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Posts tagged Heather Gibney

Focusing better on new Iowans

Posted July 3rd, 2014 to Blog

Oftentimes the topic of immigration reform stirs up heavy debates and preconceived notions about what it means to be an immigrant in the United States. Reality about immigrants, their occupations and contributions to the economy can be misunderstood.

But here in Iowa, we know immigrants are important to our state and our economy. There are 120,000 documented and undocumented immigrants contributing both as workers and as employers. Most immigrants came to find jobs so it shouldn’t be surprising that most are of prime working age, and are working.

Look around your community and you will see them working in grocery stores and delis as butchers and meat cutters, teaching in high schools and colleges, cleaning homes and businesses, and working as computer programmers. Some are small business owners, filling gaps for particular goods and services in Main Street-type businesses.

10371388_10154327977850154_8158749370873517078_nOne big misunderstanding is about the state and local taxes that immigrants pay, regardless of their legal status, on the income they earn, the goods they purchase and the homes where their families live.

It is also estimated that 50-70 percent of undocumented workers — those who do not have legal authorization to work or live in the United States, have federal and state income and payroll taxes withheld from their paychecks.

Our new Iowa Policy Project report estimates that undocumented immigrants annually pay $64 million in Iowa state and local taxes, increasing revenue available for public programs and services, including many services they are unable to access themselves.

Immigration reform enabling work authorization and a path to citizenship for current undocumented residents would bring benefits not only to immigrants but all Iowans. Legal work status would open up better job opportunities and make it more worthwhile to invest in worker education and training. Immigrants would be less susceptible to wage theft and other exploitation by employers.

Legal status would increase earnings for workers and revenues for the state. It would mean that young adults brought here as children (DREAMers) could attend college and get better jobs and it would give immigrant business owners access to more options to start or expand a business.

While the future of immigration reform is uncertain, we can be certain that immigrants contribute to the state’s workforce, economy, tax revenues and communities.

IPP-gibney5464Posted by Heather Gibney, IPP Research Associate


Why the tuition freeze matters

Posted May 2nd, 2014 to Blog

A bright spot in the just completed session of the Iowa Legislature is that lawmakers for the second year in a row have assured a tuition freeze at Iowa’s Regents universities.

The 4 percent increase in state funding for FY2015 is an important investment. It means current students will be able to keep a little more money in their pockets, and prospective students will have greater access to higher education at the University of Iowa, Iowa State University or the University of Northern Iowa.

For now, the state has stalled its trend toward sharp tuition increases — a trend similar to what’s happened at public colleges and universities across the country. A new report from the Center on Policy and Budget Priorities found that from FY2008-FY14 state funding per student at Iowa’s Regent universities decreased by 23.8 percent, leading to a 12.2 percent change in average tuition after adjusting for inflation — $854 more a year per student.

It’s a simple equation: When state funding goes down, tuition goes up and/or resources to help students are reduced. Iowa Fiscal Partnership research has shown these trends in our state, as noted in the graph below covering tuition vs. state support of Regents institutions from 2001-13.

tuitionvsstateaid

These trends shift the cost of education from the state to the students and their families. The result is that students take on more debt or have fewer choices among institutions, if they choose to attend at all. At low incomes, some students may simply choose not to enroll even though education might be what they want, and necessary to their career goals.

Excessive student loan debt has broad economic implications. It is associated with lower rates of homeownership among young adults, it can create enough stress to decrease the probability of graduation and reduce the chance that graduates with majors in science, technology, engineering and mathematics will go on to graduate school.

The economic importance of higher education will continue to grow, as getting a college degree is increasingly a prerequisite to enter the middle class. And beyond those who receive the degree, everyone in the community benefits when more residents have college degrees. An area with a highly educated workforce attracts better employers who pay better wages and this can boost an area’s economic success.

Strong state revenues offer a time to reinvest in higher education, and to return funding of services to pre-recession levels.

