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Too far for a tax-cutter

Posted June 13th, 2018 to Blog

Editor’s Note: This piece ran in the Wednesday, June 13, 2018, Cedar Rapids Gazette as a guest opinion from IPP’s David Osterberg.

The attack on higher education funding by the governor and legislative leadership has gone too far for at least one longtime tax-cutter.

Former state Sen. Larry McKibben, a member of the Iowa Board of Regents, expressed his concern about state support of universities. The regents voted Thursday to raise university tuition rates at Iowa, Iowa State and Northern Iowa universities, following $40 million in state funding cuts.

McKibben was forthright in blaming the legislative session for an increase in tuition at the three state universities and the loss of professors to better positions after years of low salary increases. From The Gazette’s story on the regents’ meeting:

“We have lost great folks, and now we are going to have to raise tuition,” McKibben said, noting that will persist “as long as we continue what I believe is, in my time on the board, the worst state government attack on our three public universities that I can ever remember.”

In fairness, the groundwork has been laid for this latest attack over many years. An Iowa Fiscal Partnership report in 2012 showed how spending on the UI, ISU and UNI dropped from fiscal year 2000 through fiscal year 2012.

An Iowa Policy Project analysis by Brandon Borkovec showed that adjusting for inflation, state funding for Iowa public universities has declined since fiscal year 2001 by 40 percent at UI, 42 percent at ISU, and 28 percent at UNI.

As a percentage of university budgets, the state share dropped by almost half from fiscal years 2001 to 2016.

Some of this happened on McKibben’s watch as one of the Legislature’s most powerful lawmakers on tax policy — one who often looked for ways to cut taxes, as he did in 2003 with a proposed flat tax that would have cost more than $500 million.

He did not intervene to rein in the Research Activities Credit, which sends more than $40 million a year to profitable corporations that pay no income taxes to the state.

He turned the other way as corporations raided Iowa’s treasury through tax loopholes at a cost of $60 million to $100 million a year.

As Regent McKibben, his new concern is understandable and his advocacy for college students laudable. He wants Iowa voters to pay attention and ask what candidates will do about severe underfunding that he says will assure more tuition increases. From the story in The Gazette: “I look forward to hearing the candidates say that,” McKibben said. “What are you going to do about higher education and our three great universities?” And what are you going to do to bring them back to level?”

These same trends were happening when McKibben was a legislator. Now, it seems, the governor and state legislative leaders have gone too far, even for him.

David Osterberg is founder and former executive director of Iowa Policy Project in Iowa City. Comments: dosterberg@iowapolicyproject.org

15 yards, loss of revenue

Posted May 31st, 2018 to Blog

It’s time to throw the penalty flag on Governor Kim Reynolds. Her remarks about the tax cuts she signed into law Wednesday for the wealthy fail any test of accuracy. Iowans need to know the facts.

It would be different if she had acknowledged, and made a case for:

•  massive tax cuts for the wealthiest.
•  cutting revenues, assuring continued suppression of education and opportunity, public health and safety and investments in the future of Iowa.
•  continued massive corporate tax giveaways, as business tax credits have doubled in five years.

But those were not her messages — and those messages will not be repeated here. The Governor is (1) deceiving Iowans about some policies she has adopted, and (2) ignoring likely damage to the economy from these tax cuts.

She even put off some forward strides she had suggested but abandoned during the recent legislative session. The concept of “reform” is gone, as the bill does nothing to simplify taxes for at least four years, and leaves in place a system that already was heavily skewed to benefit the wealthy.

Here are a few critical realities:

  The income tax savings to a middle class family next year are only $3 to $4 a week (according to the Department of Revenue) — while the sales tax increase will offset such savings for many.
  Millionaires, on the other hand, will see on average an $18,773 cut for the year.
  Larger tax cuts scheduled to take place in five years might not happen because they are triggered by a revenue target that will be very difficult to meet. (But count on tax-cut proponents to campaign on them.)
  Instead of adjusting taxes in a way that cuts would be paid for, this legislation will actually take $300 to $400 million a year out of the budget. Those dollars could have gone to adequately fund education or public safety or mental health care.
  The bill makes $40 million in corporate income tax cuts.
•  The bill provides an unneeded tax break for wealthy earners of “pass-through” income from business.

Meanwhile, the bill fails to reform business tax credits, which have doubled in five years, to $400 million. And it also fails to raise the standard deduction or eliminate federal deductibility, both of which the Governor had proposed but compromised away.

As reviews and promotions of the tax bill proceed, keep these points in mind. And watch for more information, because the analysis will continue on a bill developed in secret, for signing at an invitation-only ceremony.

