deduction ($18,000 in mortgage interest and property taxes, $4,000 in state and local taxes, and $2,000 in charitable contributions or other deductions) would owe $359 more in federal taxes under the Senate version. Although the family would benefit from the increase in the CTC, that would be more than offset by other changes, such as the loss of personal exemptions.

The chart below shows the specific impacts on these families of the changes in the child tax credit itself but also the changes of the overall tax changes to their individual income tax:

Tax proposals should be examined both in terms of individual provisions and in terms of their overall impact. On the former, under the Senate version the benefits of raising the Child Tax Credit are highly skewed toward the highest income tax-filers. This needs to change, by making the CTC refundable and not extending it so dramatically to the highest income families.

On the latter, the overall structure of the tax provisions largely negate the positive impact expansions of the CTC have for many middle-income families, while bestowing even more benefits on high income ones. Tinkering with the CTC without major changes in other provisions in the tax proposal cannot correct these flaws.

Rather than adding CTC provisions to a bill with other fundamental flaws, Congress should start with how it can make the CTC better reflect the cost of raising families. There exist different bipartisan proposals that would do this, but the proposal before Congress goes in the opposite direction.

Charles Bruner of Ames, a former member of the Iowa House and Senate, is director emeritus of the Child and Family Policy Center in Des Moines. CFPC, he worked with the Iowa Policy Project to form the Iowa Fiscal Partnership. Find his commentary on current issues at childequity.org. Contact him here.

Beyond Battelle: Let’s broaden the dialogue of Iowa economic health

As Iowa legislators this week start work on a course to a more robust and diversified economy, discussion already has focused on a new privately funded report, Iowa’s Re-Envisioned Economic Development Roadmap.[1]

Produced by Battelle Technology Partnership Practice and commissioned by the Iowa Partnership for Economic Progress,[2] the $400,000 report makes some important points and deserves a careful look.

It focuses heavily on the importance of business to promote economic activity, but its core message acknowledges the significant role of public investments in providing the foundations for Iowa’s economy. This includes the education system needed to develop the skills, talents and capacity of the current and future workforce, including those who will become the future entrepreneurs and leaders for the 21st century.

While the report acknowledges the centrality of an educated and skilled workforce and a high quality of life to making Iowa an environment for business to flourish, it places very little focus upon how government can deliver on that role. It falls to government to educate that future workforce — at the early childhood, primary and secondary, and higher education levels.

The report does not adequately address the challenges Iowa faces in creating that higher skill level among its emerging workforce — in particular, the need to address lagging and stagnant educational achievement. To do so takes resources, and the report’s emphasis is to leave in place a business subsidy structure that has increasingly reduced the state’s ability to meet those needs.

The report itself was overseen largely by business leaders and economic development agency staff. However, these are not the only stakeholders in Iowa’s economic future; many others need to engage in the dialogue about Iowa government’s role in economic development.

The Battelle Report raises one perspective on economic development. Lawmakers, the media and the public need to insist that other perspectives and expertise also are fully considered and vetted.

More Iowans need an invitation to the table.

08-Bruner-5464Charles Bruner is executive director of the Child & Family Policy Center, www.cfpciowa.org, part of the Iowa Fiscal Partnership, www.iowafiscal.org.

Note: This piece also ran as an “Iowa View” in The Des Moines Register, Jan. 14, 2015.

[1] Technology Partnership Practice, Battelle Memorial Institute, December 2014, “Iowa’s Re-Envisioned Economic Development Roadmap.” http://www.iowaeconomicdevelopment.com/battelle
[2] Iowa Economic Development Authority, News release, Dec. 18, 2014, “Governor, IPEP Release Findings of 2014 Battelle Report, a New Economic Development Roadmap for Iowa,” http://www.iowaeconomicdevelopment.com/newsdetails/6051

Food insecurity: 1 in 9 Iowa households

Better in Iowa than U.S. average — but worse for Iowans over the decade

140904-IFP-foodinsec-boxIowa households fared better than the national average on food insecurity in 2011-13, but worse than Iowans did a decade earlier, according to the U.S. Department of Agriculture.

In its annual report on food insecurity, USDA reported the prevalence of food insecurity in Iowa at 11.9 percent in those years, compared to a national average of 14.6 percent.

In addition, 4.4 percent of Iowans experienced “very low food security” — households that cited several food-insecure characteristics and disruption in eating patterns because of a lack of money or other resources.

