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IFP News: Sales-tax sleight of hand in Iowa

NEWS RELEASE — Proposals test limits of authority, defy voters’ intent and expectations

View the report

IOWA CITY, Iowa (March 10, 2016) — Schools would lose revenue and Iowa voters’ intent would be distorted by new proposals on the state sales tax, according to a report from the Iowa Fiscal Partnership.

“This is the new sleight of hand in Iowa — pass a tax for one purpose, and then shift the way the money will be used. That’s what the Governor is proposing with his attempt to divert funding from the school infrastructure sales tax, and that’s only one example,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project and author of the report for the Iowa Fiscal Partnership.

“Another is a special sales-tax break for manufacturers that the Governor has set in place on his own, without legislative approval. This might change in current budget negotiations, but we likely would not be talking about it at all had the Governor not acted on his own.

“The precedents being set raise uncertainties for the future governance of our state.”
 
The six-page report is available here: http://www.iowafiscal.org/sales-tax-sleight-of-hand-in-iowa/.

In the paper, Owen looks at a sales-tax break implemented unilaterally by the Branstad administration, as well as various proposals that would extend a state sales tax currently designated for school facilities and equipment — but only if shares of the funding are diverted to other purposes.

 
The Iowa Association of School Boards (IASB) uses Department of Revenue data to project the Governor’s plan, now in the House as HF2382, would cause a loss of $426 million for school infrastructure from FY2017 through FY2029, when the current tax expires.

Schools would see a 20-year extension of the tax under the Governor’s plan, but would receive $4.7 billion less through FY2049 than under a straight 20-year extension of the sales tax for its currently defined use, according to IASB.

 
“That sales tax would not exist but for local votes across the state, for the revenues to go to school infrastructure, and secondarily to offset property taxes,” Owen said. “What the Governor and proposals in the Iowa House would do is to divert that funding to purposes never intended.

“They would do this in the near term, changing the rules of the current law set to expire in 2029, and they would do so in greater proportions over the following 20 years. Construction costs for schools will not be going down over that time.”

Proposals also would impose new restrictions on schools’ ability to spend the funds, and two would require voter approval by supermajority for even relatively small-scale construction projects, anything over $1 million.

 
“Once more, we see efforts to impose minority rule against efforts to improve our public infrastructure, to make it more difficult for school boards to do their jobs,” said Owen, who is serving his third term as an elected school board member in West Branch.

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

Iowa Sales-Tax Sleight of Hand

POLICY BRIEF

Proposals test limits of authority, defy voters’ intent and expectations

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By Mike Owen

Recent proposals and actions on Iowa’s sales tax would directly cost Iowa schools funding for both facilities and general operations, and most critical services could expect less as well. Aside from fiscal impacts, these proposals ignore existing law or voters’ directives, and long traditions in the way we govern ourselves. To many, this is a low road — of lower revenues, services and commitment. We map that road below.

Here we do not review in detail the impact of the sales tax on various types of Iowa households, though we examine Iowa’s significant shifts toward regressive taxation (particularly the sales tax) in greater depth elsewhere.[i] Rather, we focus on the revenue and governance issues raised by a recent unilateral action by the Branstad administration for a special sales-tax break, and pending proposals by the Governor and legislators to change intended spending from sales taxes now in place. Each represents a sleight-of-hand either in defiance of existing laws that have not been duly changed, or of promises made to voters who years ago authorized specific tax policy changes with clear expectations on the use of new revenue.

These new, opportunistic approaches are suddenly possible because of Iowa’s polarized political landscape. Ironically, they capitalize on what education and environmental advocates had seen as opportunities to progress despite a general lapse of the state’s commitment of funding. Only an expectation that lawmakers will not agree to stop the Governor permits him to act unilaterally on a sales tax exemption, a reinterpretation of longstanding existing law to grant manufacturers a special break without prior legislative approval. Only the looming expiration of­­ the school infrastructure sales tax gives the Governor an opportunity to attempt a diversion of that funding from school districts to water programs — an immediate loss to schools in the near term, and insufficient resources for schools and the full range of environmental priorities for the long term.

Meanwhile, policy makers do not follow the dictates of law for school funding, nor the direction of voters on environmental funding. Legislators already routinely dismiss their annual legal deadline for setting state school aid levels 14 months ahead of schools’ own budget certification deadlines. And we now see attempts by both the Governor and some legislators to come up with proposals that divert revenue and change the rules for funding of school facility needs. While education advocates have voiced concerns for several years about the state’s commitment to funding of public schools, environmental advocates have done the same through five-plus years of legislative inaction following a 2010 electoral victory. That year, voters statewide approved a constitutional amendment directing the first three-eighths-cent sales-tax increase to a trust fund to enhance stewardship of Iowa’s land, air and water resources — not all of which are in the Governor’s plan. 

 

The Sales Tax Under Current Law

Iowa’s state sales tax is part of a three-pronged funding structure to support state and local services and infrastructure: state and local sales and excise taxes; state income tax and local income surtax; and local property tax. State law governs all of these. The state sales tax is 6 percent on applicable purchases and services, with exemptions set by state law. The first five pennies of sales tax per dollar go to the state general fund; the sixth penny is dedicated to school infrastructure or school property tax replacement. That penny is worth about $435 million to Iowa schools in Fiscal Year 2016.[ii]

New Proposals Reduce Revenues for Services, Either Directly or Indirectly

Each of the imminent or proposed actions summarized below provide less revenue for public education than is provided under current law. These come at a time when the Legislature and Governor have settled Iowa into a trend of holding down the basic building block of school budgets — per pupil cost — in a formula designed to produce equitable funding for a student regardless of his or her school district. These actions give local school districts scant ability to sustain funding over time.