IPP-gibney5464  Posted by Heather Gibney, Research Associate


Hyperbole Alert: The drumbeat to cut corporate taxes in Iowa

Posted July 24th, 2013 to Blog
Mike Owen

Mike Owen

TWELVE PERCENT!

The figure practically screams at you, even when it’s not in all caps, when the conversation comes to corporate tax rates in Iowa.

Here’s the thing: It’s not a real number. Not really.

That is what is known as Iowa’s “top marginal rate” on corporate income tax. And it’s not a real number because it simply does not — cannot — reflect what a business pays on all its profits. Yet that is the implication when people (especially politicians) or corporations complain about it.

A top Iowa columnist, Todd Dorman of the Cedar Rapids Gazette, this week discussed the political battles over Iowa’s latest gigantic subsidies to Egyptian fertilizer company Orascom. In his piece he expressed a note of concern about the hyperbole in those battles. Then, he turned the discussion to Governor Branstad’s desire for cuts in corporate income taxes.

It is in that discussion where the hyperbole typically has been the strongest in Iowa. We are often told — as Dorman noted — that Iowa’s top corporate income tax rate is the nation’s highest. Note the emphasis added on “top.” More on that in a moment. Dorman also noted, accurately, that Iowa “has four brackets and a tangle of special interest credits.”

Because of the latter, any serious concern for our corporate friends should evaporate. Because they’re really being taken care of quite nicely, thank you, by their friends in the General Assembly and the Governor’s Office.

Now, about that “top rate.” It applies only to Iowa-taxable corporate profits above $250,000. Iowa doesn’t tax any profits from sales outside the state, so the rate doesn’t apply at all there, which for many businesses is a significant share of profits. For all taxable profits below $250,000, rates are lower — 6 percent on the first $25,000, 8 percent on the next $75,000 and 10 percent on the next $150,000.

Before these rates kick in, the business gets to deduct half its federal income tax from taxable income, and may have other deductions or ways to shelter income from state tax.

Then, after the rates are computed and the taxes determined, the tax credits enter the picture — and state revenues exit. The state just expanded the potential for those credits by $50 million, raising the cap on a select group of credits. In the case of the Research Activities Credit, these credits not only erase all tax liability, but offer state checks for the remaining amount of the credit. Through that program in 2012, Iowa paid out almost $33 million to 130 firms that paid no income tax, because those companies had more credits than tax liability.

And you can bet the corporate execs and their accountants fully understand all these nooks and crannies in our tax code. But if you want to give them a free million or so, they’ll take it. They are smart folks, and they have proven themselves to be more skilled negotiators than Iowa’s economic development moguls.

Want to talk reform? Then recognize the real problems — that we receive less in corporate tax than we used to, and that a lot of corporate tax is not collected because of the swiss-cheese nature of our tax code. That gives us all something to talk about.

Just be ready for the hyperbole from those who don’t want to change that part of our system.

Posted by Mike Owen, Executive Director


For more information about Iowa business taxes, see these Iowa Fiscal Partnership reports:
— “Reducing Iowa Commercial Property Taxes,” by Heather Milway and Peter Fisher, April 24, 2013.
— “Amid Plans to Relax Limits, Business Tax Credits Grow,” by Heather Gibney, April 16, 2013.
— “Corporate Taxes and State Economic Growth,” by Peter Fisher, revised April 2013.
— “A $40 Million Budget Hole: Persistent and Growing,” IFP backgrounder, February 25, 2013.
— “Tax Credit Reform Glass Half-Full? Maybe Some Moisture,” IFP backgrounder, revised March 23, 2010.
— “Single Factor to Consider,” IFP backgrounder, April 2, 2008.