The nonpartisan Iowa Fiscal Partnership (IFP) noted that in both cases, Iowans were doing much better on the food security scales in 2001-03 than in the latest period examined.

“While Iowans’ very low food security was lower than the national average of 5.7 percent, it was almost 50 percent higher than it had been only a decade before,” said Mike Owen, executive director of the Iowa Policy Project, part of IFP. Owen noted that level had risen from a 3.0 percent average for 2001-03 to 4.4 percent in 2011-13.

Charles Bruner, executive director of the Child & Family Policy Center, also part of IFP, pointed to the overall food insecurity change, from 9.5 percent in 2001-03, to 12.1 percent in 2008-10, to 11.9 percent in the latest period examined.

“Statistically, food insecurity in Iowa has been fairly level for recent years, but these are Iowans — including kids and seniors, not statistics — and the comparison over the decade is disturbing,” Bruner said. “This makes it more important to assure that the Supplemental Nutrition Assistance Program (SNAP) is maintained, that eligibility standards are not weakened, and that access is assured to all who need the help.”

For both food insecurity and very low food security, USDA reported the small Iowa improvements from 2008-10 to 2011-13 to be statistically insignificant. According to the USDA, taking into account margins of error for the state and U.S. estimates, eight states had statistically significant higher levels of food insecurity than the national average of 14.6 percent in 2011-13.

Iowa was among 14 states with a statistically significant lower level of food insecurity than the national average. In addition, the Iowa level of very low food security was statistically lower than the national average, as was the case in 12 other states.

 The Iowa Fiscal Partnership is a joint public policy analysis initiative of two Iowa-based, nonpartisan, nonprofit organizations — the Iowa Policy Project (IPP) in Iowa City and the Child & Family Policy Center (CFPC) in Des Moines. For IFP reports, go to http://www.iowafiscal.org. For information about how to make tax-deductible contributions to IPP or CFPC, visit their websites: http://www.iowapolicyproject.org and http://www.cfpciowa.org, respectively.

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* Alisha Coleman-Jensen, Christian Gregory and Anita Singh, “Household Food Security in the United States in 2013,” U.S. Department of Agriculture.

 

IFP News: Income Down, Poverty Up Since ’07

Iowans in slow recovery from Great Recession

PDF of this release

IOWA CITY, Iowa — More Iowans remained in poverty three years after the recession, new data from the Census Bureau showed Thursday.

The American Community Survey (ACS) indicated 12.7 percent of Iowans — about 377,500 people — were in poverty in 2012, up from 11 percent in 2007, the year the last recession started.

“These are the signs we have been seeing across the board in our research,” said David Osterberg, founding director of the Iowa Policy Project, part of the Iowa Fiscal Partnership. “Whether you’re looking at jobs, or income, or poverty, or food insecurity, we simply have not caught up with where we were before the Great Recession.”

Other key points for Iowa from the release of 2012 ACS data:

•       Iowa’s poverty rate of 12.7 percent compared with 11 percent in 2007 and 9.7 percent in 2001. The change from 2011 — a drop of 0.1 of a percentage point — was not statistically significant.

•       Child poverty was 15.6 percent in 2012 (about 110,200 children), up from 13.1 percent in 2007 and 12 percent in 2001.

•       Median income was $50,957 in 2012, changing little from 2001 in inflation-adjusted dollars, but it dropped from $52,371 in 2007.

“Public policy needs to give people the tools to lift themselves out of poverty, and at the same time boost the economy,” said Charles Bruner, executive director of the Child & Family Policy Center, also part of the Iowa Fiscal Partnership. “We have those kinds of tools in place — such as SNAP, or Food Stamps — but many of those same tools are under assault in Congress.”

In the U.S. House, lawmakers Thursday debated legislation that would cut SNAP benefits to an estimated 3.8 million beneficiaries.

“Look at these numbers today,” Osterberg said. “How can we see over 100,000 kids in Iowa in poverty and not realize this is a problem that needs to be addressed?”

Reports from the Iowa Fiscal Partnership are at www.iowafiscal.org.

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Note: A simple comparison of the Current Population Survey and the American Community Survey is available at http://www.census.gov/hhes/www/poverty/about/datasources/factsheet.html.