Administrative Change in Sales-Tax Law Without Legislative Approval

The first policy change, an administrative order to be implemented July 1 unless blocked by a veto-proof majority in the Legislature this spring, unilaterally reinterprets existing sales-tax law governing purchases by manufacturers. The Iowa Department of Revenue (DOR) preliminarily estimated the cost of this change to be $35 million or more in FY2017, which begins July 1. While there has been no official update of that estimate, many have projected it to be higher.[iii]

The governance issue may be of even greater importance than the fiscal impact. One observer with experience in the world of administrative rules, in testimony to the DOR on the proposed rule change, called it “an unprecedented potential shift of institutional, constitutional forces.”[iv] James C. Larew, an Iowa City attorney and former general counsel to Governor Chet Culver, stated:

“The balance of political power changes from one election to the next. 

“The balance of constitutional power — the relationship between the Iowa General Assembly and executive departments of our state government — is more serious and more lasting. 

“Broad statutory interpretive powers given up by the legislature to an executive agency, in one moment of time, concerning one issue, are not easily later recovered.”

The sharp partisan divide between the Iowa House and Senate appears to be weighing against a reversal of the Governor’s new interpretation of longstanding tax law, though about two months into the session there are indications that lawmakers may agree on a compromise that lessens the fiscal impact.[v] If the Governor’s change stands, it leaves an open question of how many other executive-branch reinterpretations of other tax laws may occur with this precedent, and with fiscal impacts of their own.

The following proposals stem in part from pressure for greater environmental funding, and capitalize on school districts’ interest in extending a statewide sales tax currently designated for school infrastructure funding but set to expire in 2029. Each proposal would cut into schools’ exclusive use of those funds even before the deadline.

Diverting the “Statewide Penny” from School Infrastructure for Other Uses

The so-called “statewide penny” is the sixth cent of Iowa sales tax — the sixth cent per dollar in sales on goods or services, added in 2008. After Governor Branstad first took office in 1983, he proposed and passed an increase in the sales tax from 3 percent to 4 percent. Again, in 1992, he approved an increase in the state sales tax to 5 percent. Meanwhile, beginning in 1998, local school districts were permitted to seek, through authority granted countywide, a 1 percent sales-tax increase to fund school infrastructure. This was known as the School Infrastructure Local Option, or SILO, tax. Frequently, these local referendum campaigns included assurances to voters by school administrators and school board members that the penny would be used for school facilities — and could not be used for salaries or other purposes. In 2008, these local SILO taxes were converted to a statewide tax, with an expiration date of Dec. 31, 2029. The stated legislative intent in the law is that the 1 percent tax “shall be used solely for purposes of providing revenues to local school districts under this chapter to be used solely for school infrastructure purposes or school district property tax relief.”[vi] Further, local districts must follow a voter-approved “revenue purpose statement” governing how the funds — from what is called the Secure and Advanced Vision for Education, or SAVE, fund — will be used within the bounds of the state law.

School officials across Iowa have been seeking an extension — or removal — of that sunset provision because they are allowed to borrow money against those anticipated SAVE revenues. The closer they get to that 2029 date, the more they are limited in long-term borrowing against that revenue source for school infrastructure projects. Schools also have been concerned about the possibility of attempts to scoop revenues from that source for other purposes. The Iowa Association of School Boards made “preserving the integrity of the statewide penny sales tax for school infrastructure,” along with repeal of the 2029 sunset, one of its four priorities for the 2016 legislative session.[vii] Proposals under consideration offer a nod to the latter — extending the law rather than repealing the end date — only by losing the “integrity of the statewide penny.”

Governor’s Plan — Diversion for Water Programs

While the question of school infrastructure is one of many funding challenges for schools as operational budgets have been held down by lawmakers in recent years, environmental advocates have sought more resources to deal with land and water management at a time of serious pollution issues. The latter have been highlighted by a 2015 lawsuit by the Des Moines Water Works against three counties whose ag-based pollution has driven up water treatment costs for their urban and suburban neighbors downstream.

The Governor’s proposal amounts to a bait-and-switch tactic to voters who passed local school infrastructure sales taxes, and to legislators who converted them into a statewide tax in 2008. Iowa Code Chapter 423F, with the same restrictions on the use of revenue.

Voters had approved strategies to address both challenges, for schools and the environment. While the Governor purports to do the same with a different approach, the changes weigh heavily against schools, when compared with current law for the near term and educator-backed proposals for the long term. While he would extend the school facilities sales tax from 2029 to 2049, he would reduce the share of that tax going to schools for the next 13 years, and limit growth to only $10 million a year statewide — a net loss to schools of $425.9 million through 2029.[viii] At the same time, he would divert increasing shares of the growth in those revenues through 2049 to water programs — an estimated $4.7 billion. See Figure 1 below.

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The history of this sixth penny of the state sales tax is important, as it established a level of political legitimacy for a tax increase among legislators who have not typically been out front in favor of tax increases. Its roots are in local votes across Iowa, where voters were asked to add a penny per dollar in sales tax to fund improvements to school facilities and equipment. This purpose was expressly stated for those elections. The Legislature in 2008 — following those local, carefully focused ballot issues — converted the local taxes to a statewide sales tax with a common expiration date and the same purpose as that used to sell voters on the tax increases from the outset. It is quite likely that without the local taxes in place, there would have been no political vehicle for establishment of the statewide tax that replaced them.

At the same time the Governor’s plan ignores the historical justification for the sixth penny of sales tax, he has rejected implementation of an alternative for water-quality funding that Iowa voters have given him. The 2010 referendum — passed in the same election that returned the Governor to his office after 12 years away — did not require the passage of a sales tax, but it did designate the first three-eighths of a penny of the next sales tax increase to be used for environmental stewardship. Voters said “yes” to a penny for school infrastructure, and said “yes” to three-eighths of a cent for water and land improvements. Voters have not granted authority for the Governor’s hybrid approach.