Amid Plans to Relax Limits, Business Tax Credits Grow

Posted April 16th, 2013 to Budget, Corporate Taxes, Taxes

Accountability Gap: Little Evidence Required to Demonstrate Effectiveness
IFP Backgrounder By Heather Gibney, Iowa Policy Project

Calls for reform of business tax credits followed Iowa’s scandal in the management of subsidies to the film industry.1 Little reform resulted. Now, just three years later, those calls for new limits have given way to Governor Branstad’s proposals to relax limits on spending through the tax code on business subsidies, mostly outside the budget process, and outside the view of Iowans. Tax credits are a significant part of the state’s subsidies to businesses, reflecting considerable political pressure to support tax credits as part of the normal state course of supporting business. The Governor’s recent deal to Egyptian fertilizer company Orascom is a prominent example, as over $100 million in tax credits2 were part of the $200 million in subsidies offered — illustrating, if nothing else, that whatever restrictions exist on the use and awarding of tax credits, they are not hindering their use.

Iowa is projected to spend $224 million on an array of business tax credits this fiscal year. Tax incentives and direct financial assistance are intended to support business growth by encouraging economic development, investments in new facilities, research, and job creation — new activity that would not have otherwise occurred. Whether these incentives accomplish those goals or are cost-effective remains largely unknown. Yet they continue to grow. Table 1 shows how much the state has spent on the 20 business tax credits for the past three fiscal years, and the projected spending for this year and next.

Table1-credits2010-14While General Fund revenue has increased since the end of the recession, credits have grown more quickly. Credits more than doubled from FY2005 to FY2012 while General Fund revenue increased by 28 percent during that same period. As a result, total business tax credits increased as a percent of General Fund revenue — from 2.1 percent in FY2005 to a projected 3.44 percent by the end of FY2013.3 (Figure 1.) Fig 1 tax credits grow as share of revenueThe continued growth of Iowa’s business tax expenditures is largely the result of new or expanded credits, increased spending without accountability, sizable uncapped credits, limited review of credits, and no required authorization by the General Assembly.

Iowa has two categories of tax credits: automatic and awarded. Awarded credits require an application and a specific award for a taxpayer to claim the credit. The total amount of awarded credits may also be capped or uncapped. (Table 2) Capped credits must not exceed a certain dollar amount in any year. Automatic credits may be claimed by any eligible taxpayer, with no specified limit on the amount of claims.4

Several Iowa Business Tax Credits Have No Cap on Cost, and Happen Automatically

Business credits don’t require annual authorization or scrutiny by the General Assembly to evaluate their specific value or public purpose once they have been established, as do appropriations for program expenditures or state grants.5 This can lead to excessive or unexpected spending through the tax code when credits are used to a far greater extent and for different purposes than originally intended. Even when the credits meet the criteria originally set, they may go to businesses that would have grown and developed without them. 6

In FY2012 businesses claimed $136.7 million in uncapped credits and $70.8 million in capped credits — a considerable increase from the $70.9 million in uncapped credits and $33.5 million in capped credits spent in FY2005. Governor Branstad is proposing an increase in the global credit cap for the FY2014 budget. Six economic development credits are under the global cap, currently $120 million, which the Governor wants to raise to $185 million — reversing one of the few reforms actually passed in 2010.7 These credits are all awarded by the IEDA.8

The six credits are:
• Enterprise Zone Program
• High Quality Jobs Program
• Redevelopment Tax Credit
• Venture Capital Tax Credit-Innovation Fund
• Venture Capital Tax Credit-Qualified Business or Community-Based Seed Capital Fund
• Assistive Device Tax Credit

The Governor’s proposal estimates this change would reduce General Fund Revenue by $1 million in FY2014 and $3.9 million in FY2015, with the majority of the potential $65 million annual impact on the General Fund to occur in fiscal years after FY2015.9 The Governor is also recommending raising the cap on the Endow Iowa Tax Credit from $3.5 million to $4 million. This change is estimated to reduce General Fund revenue by $200,000 in FY2014 and $400,000 in FY2015.