 

IFP News: Iowa Paid $33 Million in Research Checks in 2012

Posted February 15th, 2013 to Budget, Corporate Taxes, Tax Credits, Taxes

Rockwell Collins, Deere & Dupont Again Lead RAC Beneficiaries

Download this news release — 2-page PDF and Department of Revenue report 3-page PDF

IOWA CITY, Iowa (Feb. 15, 2013) — The largest recipients of a state research credit shared $28.5 million in subsidy checks as some or all paid no income tax in 2012, according to a new report from the Iowa Department of Revenue.

The report released Friday shows that overall, 178 corporations claimed a total of $46.1 million from the Research Activities Credit (RAC) in 2012, including both the regular RAC and a separate supplemental credit, but nine corporations claimed over 90 percent of those funds.

Of those credits, $32.5 million was paid to 130 claimants as “refunds,” the amount paid as checks because the claimants had more credits than income tax liability. Most of those “refunds” went to some or all of the nine largest beneficiaries of the credit.

“This report is the latest evidence of the need for reform of this poorly named ‘tax credit,’” said Charles Bruner, executive director of the Child & Family Policy Center. “The credit is used less to reduce taxes than to provide straight subsidies to big companies through the tax code, outside the budget process.

“It was never designed or promoted for huge subsidies for highly profitable businesses. These state reports are showing not only that the program is very expensive, but that most of the money — over 70 percent in 2012 — is paid out as checks to companies that already have wiped away all their income tax liability.”

A special tax-credit review panel appointed in 2009 by then-Governor Chet Culver urged lawmakers to eliminate the refundability of the credit for large companies, capping its cost and setting a five-year sunset that would require fresh approval to continue the credit. None of these proposals have been followed.

This latest state report shows that eliminating refundability in FY2012 would have cut the cost of corporate RAC credits from $46.1 million to $13.5 million.

“The difference would be enough to fund about 1 percent of allowable growth for K-12 schools in Iowa,” noted David Osterberg, executive director of the nonpartisan Iowa Policy Project.

The state, which spent $21.2 million on the credit in FY2010, is projected to spend $72.2 million on it in FY2017 if there are no changes.

Bruner noted that the RAC began as a way to support start-up companies to do research in Iowa, but that very large, profitable multinational companies dominate its use.

The biggest claimants in 2012, the same top three recipients as in the previous two years, were:
• Rockwell Collins Inc. and subsidiaries, $13.8 million;
• Deere and Co., $11.9 million; and
• Dupont, $8.5 million.

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As a group, the largest claimants — those with over $500,000 in claims — received credits of $42.1 million — $28.5 million of that in checks considered “refunds,” not as a return for an overpayment of taxes, but for tax credit value beyond their tax liability. The report further disclosed that 91 percent of the credits were claimed by only 5 percent of the corporations (nine).

This is the fourth annual report from the Department of Revenue as a result of a 2009 law requiring disclosure of the overall amount of individual and corporate RAC claims and refunds, and individual company claim amounts in excess of $500,000 for a year. While the law requires reporting of claims for large beneficiaries, it does not require that the amount of “refunds” be individually disclosed.

“The disclosure we have now is an improvement, but remains limited,” Bruner said, noting a stronger law would specify how much of individual corporate claims are paid out as checks, as opposed to credits that remove tax liability.

“Even with revenues coming in strong, the Research Activities Credit is expensive. What disclosure we have, and the limits on that disclosure, show that the RAC is a poster child for the need for accountability on the state’s corporate subsidies,” Bruner said.

Osterberg agreed.

“There simply can be no question that if we are going to spend over $40 million on these subsidies, they should be transparent in the budget process. These resources could be going toward education or water-quality enforcement,” Osterberg said.

“Why do we subsidize something that we know will happen anyway? Rockwell Collins, Deere and DuPont all need to do research to thrive; they will do what research is necessary for their business — they don’t need their taxes cut to persuade them of the need. But even if we think taxes should be reduced to encourage research, why do we send these companies a check on top of eliminating their taxes?

“Perhaps the biggest question is this: Why isn’t the Legislature asking more about it, and demanding answers on behalf of their constituents?”

Besides the top three claimants, John Deere Construction had $3.4 million in claims, Monsanto $1.7 million, with four other companies — Vermeer, CNH America, Kemin Industries and Skyworks — above $500,000.

In addition, the report showed 1,144 individuals claimed a total of $4.5 million from the RAC, with $1.7 million of that paid as refunds to 307 claimants. Individual claimants are not identified in the report.

The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit Iowa-based organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines. Reports are at www.iowafiscal.org.

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