House Alternative Proposals to Divert School Revenue

Proposals in the Iowa House offer other ways in which the sales-tax increase is extended, but for uses different from those in the 2008 legislation that created the sixth penny of sales tax and different from those in the local option votes that set up the statewide tax. One, HF2382, builds on the Governor’s proposal for water quality funding, but also includes provisions to permit use of the funds to ease statewide inequities in per-pupil spending[1] — with restrictions that do not exist for other general spending — and inequities in transportation spending. The funds could not be used for teacher pay, for example, which is a major share of the cost of educating students. The legislation also carries new requirements for a voter referendum on any school facility project costing over $1 million, and approval by a supermajority of at least 60 percent. Already, a supermajority is required for a general obligation bond issue against property tax. Adding this requirement for use of the sales tax would further institutionalize minority rule against school facility improvements, even for relatively small-scale construction projects. Other proposals in the House — HF2260, HSB549 and HSB548 — also would impose new limits on spending and divert funding currently designated for school facility improvements under long-accepted restrictions that schools have not contested. HF2260 includes a provision to allow for the use of the funds to help address inequities from district to district in the share of their budgets that go to transportation costs — one issue raised by education advocates about reforms needed in the school funding formula.[ix]

The desire of school districts to extend the tax for its currently authorized use is the opening, as noted above, for a host of new restrictions that lawmakers have sought to impose on public school spending authority in the state — with window-dressing solutions for other concerns schools have raised about statewide equity.

Property Tax Impact of Branstad Plan

A notable consequence of this change may well be property-tax increases — in two ways —because less funding would be available in real terms through the SAVE disbursement. First, districts looking for resources will be more likely to increase their Physical Plant and Equipment Levy, if they are not already at the maximum $1.67 per $1,000 levy rate. Second, where SAVE funding can reduce the need for, or size of, property tax-based bond issues for facilities, districts might be left with no other option, provided they have the bonding capacity to do so. In both cases, these could cause property-tax increases — even though reductions in property tax have been the driving message behind tax changes by both the Governor and legislators in recent years.

In addition, the sales tax for school infrastructure already provides some property-tax replacement funding, to the Property Tax Equity and Relief (PTER) Fund.[x] The Governor’s proposal would reduce that by a total of about $9 million through 2029 compared to current law, and by about $102 million overall compared to a simple 20-year extension of the current law.[xi]

Constitutional Amendment Remains in Place

One of the problems with setting tax policy through a constitutional amendment is that policy makers lose flexibility. Diverting other funds now for the purpose designated by the 2010 constitutional amendment may well tie lawmakers’ hands in raising revenue in the future. The next three-eighths of each penny raised by a sales-tax increase will go to environmental programs, regardless of action amending the use of the school infrastructure sales tax. In the event of a sales-tax increase in the next five-10 years, it is inevitable that this would set up new competition for revenues between environmental advocates and advocates for other critical services left out of the Governor’s plan. Would there be a move to redirect the diversion from the school infrastructure tax? How might this affect bonding arrangements for projects for either water quality or schools? It would be best for lawmakers to address such scenarios before, rather than after, passage of anything along the lines suggested by the Governor.

Conclusion

Transparency is essential for Iowans to understand how and why they are being taxed, and how the revenues will be used. Whatever their perceived merits, the tax policy changes that we examine here are being pursued in defiance of understandings and expectations that exist by both tradition and law. The precedents they offer raise uncertainties for future governance of our state.

Ultimately, the Governor’s proposed diversion of school funding to water programs is a response to a short-term challenge in both areas with, at best, long-term uncertainties. More likely it poses a long-term hindrance to school districts’ ability to meet facilities needs, and to the funding choices of future legislators and governors.

Finally, while we do not delve deeply with this paper into the tax fairness issues posed by an enhanced focus on the sales tax where revenues are needed, it is well established that Iowa’s sales taxes disproportionately affect poorer households. To put even more reliance on this most regressive piece of Iowa’s state and local tax structure, which overall is regressive, means policy makers should be looking at offsets to assist low-income families in conjunction with sales-tax increases. None of these proposals make an attempt to balance out fairness issues, which also is true of the solution offered by the 2010 constitutional amendment. Some proposals in the House, in fact, would exacerbate fairness problems, by encouraging local school districts to buy down property taxes with sales-tax revenues.

 


[1] Iowa school budgets are built based on a per-pupil cost, which varies by as much as $175 per student from the highest to lowest district. About half of Iowa school districts are at the lowest level, and in recent years this has prompted calls for a legislative solution. For more on this issue, see “Building blocks of inequity,” Iowa Policy Project blog post, February 2016, http://iowapolicypoints.org/2016/02/10/building-blocks-of-inequity/


[i] Cementing Inequity: Richest Iowans Pay Lower Tax Rate, Iowa Fiscal Partnership, January 14, 2015. http://www.iowafiscal.org/cementing-inequity-richest-iowans-pay-lower-tax-rate/
[iv] Testimony of James C. Larew, Iowa City attorney and former administrative rules advisory and General Counsel to Governor Chet Culver, Dec. 1, 2015. Available here: http://www.iowapolicyproject.org/2015docs/151201-Larew-DOR_RulesTestimony.pdf.
[v] The Gazette, Cedar Rapids, March 9, 2016: Iowa legislators move forward with compromise on taxes. http://www.thegazette.com/subject/news/government/iowa-legislators-move-forward-with-compromise-on-tax-policy-compromise-20160309
[vi] Code of Iowa, Chapter 423F.1 Legislative intent: https://www.legis.iowa.gov/docs/code/423F.pdf
[viii] Calculations by Shawn Snyder, Finance Support Director, Iowa Association of School Boards.
[ix] See December 2015 testimony to Iowa Legislature School Finance Inequities Committee, https://www.legis.iowa.gov/committees/meetings/documents?committee=24164&ga=ALL, and the committee’s final report, Jan. 1, 2016: https://www.legis.iowa.gov/docs/publications/IP/765872.pdf
[x] Iowa Code Chapter 423F https://www.legis.iowa.gov/docs/code/423F.pdf, Iowa Code Chapter 257.16A https://www.legis.iowa.gov/docs/code/423F.pdf. The Property Tax Equity and Relief (PTER) Fund receives a state appropriation, plus funds from the Secure an Advanced Vision for Education (SAVE) Fund, after per-pupil allocations are made as a result of the statewide 1 percent sales tax for school infrastructure.
[xi] Calculations by Shawn Snyder, Finance Support Director, Iowa Association of School Boards.