In addition to businesses credits, some business subsidies are appropriated by the Legislature. When proposed, this kind of financial assistance for a specific program is part of the yearly appropriations process — and not included as part of capped or uncapped credits. For FY2014, the Governor proposes a $19 million cash incentive for the High Quality Jobs Program that would be allocated from the General Fund. 10

Little Progress Has Been Made Reforming Credits

A serious effort was made in 2010 to review all of Iowa’s tax credit programs and identify needed reforms. Then-Governor Chet Culver appointed a seven-member Tax Credit Review Panel, which analyzed the major provisions of each tax credit and made recommendations based on assessments of the costs and benefits, oversight and responsibility, and performance.11

The first recommendation of the panel was to provide greater transparency of tax credits by having the Revenue Estimating Conference (REC) make available the types and amounts of tax credit claims that it includes in its Tax Receipts calculation. This would allow state policy makers and the public to clearly see the impact of tax credits on the General Fund budget. Currently, the REC calculates revenues based on the information in the Iowa Department of Revenues Contingent Liabilities Report, but it does not list the types and amounts of each tax credit in its reports.

The second recommendation was to eliminate the transferability provisions of all tax credits — a provision that still remains for six credits. Recipients of certain credits whose tax liability is less than the credit can sell the credit at a discount to Iowans who do owe income taxes. This can lead to an ineffective tax credit program as it complicates the projection of revenues and the tracking of credits, and creates uncertainty about when the credits will be claimed because the entity that purchased the credit may utilize a different fiscal year than the entity awarded the credit.12 When a credit is sold, it is difficult to follow who actually benefits — the buyer may not be in the same industry as the seller, and the credit can wind up subsidizing activity that is completely unrelated to the original target and may contradict other public policy goals.13

The panel’s third recommendation was to develop an effective return on investment calculation for each tax credit. Thus far, however, only one has been fully developed — for the state’s High Quality Jobs Program.14 The process of calculating a return on investment for each tax credit is still incomplete and inconsistent. Without an effective return on investment calculation, the state cannot know how effective tax credits have been and what changes should be made.

As part of the state establishing more accountability to the taxpayers, the panel recommended a five-year sunset on all tax credits. This provision was not imposed on any credit; however, six tax credits are scheduled for repeal in the next eight years. Establishing a five-year sunset would require policy makers to affirm the value of a credit, encouraging them to evaluate each tax credit and determine whether the original economic development purpose remains relevant.

To enable the state to manage its General Fund budget more effectively, the panel recommended capping all credits. Currently, seven business tax credits have no individual cap and are not included under the global cap; this includes two of the largest credits, the Research Activities Credit and the Iowa Industrial New Job Training Program.

The panel recommended elimination of six business tax credits as not being fully used and no longer necessary because of changing economic conditions — four have been repealed. Two targeted credits that remain include the Assistive Device and Qualified Business or Community-Based Seed Capital Fund.

Overall, few of the panel’s recommendations were enacted. Subsequent attempts to curb tax expenditures have met strong opposition.

Tax Expenditure Committee

In response to concerns raised by the review panel, the Legislative Tax Expenditure Committee was created in 2010 under Senate File 2380 to provide greater oversight of tax expenditures.15 This committee is composed of 10 members of the General Assembly (five members from each chamber) appointed by the Legislative Council. The purpose of the committee is to evaluate tax credits for their original purpose and to conduct a review of all credits over a five-year period — assessing their equity, simplicity, competitiveness, public purpose, and adequacy. They also are tasked with estimating the cost of each tax expenditure every fiscal year as well as the total cost of all tax expenditures.16

To date, the committee has reviewed the following business credits: High Quality Jobs, Research Activities, and Targeted Jobs from Withholding, as well as reviewing the Fund of Funds. The committee has met twice — in the Fall of 2011 and the Fall of 2012, but has not made major recommendations for changes to any tax credits that it has examined. The Iowa Department of Revenue has prepared a number of reports on various tax expenditure programs; those have provided more in-depth information about their use.