Mike Owen is executive director of the nonpartisan Iowa Policy Project. Contact: mikeowen@iowapolicyproject.org

Tax bill: Know five points

Posted May 3rd, 2018 to Blog

Here are five things you need to know about the final version of the tax bill now scheduled for a vote in the Iowa Legislature this Saturday: (1) It is not income tax reform, (2) It is not a middle-class tax cut, (3) It is more skewed to the richest Iowans than previous bills, (4) It is very expensive and will force cuts in education, public safety and other services, and (5) It is more likely to hurt the Iowa economy than to help it.

As we have pointed out previously, real income tax reform would rein in expensive business tax credits that have little effectiveness, eliminate federal deductibility, increase recognition of the costs of raising a family, and raise the Iowa standard deduction — which would both simplify taxes for thousands of Iowans, and target tax cuts at lower and middle-income taxpayers. The tax bill does none of these things for the next four years.

Earlier versions of the House bill would have increased the standard deduction and eliminated federal deductibility, but those provisions were jettisoned in favor of $40 million in corporate tax cuts and more tax preferences for high-income business owners. The bill does little to reform business tax credits, which have doubled in five years. It adds a new and expensive loophole — a deduction for pass-through income from certain businesses.

For the next four tax years the bulk of the tax savings go to the most well off. In 2021, almost half of the tax cuts will go to the richest 2.5 percent of Iowa taxpayers, those making $250,000 or more. Their taxes are reduced by 18 percent, over twice the cut for those in the middle. For those making over a million dollars, the tax cut will average $24,636.

Meanwhile, those in the middle will see income tax cuts of $100 to $300 over the next four years, much of which will be taken back in increased sales taxes of $35 to $60.

All of this comes at a high cost to the state — over $400 million a year by 2021. With over half the budget going to education, this means the underfunding of our public schools and the rising tuition and debt for our community college and university students will continue.

The bill’s only “trigger” does nothing to guarantee fiscal sustainability, its purported purpose. The $400 million hit to the general fund will happen no matter how slow the Iowa economy, and state revenues, grow. We could hit a recession in the next two years, and those tax cuts will remain in place.

The only trigger governs an additional round of tax cuts for 2023. If the revenue target is met (and it would require growth rates of over 5 percent per year) then the annual cost of the bill jumps to $643 million. Only then would federal deductibility end, and the higher federal standard deduction come into play.

If the bill’s backers are counting on growth to come to the rescue, they are willfully ignoring all evidence to the contrary. The last major income tax cuts in Iowa, in 1997-98, not only failed to stimulate growth, but likely contributed to the subsequent slowing of the state’s economy. The tax cuts in Kansas led to slower growth.

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

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.

♦♦♦♦♦♦

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

SNAP changes: Ignoring what works

Posted April 19th, 2018 to Blog

EITC and child care more effective than drug tests and work requirements

Work requirements for public assistance seem to be all the rage — at both the national and state levels — when other policies would do more to encourage and support work.

President Trump signed an executive order April 10 enhancing enforcement of federal public assistance work requirement laws, evaluation of program effectiveness, and consolidation or elimination of “ineffective” programs.[1] The Trump administration also is considering drug tests for SNAP (Food Stamp) recipients.[2]

Similar legislation in Iowa (Senate File 2370) intended to expand regulations on and further monitor recipients of public assistance in Iowa, but appears to have stalled as the 2018 session nears an end. This included implementing work requirements, drug testing, quarterly reviews of eligibility, and a one-year residency requirement.[3]

The Farm Bill draft[4] released April 12 would reduce or eliminate SNAP benefits for 1 million households, or 2 million recipients, according to the Center on Budget and Policy Priorities (CBPP). Work requirements would force able-bodied adults without dependents to prove every month that they work or participate in a training program 20 hours per week. Severe sanctions for noncompliance would cut off benefits for one year the first time — three years the second.[5]

Recent research found recipients under work requirements for Temporary Assistance to Needy Families (TANF) continued to live below the federal poverty level, and that small increases in employment diminished over time and did not result in stable employment in most cases.[6] In the long term, programs that provide training, skill building, and educational opportunities to recipients are shown to be more successful than only implementing work requirements.[7]

Evidence shows that people in SNAP households who can work do work. More than 80 percent work during the year before or after receiving benefits.[8]

Drug testing public assistance recipients has proven to be costly and frivolous. States that have implemented drug testing found that applicants have lower drug usage rates than the general population. The state of Missouri spent $336,297 in 2015 to test 293 of 31,336 TANF applicants and found only 38 positive results.[9]

Eleven percent of Iowans received public assistance in February of 2018.[10] Already, able-bodied adult without dependents have work requirements to receive SNAP in the state of Iowa.[11]

By contrast, the Earned Income Tax Credit and Child Care Assistance (CCA) are policies that are effective in encouraging work. In addition, Iowa could make changes in work support programs, such as CCA,[12] to reduce what are known as “cliff effects” — when families with a pay raise or a new job are faced with a net loss because a reduction in benefits exceeds the new income.