 

IPP-Owen-2013-5464Mike Owen is executive director of the Iowa Policy Project (IPP) in Iowa City. A former journalist in Iowa and Pennsylvania, he has been a member of the West Branch Community School District Board of Education since 2006.

 

110929-ifp-newlogo10IPP and the Child & Family Policy Center in Des Moines are two nonpartisan, nonprofit Iowa-based organizations that formed the Iowa Fiscal Partnership, to make public policy analysis available to all Iowans. Reports are at www.iowafiscal.org. The Iowa Fiscal Partnership is part of the national State Priorities Partnership, with IFP research supported in part by the Stoneman Family Foundation and the Annie E. Casey Foundation, as well as individual and organization donors in Iowa. IFP analysis is solely the responsibility of the authors and may not reflect the views of supporting funders.

No taxes, big checks

Iowa has choices: Keep giving millions to companies that don’t pay Iowa state income tax — OR add 1 percent in school aid.

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FOR IMMEDIATE RELEASE MONDAY, FEB. 15, 2016

Big companies erase taxes — take millions in state checks

Research Credit annual report shows big companies keep gaining

IOWA CITY, Iowa (Feb. 15, 2016) — A lucrative tax subsidy is providing as much in checks to companies that don’t pay income tax as the state could use to pay for 1 percent in state aid to schools.

A new annual report from the Department of Revenue outlines the use of the Research Activities Credit (RAC), which in 2015 provided $42.1 million — about the cost of an additional percentage point in school aid — to companies that paid no state income tax. Most of that went to very large companies.

The state report, released Monday, shows that in 2015:

  • Claims by 248 companies totaled $50.1 million for the RAC and the related supplemental RAC for which some claimants are eligible.
  • Of those, 186 (75 percent) are companies that not only owed no state corporate income tax after applying the credit, but received state checks in return.
  • Eighty-four percent of the tax credits were paid as checks to the companies.
  • Very large claimants — companies with over $500,000 in RAC claims — had at least 85 percent of those checks ($35.8 million) while paying no income tax.
  • Rockwell Collins, Dupont, Deere & Co., John Deere Construction and Monsanto were the largest corporate claimants, as they have been for the past six years. Together, those five companies have claimed nearly $218 million from the RAC program from 2010-15. (See table below.)

“This spending outside the budget process is distorting the choices now on the table as state lawmakers consider what is available for schools, clean water, human services and public safety,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project.

“Is it a better use of taxpayers’ money to send millions in checks to profitable companies to do research they would do anyway, or to make sure schools can hire enough teachers next fall? That is the question that should be raised by this automatic spending on business tax breaks. To ignore it is a fiscal scandal.”

Overall, the credit program cost $57.1 million in calendar year 2015, with $50.1 million of that in claims by corporations and the rest by individuals. The credit is refundable, which means that if a company has more tax credits available than it owes in taxes, the state makes a payment for the difference. These so-called “refunds” — not of taxes owed but of credits in excess of taxes owed — accounted for 84 percent of all of the corporate research credits in 2015, according to the new report from the Department of Revenue.

The report is available on the Department of Revenue website at https://tax.iowa.gov/sites/files/idr/RAC Annual Report 2015.pdf

The Iowa Fiscal Partnership (IFP), a joint initiative of the Iowa Policy Project and another nonpartisan organization, the Child & Family Policy Center in Des Moines, has reported on the RAC for many years.

Owen noted that Iowans have access to more information about this credit than they did years ago because of the annual report, which was ordered by the Legislature in 2009.

All of the state annual reports on the RAC are available on the Iowa Department of Revenue website at https://tax.iowa.gov/report/Reports?combine=Research%20Activities.

Those reports show that the number of corporate claimants has grown from 160 in 2010, the first full year covered by the annual reports, to 248 in both 2014 and 2015. The number of claimants receiving the credit as checks, rather than to only erase tax liability, rose from 133 in 2010 to 181 in 2014 and 186 in 2015.

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Basic RGBAn IFP report last month showed that Department of Revenue forecasts indicate business tax breaks will grow by 13 percent from this budget year to the next, even though the debate over school aid focuses on numbers between 2 percent and 4 percent.

According to the Iowa Association of School Boards, each percentage point increase in Supplemental State Aid (SSA), costs about $41 million to $43 million.

“There is at least a legitimate question, one that lawmakers are refusing to consider, of why large, profitable corporations do not have to defend these millions of dollars in tax breaks and subsidies, when teachers and children’s advocates are going hat in hand to the Capitol for enough to keep up with basic costs,” Owen said.

A special tax credit review panel recommended in 2010 that the state curtail some spending on business tax credits. Among its proposals were to scale back “refunds” of the research credit, and to impose a five-year sunset on all tax credits to assure that the Legislature would have to vote to continue them.

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For more information about the Research Activities Credit and other Iowa tax credit issues, see the Iowa Fiscal Partnership website at www.iowafiscal.org.

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

Here a tax break, there a tax break, everywhere a tax break

Iowa’s revenue shortfall largely self-inflicted — education, other priorities suffer

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By Peter Fisher

Iowa legislators facing projections of scant revenue growth for next fiscal year will have a difficult time adequately funding education and other priorities, but their dilemma is largely self-inflicted. A penchant for tax cuts over the past 20 years has left the state with a long-term revenue shortfall.