Many of Iowa’s business tax credits are designed to promote specific businesses or benefit specific firms, which run counter to a number of fundamental tax principles related to simplicity, fairness and economic efficiency. Even conservative organizations such as the Tax Foundation argue against providing special tax exemptions and credits for specific economic activities, considering them distortions to a free market with the potential to unfairly advantage one business to the detriment of another. Further, large increases in credits for businesses results in decreased tax liability, often for the benefit of a few firms and individuals who already are economically prosperous — and this decrease in General Fund revenue available to fund education, human services, health care, workforce development, environmental protection, and other economic development programs serving the larger public. Many of the state’s vital services are still not funded at pre-recession levels and proposed increases are less than what can be expected in a time of recovery. Yet business credits continue to increase faster than revenue.

The connection of tax expenditures to debates about budget choices is something the General Assembly and Governor must acknowledge. Tax expenditures have the same overall impact on state budget choices as do direct appropriations. Before adding new tax expenditures or raising the caps on those that exist, Iowa lawmakers would do well to return to the findings of the most comprehensive review in the last decade, that of the Tax Credit Review Panel, and address these issues anew.

[1] “Tax Credit Reform Glass Half-Full? Maybe Some Moisture,” Iowa Fiscal Partnership, March 23, 2010. http://www.iowafiscal.org/2010docs/100317-IFP-analysis.pdf
[2] “Branstad, Reynolds Celebrate Largest Capital Investment in Iowa History,” Office of the Governor, September 5, 2012.
http://www.iowaeconomicdevelopment.com/NewsDetails/5496.
[3] Author’s analysis of tax credit figures from 2005-2015 Contingent Liabilities Report, Iowa Department of Revenue.
http://www.iowa.gov/tax/taxlaw/0313RECReport.pdf.
[4] Tax Credit Contingent Liabilities Report, Iowa Department of Revenue, March 22, 2013.
http://www.iowa.gov/tax/taxlaw/0313RECReport.pdf.
[5] “Seduction: The Disaster Story of Iowa’s Film Tax Credit,” Iowa Fiscal Partnership, October 8, 2009.
http://www.iowapolicyproject.org/2009docs/091008-ifp-film.pdf.
[6] Charles Bruner, Peter S. Fisher, “Business Tax Credits and Expenditures 101: A Primer on the Economics of State Subsidies to Promote Iowa Economic Development,” Iowa Fiscal Partnership, February 1, 2010.
http://www.iowafiscal.org/100204-taxcredits101.html.
[7] Author’s analysis of tax credit figures from 2005-2015 Contingent Liabilities Report, Iowa Department of Revenue.
http://www.iowa.gov/tax/taxlaw/0313RECReport.pdf.
[8] Tax Credit Contingent Liabilities Report, Iowa Department of Revenue, March 22, 2013
http://www.iowa.gov/tax/taxlaw/0313RECReport.pdf.
[9] “Preliminary Summary of the Governor’s FY2014 Budget Recommendations,” LSA, Fiscal Division.
https://www.legis.iowa.gov/DOCS/lsaReports/BudgetAnalysis/Archives/FY%202014%20Prelim.pdf.
[10] “Summary of the FY2014 Budget and Governor’s Recommendations,” LSA Fiscal Division.
https://www.legis.iowa.gov/DOCS/lsaReports/BudgetAnalysis/Archives/FY%202014.pdf.
[11] State of Iowa Tax Credit Review Report, Department of Management, January 8, 2010.
http://www.dom.state.ia.us/tax_credit_review/files/TaxCreditStudyReviewReportFINAL1_8_2010.pdf.
[12] State of Iowa Tax Credit Review Report, Department of Management, January 8, 2010.
http://www.dom.state.ia.us/tax_credit_review/files/TaxCreditStudyReviewReportFINAL1_8_2010.pdf.
[13] Jennifer Weiner, “State Business Tax Incentives: Examining Evidence of their Effectiveness,” New England Public Policy Center, December 2009.
http://www.bos.frb.org/economic/neppc/dp/2009/neppcdp0903.pdf.
[14] Lee Rood, “Have State Tax Credits worked for Iowa?” Des Moines Register, November 16, 2011.
http://www.public.iastate.edu/~nscentral/mr/11/1118/monitor.html.
[15] Notes on Bills and Amendments: Tax Credit Reductions and Review, Senate File 2380, LSA, March 17, 2010.
https://www.legis.iowa.gov/DOCS/LSA/IntComHand/2012/IHMJD000.PDF.
[16] Background on Senate File 2380, Legislative Tax Expenditure Committee, LSA, Fiscal Division.
https://www.legis.iowa.gov/DOCS/LSA/IntComHand/2012/IHMJD000.PDF.