As lawmakers anticipate meager revenue growth for a budget exceeding $7 billion, they face built-in and anticipated spending increases for existing programs, projected to total $269.5 million.[i] Furthermore, these increases assume no boost in per pupil state school aid because the 2015 Legislature failed to set that figure for FY2017 as required by law. The governor has proposed 2.45 percent growth in school aid, which would add another $100 million to the budget. Clearly that cannot be funded without large cuts elsewhere in the budget — or addressing the elephant in the room: rampant spending on business subsidies. 

Business tax credits create part of the problem

Why is revenue growth a problem in a state that has done better than most in recovering from the Great Recession? The answers can be found in the growth in business tax breaks. Business tax credits already on the books drained $178 million from the state treasury in fiscal year 2015, then grew by $94 million to $272 million in FY16, and are expected to remain at about that level next year. The six largest credits (or groups of credits) account for 84 percent of the total (Table 1).

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Spending on business tax credits has grown 263 percent since 2007. Caps on individual credits and groups of credits have done little to slow growth. The cost of credits has far outstripped growth in general fund spending overall.

New tax breaks have worsened the problem

Recent measures have added greatly to the problem. The massive commercial and industrial property tax bill passed in 2013 is responsible for a $268 million cut in funds that otherwise would have been available to adequately fund education, natural resource programs, and other priorities in the current fiscal year, FY16. Next year that figure is expected to grow to $304 million.[ii] The property tax breaks are larger than the sum of all business tax credits.

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To make matters worse, the administration has enacted a rule, without legislative approval, that greatly expands a sales tax exemption for manufacturing. That will cost the general fund another $35 million next year, while depriving schools and local governments of another $13 million.[iii]

Altogether business tax breaks will drain $611 million in revenue from the state general fund next fiscal year. At a time when the state is struggling to fund education at all levels, those business tax breaks take on added importance. And they tell us something about the state’s priorities.

Iowa business taxes are already quite competitive

Iowa did not need these tax breaks, and certainly does not need to add to the damage to state services by enacting more. Iowa has been right in the middle of the pack in how it taxes business for a long time. The most recent study of state and local taxes on business as a percent of state GDP by Ernst and Young and the Council on State Taxation shows that Iowa taxes business at 4.5 percent of GDP, just below the national average.[iv]  A study by Anderson Economic Group in 2015 found Iowa’s effective tax rate on businesses to be 8.7 percent of profits, which placed it 32nd among the states, and again below the national average.[v]

State and local taxes have little effect on business location decisions

State and local taxes are less than 2 percent of total costs for the average corporation.  As a result, even large cuts in state taxes are unlikely to have an effect on the investment and location decisions of businesses, which are driven by more significant factors such as labor, transportation, and energy costs, and access to markets and suppliers.

Tax breaks erode support for public investments in our future

The proliferation of tax incentives and business tax cuts over the past two decades has resulted in several hundred million dollars each year cut from the state budget. This has undermined the state’s ability to support quality education, from preschool through public colleges and universities, which in the long run will have serious consequences for state economic growth and prosperity.

Fixing Iowa’s problem with unsustainable revenues

Long-term sustainability for Iowa revenues should begin with a recognition that business tax breaks have grown to unsustainable proportions. At the very least, the Legislature should reject any proposals for new tax breaks. Any bill to couple with the recently enacted federal tax changes should exclude coupling with the new depreciation rules. There is no justification for piling on additional business tax breaks at a time when basic state services cannot be adequately funded, breaks that will continue to erode revenues on into the future.

In the 10 years from FY2005 to FY2015 state tax revenue actually declined as a share of the Iowa economy. State taxes represented 5.8 percent of state personal income in 2005, 5.6 percent in 2015.[vi] If taxes had grown along with the economy over this period we would have had an additional $279 million in revenue in FY2015. A real long-term solution to sustain Iowa’s critical public services, including education, will require that the state rejuvenate state tax revenues by reducing or eliminating unnecessary and ineffective tax breaks and seeking new sources of revenue. To do otherwise is to shortchange our future.




[i] Figures are based on Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, pp. 12-13, with some adjustments for the Revenue Estimating Council report of December 10, 2015 which was released after the LSA report.

[ii] Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, pp. 17 and 55. Includes the effect of SF 295 on state school aid as originally estimated.

[iii] Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, p. 59.

[iv] Ernst and Young and the Council on State Taxation, Total state and local business taxes: State-by-state estimates for fiscal year 2014. http://www.cost.org/Page.aspx?id=69654

[v] Anderson Economic Group, 2015 State Business Tax Burden Rankingshttp://www.andersoneconomicgroup.com/Portals/0/AEG%20Tax%20Burden%20Study_2015.pdf

[vi] Legislative Services Agency, Fiscal Services Division, Issue Review January 6, 2015.

 

 

 

2010-PFw5464Peter S. Fisher is research director of the Iowa Policy Project, which together with the Child & Family Policy Center formed the Iowa Fiscal Partnership, a nonpartisan initiative focused on helping Iowans to understand the impacts of budget choices and other public policy issues on Iowa families and services. IFP reports are at www.iowafiscal.org.

 

Veto words ‘ring hollow’

‘Governor Branstad’s words ring hollow in his decisions to cut education funding and to prevent greater access to child care assistance.’

IOWA CITY, Iowa (July 2, 2015) — The Iowa Fiscal Partnership released this statement from Mike Owen, executive director of the nonpartisan Iowa Policy Project, about actions taken late today by Governor Branstad on school funding and legislation that would have expanded eligibility for child care assistance:

 
Governor Branstad’s words ring hollow in his decisions to cut education funding and to prevent greater access to child care assistance.
 
First, the Governor is whacking $55.7 million in one-time funding for local schools and area education agencies from a budget compromise reached over many months by legislators. To defend this and other vetoes, the Governor speaks of concern about across-the-board cuts, when there is no threat of that possibility. These one-time funds for education were designated for one-time uses — in deference to the Governor’s previously stated concerns. The veto leaves schools with only 1.25 percent growth in the cost per pupil for the new fiscal year, well below schools’ actual costs — a legislative decision that will drive up property taxes for many districts. Neither the Governor nor the Legislature can claim accurately that they have provided sufficient funds for Iowa’s public schools, and the conclusion to this question comes 16 months past the legal deadline.
 
Second, low- and moderate-income Iowans face severe “cliff effects” — a sharp loss of resources — when their income rises enough to end their eligibility for child care assistance. A vetoed provision of SF505 would have lessened this effect for an estimated 200 families and nearly 600 children each month. These families, whose incomes are just below 150 percent of the federal poverty level (about $36,400 for a family of four), would have become eligible for child care assistance. This would have been a small but significant first step toward reducing the cliff effect. The Governor talks about increased incomes, but his veto means families will not be able to accept or seek small pay increases if it means they could no longer afford child care. The Governor’s claim that an improvement would “perpetuate” the cliff effect is to totally misunderstand the impact of this important benefit for low-income working families. Child care costs are not going down, and incomes are not rising fast enough for families to recover.
 
These issues are only two pieces of the package of decisions announced at the end of the day by the Governor’s Office. There will be more for Iowans to consider as the Governor’s decisions are reviewed more fully.

 

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. For more on the issues raised in this statement, see the IFP website at www.iowafiscal.org.

More for Millionaires, Part II

Posted April 20th, 2015 to Budget, Equity and Fairness, Income Taxes, Taxes

Flat-Tax Option Grants Most of Benefit to Minority of Iowa Taxpayers — Plus Out-of-State Millionaires

PDF (2 pages)

Department of Revenue estimate — tax plan choices
Department of Revenue estimate — tax plan benefit differences

By Peter S. Fisher

The optional flat tax bill recently introduced in the Iowa House would give $26.5 million in tax cuts to people living outside the state, including almost 5,000 non-resident millionaires. The remaining $346.6 million in tax cuts for Tax Year 2015 would go to Iowa residents, but nearly two-thirds of that would go to the 1-in-8 taxpayers making $100,000 or more.

The bill does not cut income taxes for everyone. It provides an optional way of calculating tax, so that taxpayers would need to compute their taxes two different ways to determine which was better. The flat option is more likely to be advantageous for those over $100,000 per year. The Department of Revenue estimates about 54 percent of those taxpayers would choose the flat tax.

For the vast majority of taxpayers making less than $100,000, however, at most 35 percent would benefit from the flat tax option. Because the flat option does not allow any tax credits, lower income households using the Earned Income Tax Credit or other refundable credits would be unlikely to benefit from the flat tax, and certainly would not if they now receive a refund because of a credit.

Table 1 shows the number and percent of Iowa resident taxpayers choosing the flat option vs. the current system. For example, 61.5 percent of taxpayers earning $40,000 to $100,000 per year stick with the current system because the flat option would cost more; they would get no benefit. The remaining 38.5 percent of taxpayers in that income bracket would choose the flat tax and receive on average a $549 cut.

Table 1. Iowa Residents: Minority Benefit from Flat Tax Option

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Source: Tables 2A, 2B, 5A and 5B, for residents vs. non-residents, for tax year 2015, provided by the Iowa Department of Revenue upon request, March 31 and April 2, 2015.

While 858,000 Iowa resident taxpayers making under $200,000 a year (and representing 61 percent of all Iowa resident taxpayers) would see no tax reduction under this bill, a handful of Iowa millionaires would choose the flat option and gain an average of $26,798 each.

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Keeping Ahead of the Kansans

Posted April 9th, 2015 to Blog

As state legislators consider drastic cuts in Iowa’s income tax, they would do well to consider the experience of our neighbor Kansas, which enacted a huge income tax cut in 2012, and cut taxes again in 2013. These cuts have dramatically reduced state funding for schools, health care, and other services.

It is instructive to consider as well the experience in Wisconsin, where a large personal income tax cut took effect at the start of 2013, with similar results: subsequent job growth of 3.4 percent, farther below the norm than Kansas’ 3.5 percent from the implementation of its tax cuts.

None of this should come as a surprise. Most major academic research studies have concluded that individual income tax cuts do not boost state economic growth; in fact, states that cut income taxes the most in the 1990s or in the early 2000s had slower growth in jobs and income than other states.

Businesses need an educated workforce, and drastic cuts to education are likely to make it difficult to attract new workers, who care about their children’s schools at least as much as they care about taxes.

2010-PFw5464Posted by Peter Fisher, Research Director, Iowa Policy Project

See Fisher’s Iowa Fiscal Partnership Policy Snapshot on this issue.

 


Keeping Ahead of the Kansans

Posted April 9th, 2015 to Blog

As state legislators consider drastic cuts in Iowa’s income tax, they would do well to consider the experience of our neighbor Kansas, which enacted a huge income tax cut in 2012, and cut taxes again in 2013. These cuts have dramatically reduced state funding for schools, health care, and other services.

It is instructive to consider as well the experience in Wisconsin, where a large personal income tax cut took effect at the start of 2013, with similar results: subsequent job growth of 3.4 percent, farther below the norm than Kansas’ 3.5 percent from the implementation of its tax cuts.

None of this should come as a surprise. Most major academic research studies have concluded that individual income tax cuts do not boost state economic growth; in fact, states that cut income taxes the most in the 1990s or in the early 2000s had slower growth in jobs and income than other states.

Businesses need an educated workforce, and drastic cuts to education are likely to make it difficult to attract new workers, who care about their children’s schools at least as much as they care about taxes.