 

Heather GibneyHeather Gibney is a research associate for the nonpartisan Iowa Policy Project, where she focuses on state fiscal issues and their effect on working families. She received her master’s degree in Public Policy from the University of Northern Iowa and undergraduate degrees in Psychology and Criminal Justice from the University of Iowa and Mount Mercy University.

The Iowa Fiscal Partnership is a joint budget and tax policy initiative of two nonpartisan, Iowa-based organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines. Find IFP on the web at www.iowafiscal.org.

EITC boost would help families who need it — and economy

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

Heather Gibney

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

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

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

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

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

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

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

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

Posted by Heather Gibney, Research Associate


EITC boost would help families who need it — and economy

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

Heather Gibney

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

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

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

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

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

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

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

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

Posted by Heather Gibney, Research Associate


Better understanding the 47 percent

Posted October 1st, 2012 to Blog
Heather Gibney, Research Associate

Heather Gibney

The current political environment has set off a firestorm of confusion about who does and who does not pay taxes in America — and unfair criticism of many working families and others.

It’s true that 47 percent of Americans pay no federal income taxes, but they do pay taxes. In fact, almost two-thirds of the 47 percent are low-income, working households who are paying payroll taxes to help finance Social Security and Medicare, and many pay federal excise taxes on things like gasoline, alcohol and cigarettes.[1] These households are also paying a large percentage of their income in state and local sales and property taxes.

Many working Americans are exempt from the income tax because of features Congress added to the tax code — with overwhelming bipartisan support, in an effort to enable people to care for themselves and their children while encouraging them to work. Some of these features include the Earned Income Tax Credit, a Ronald Reagan era anti-poverty program that enables low-wage working families with children to meet their basic needs while promoting employment. In addition, the child tax credit gives families a tax credit through the form of a refund check even when they don’t owe federal income taxes.[2]

The other one-third of the 47 percent — those households that aren’t paying either major federal tax — includes those who are unemployed, low-income senior citizens who paid taxes during their working years and aren’t currently taxed on Social Security benefits, students, those who have disabilities or can’t work due to serious injury and people who don’t meet the income tax obligation because their wages aren’t high enough.

Often missed in the focus on those who are not currently paying income taxes is the errant assumption that all those people have never paid taxes and never will. Just because a household doesn’t owe income tax one year, doesn’t mean they won’t pay income taxes over their lifetime. For many, a career change, the loss of a job, a disability or injury, or low wages can lead to incomes too low to pay taxes.

Iowa households who aren’t paying federal income tax are still paying a large percentage of their incomes to state and local taxes. As the Iowa Policy Project reported in (2009), moderate-and low-income Iowans pay more of their income in state and local taxes than the rich do. [3] [4]

whopays2009As the graph at right shows, Iowa’s regressive tax system takes a larger share of the incomes from those who have the least, and a smaller share from those who have the ability to pay a larger percentage of their income. Make no mistake: Working Iowans pay taxes.

For more on this issue, see our two-pager, “Better understanding the 47 percent.”