2010-PFw5464Posted by Peter Fisher, Research Director, Iowa Policy Project

See Fisher’s Iowa Fiscal Partnership Policy Snapshot on this issue.

 

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More Millions for Millionaires

IFP POLICY BRIEF /

Flat-Tax Option Showers Benefits at High Incomes — Services Face New Cuts

2-page PDF

 

By Peter S. Fisher

Tax legislation pending in the Iowa House would shower most benefits on higher income Iowans, while reducing revenues by over half a billion dollars.

Already for the coming fiscal year, $277 million — two-thirds of the increased revenue to the general fund — is going to be funneled to commercial and industrial property tax relief. This will leave the state short of funds to adequately finance education and other services, before the new legislation would strip the general fund of another $482 million.

House File 604 would give taxpayers a choice each year: File income taxes using current law, or a new flat rate option. Under the flat rate option, the tax is 5 percent of all “base income,” where that is defined more broadly than current taxable income (no deduction for federal taxes), but allows the deduction of all federal interest, all retirement income, and a larger standard deduction.

Higher income Iowans would benefit most — Iowa tax filers with adjusted gross income of $40,000 or less (representing over half of all taxpayers) get just 6 percent of the $373 million in tax cuts for tax year 2015 under this bill, for an average of just $30 savings per tax filer (see Table 1).[i] Nearly two-thirds of the $373 million goes to those with income of $100,000 or more, representing just 1 in 6 taxpayers. Of that group, Iowa’s millionaires — representing just four-tenths of 1 percent of taxpayers — get 10 percent of the total benefit, or $5,463 each.

Table 1. Tax Savings from HF604 Flow Mostly to High Income Iowans

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Source: Letter from the Iowa Department of Revenue to Jeff Robinson, Legislative Services Agency, March 26, 2015. Note: This table omits $11.5 million in tax benefits for 2,542 composite returns with unknown AGI. This amount is part of the $373 million total tax reduction.

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Iowa’s millionaires get 183 times the average benefit of those under $40,000 in income (Figure 1). Those with $1 million or more income get on average a 15 percent tax cut; other taxpayers average 11 percent.

None of this should be surprising given provisions in the bill. Key points:

  • The flat tax option cuts the top rate — which applies to income over $69,225 — by 44 percent.
  • The tax rate on taxable incomes below $13,851, now between 0.36 percent and 4.5 percent, would actually be higher under the flat tax.
  • While the flat tax option does eliminate the deductions for federal taxes, itemized deductions, and Iowa capital gains (features of the current tax that benefit primarily higher income taxpayers), it also eliminates all taxes on pension income.

Since current law already exempts all of Social Security benefits and the first $6,000 per person of pension income, eliminating the rest of the tax on pensions primarily benefits higher income seniors. The flat tax option also eliminates all tax credits, some of which (such as the Child and Dependent Care Credit and the Earned Income Tax Credit) are worth more to lower income taxpayers.

Moving to a flat tax does nothing for tax simplification. Claims to the contrary are entirely disingenuous. The bill does not substitute a simpler tax for the current calculation; it offers taxpayers the option of filing under the current system or the alternative flat tax. Thus taxpayers will have to figure their tax both ways to determine which one works to their advantage. This additional complication also increases the cost of tax administration by an estimated $796,000.[ii]

The bill will almost certainly cost the state’s general fund more than the estimates provided in the Department of Revenue tables. As the DOR points out, giving taxpayers an option provides an opportunity for taxpayers to game the system by filing under the current law one year and the flat option the next. For example, a taxpayer could have extra federal tax withheld during 2015 and then file Iowa income tax for 2015 under current law, deducting all those extra federal taxes and reducing Iowa tax. In April 2016 the taxpayer receives a large federal refund because of overpaying for 2015. But the taxpayer files Iowa tax for 2016 using the flat rate option and so does not have to add the refund to Iowa taxable income as would be required under current law. The entire amount of the federal refund, deliberately inflated by the taxpayer, thus represents Iowa income that should be taxable but escapes Iowa income tax entirely. The DOR had no way of knowing the extent of such gaming and so could not include its effects in its revenue estimates.

In sum, the flat tax bill is a very expensive effort to sharply cut taxes, mostly for upper income Iowans, and especially for millionaires. It would put a large hole in state finances for years to come, undermining the state’s ability to maintain a quality education system.


[i] The $373 million is the amount for tax year 2015 — that is, the reduction in taxes owed for income received during calendar 2015 on tax returns filed by April 2016. The Department of Revenue has translated tax year losses into fiscal year losses. The reduction for FY2015 is estimated at $482 million, then settles down to around $400 million for each of the next three fiscal years.

[ii] Letter from the Iowa Department of Revenue to Jeff Robinson, Legislative Services Agency, March 26, 2015.

Note: This Policy Brief, originally circulated March 25, 2015, was revised March 26 with new estimates from the Department of Revenue, which previously had estimated a larger benefit than shown here to filers with adjusted gross income greater than $1 million.

2010-PFw5464Peter S. Fisher is research director of the Iowa Policy Project, which together with the Child & Family Policy Center formed the Iowa Fiscal Partnership, a nonpartisan initiative focused on helping Iowans to understand the impacts of budget choices and other public policy issues on Iowa families and services. IFP reports are at www.iowafiscal.org.

Iowa’s Problem of Priorities

IFP BACKGROUNDER / 
Costly Business Property Tax Cut Excessive — Hurts Family, Kids’ Services 

2-page PDF 

Tax cuts have consequences. In the case of the massive commercial property tax cut enacted two years ago, those consequences have become all too real.

Iowa’s economy continues to rebound and state revenues are projected to rise nearly 5 percent next year, yet we find ourselves struggling to finance our most important basic services, like education. Why? Because we are giving away most of the increased revenue to commercial property owners, with no public benefit to show for it.

The commercial property tax cut will result in an estimated $277 million hit to the state budget next fiscal year, more than double this year’s cost as provisions phase in.[1] This means that the property tax cuts will consume 68 percent of the estimated $408 million in increased state revenue.[2] The small amount remaining is far too little to cover even the normal increases in the cost of providing public services due to inflation.

While the legislation has been sold as a general property tax cut, only 11 percent of the property tax reductions will flow to residential and agricultural property owners next year.[3] The rest goes to owners of commercial property, apartment buildings, industrial facilities, railroads and utilities.

The legislation has two major provisions. A Business Property Tax Credit is entirely state funded and is of more benefit to owners of small properties, since the maximum value of the credit represents a larger share of their taxes. The most costly provision reduces the assessed value of commercial and industrial property to 90 percent of actual value, with the state reimbursing localities for the resulting revenue lost.[4] This provision lavishes the majority of its benefits on large property owners.

About $5 million will flow next year to the 11 largest big-box retailers, none of them Iowa companies.[5] While this is real money flowing out of the Iowa treasury, a few hundred thousand a year to the likes of Wal-Mart or Target is of little import to them, and will have no effect on their decisions to build in Iowa, which are driven by the size of the consumer market here. There was never a case for commercial tax reductions; overall business tax levels in Iowa for a long time have been below the national average — a point you rarely hear, and never from the business lobby.[6]

What exactly are the consequences?

The cost of running schools will keep rising faster than state aid, resulting in layoffs, increased class sizes, program reductions, and more years of outdated textbooks.

The Governor’s budget proposes sizable cuts to state health care programs and requires state agencies to finance salary increases by reducing staff, thus reducing state services.

Once again we will not expand the state’s preschool program for 4-year-olds, a measure that has been shown to be an effective economic development tool yet fails to help many low-wage workers needing full-time preschool.

Our child care assistance program, with one of the lowest income cutoffs in the country, will keep penalizing families for earning more. Bi-partisan support for funding to improve water quality and expand access to mental health care will likely be for naught.

We have a problem of priorities. We keep underfunding services for average Iowa families — education, health, work supports, natural resources — in order to finance massive tax reductions to businesses that don’t need it. And we spend in excess of $350 million each year on business tax credits that continue on autopilot, with no sunset, despite the state’s own analyses that fail to find evidence of appreciable benefit to the state from some of the largest of these subsidies.[7] 

It is time to admit that the tax cuts enacted in 2013 were excessive, and are causing long term damage to the state. At the very least, the $50 million increase in the business property tax credit portion of those tax cuts scheduled for next year should be delayed or eliminated.

But that is not enough. There should be a moratorium on any further tax cuts or tax credits. All business tax credits should be subject to effective caps and sunsets to force a serious evaluation.

Without such measures, we will continue down the road of tax-cutting our way to mediocrity and shortchanging our children’s future. 

                      

2010-PFw5464A shorter version of this piece appeared as a guest opinion by Peter Fisher, Research Director of the Iowa Policy Project, in The Des Moines Register on March 6, 2015. This version has been updated to reflect March estimates by Iowa’s Revenue Estimating Conference. (See endnote 2)

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




[1] The Legislative Service Agency projects that general fund appropriations resulting from the property tax legislation will total $277.1 million for FY2016: $162 million to replace local revenue lost because the bill reduced commercial and industrial assessments to 90 percent of actual value, $14.9 million in state foundation aid to schools triggered by the reduction in assessed value, and $100 million for the business property tax credit. LSA, Fiscal Services Division, Summary of FY 2016 Budget andDepartment Requests, December 8, 2014, page 53. https://www.legis.iowa.gov/docs/publications/LADR/435197.pdf

[2] The $408 million represents the increase in state’s net receipts plus transfers, according to the Revenue Estimating Conference, March 19, 2015. The increased revenue was estimated at $338 million in December. However, the larger increase comes about not because the March revenue estimates for FY2016 are higher (they are actually a little lower) but because the revenue estimate for the current fiscal year dropped $90 million. Thus while the increase looks bigger it is a result of a worse fiscal situation for the state. https://www.legis.iowa.gov/docs/publications/BL/656455.pdf

[3] Legislative Services Agency, Fiscal Note on SF 295, May 22, 2013. https://www.legis.iowa.gov/DOCS/FiscalNotes/85_1464SVv2_FN.pdf

[4] The state promised to reimburse these losses fully only through FY 2017; after that, local governments will be on the hook for an increasing portion of the lost revenue. In addition, the state is not reimbursing localities for any of the revenue lost from a third provision that reduces the assessed value of residential rental property.

[5]Estimate based on January 2012 taxable values and the statewide average property tax rate on commercial property of 3.77 percent for FY2015.  The 11, in order by 2012 valuation statewide and with the location of the corporate headquarters, are Wal-Mart (AR), Target (MN), Menard’s (WI), Lowe’s (NC), Walgreen’s (IL), Kohl’s (WI), Younkers (PA), Home Depot (GA), K-Mart (IL), Best Buy (MN), and Sears (IL). The 11 had $1.33 billion in taxable valuation, so that the reduction to 90 percent for January 2014 values amounts to $133 million, assuming valuations before the reduction remained about the same.

[6] Iowa: Where Business Taxes are Low. Iowa Fiscal Partnership, March 5, 2014.  http://www.iowafiscal.org/iowa-where-business-taxes-are-low/

[7] Iowa Department of Revenue, Contingent Liabilities Report, December 2014 https://tax.iowa.gov/sites/files/idr/Contingent%20Liabilities%20Report%201214.pdf. For evaluations of tax credits by the Iowa Department of Revenue see https://tax.iowa.gov/report/Evaluations?combine=Study; also of note is the State of Iowa Tax Credit Review Report, prepared by the Governor’s Tax Credit Review Committee, January, 2010. http://www.dom.state.ia.us/tax_credit_review/files/TaxCreditStudyReviewReportFINAL1_8_2010.pdf