Policies that support working families, not drug testing and work requirements, would do more to encourage work, raise family incomes, and boost local economies.

 

[1] The White House, “Executive Order Reducing Poverty in America by Promoting Opportunity and Economic Mobility.” April 2018. https://www.whitehouse.gov/presidential-actions/executive-order-reducing-poverty-america-promoting-opportunity-economic-mobility/

[2] Associated Press, “Drug testing plan considered for some food stamp recipients.” April 2018. https://www.apnews.com/6f5adff5efeb4f9a9075f76bf9cf5572

[3] IA Legis, “Senate File 2370” February 2018. https://www.legis.iowa.gov/legislation/BillBook?ga=87&ba=SF2370

[4] House Agriculture Committee “H.R. 2: the Agriculture and Nutrition Act of 2018.” April 2018. 115th Congress. https://agriculture.house.gov/uploadedfiles/agriculture_and_nutrition_act_of_2018.pdf

[5] Center on Budget and Policy Priorities, “Chairman Conaway’s Farm Bill Would Increase Food Insecurity and Hardship.” April 2018. https://www.cbpp.org/research/food-assistance/chairman-conaways-farm-bill-would-increase-food-insecurity-and-hardship#_ftn1

[6] Urban Institute, “Work Requirements in Social Safety Net Programs.” December 2017. https://www.urban.org/sites/default/files/publication/95566/work-requirements-in-social-safety-net-programs.pdf

[7] Center on Budget and Policy Priorities, “Work Requirements Don’t Cut Poverty, Evidence Shows.” June 2016. https://www.cbpp.org/research/poverty-and-inequality/work-requirements-dont-cut-poverty-evidence-shows

[8] Center on Budget and Policy Priorities, “Making SNAP Work Requirements Harsher Will Not Improve Outcomes for Low-Income People.” March 2018. https://www.cbpp.org/research/food-assistance/making-snap-work-requirements-harsher-will-not-improve-outcomes-for-low

[9] Center on Law and Social Policy, “Drug Testing SNAP Applicants is Ineffective and Perpetuates Stereotypes.” July 2017. https://www.clasp.org/sites/default/files/publications/2017/08/Drug-testing-SNAP-Applicants-is-Ineffective-Perpetuates-Stereotypes.pdf

[10] Iowa Department of Human Services, “Food Assistance Report Series F-1.” March 2018. http://publications.iowa.gov/27299/1/FA-F1-2016%202018-03.pdf

[11] Iowa Department of Human Services, “ABAWD Letter.” September 2017. https://dhs.iowa.gov/sites/default/files/470-3967.pdf

[12] Peter S. Fisher and Lily French, Iowa Policy Project: Reducing Cliff Effects in Iowa Child Care Assistance, March 2014. https://www.iowapolicyproject.org/2014docs/140313-CCA-cliffs.pdf

 

2018-NV-6w_3497(1)Natalie Veldhouse is a research associate at the nonpartisan Iowa Policy Project.

nveldhouse@iowapolicyproject.org

Big costs, few real breaks

Posted April 17th, 2018 to Blog

The latest tax bill to emerge from the Iowa House would take $90 million from the state budget, robbing the ability of the state to adequately fund education, mental health, and public safety. And yet Iowans will see so little in return that most will not even be able to tell they got a tax cut.

By the time the House bill’s provisions  are fully phased in (fiscal year 2021), the income tax cuts and sales tax modernization measures will result in about $90 million a year less revenue flowing to the state’s general fund than was projected before the federal tax bill was passed.[1] After years of revenue shortfalls and budget cuts, the House bill would guarantee that those problems will continue.

Iowa is one of only three states where you can deduct your federal income tax before computing your income subject to Iowa tax. As a result, the federal tax cut bill will reduce that deduction and increase your Iowa taxable income and your Iowa income tax. But that effect is tiny. If the state were to do nothing at all, taxpayers would still keep 94 to 98 percent of the federal tax cut (see table below).

House plan offers little break for individuals, at great cost to services
Combined effects of Iowa House tax plan and federal tax changes

ia_finalhousebill_results-2.jpg

Source: Institute on Taxation and Economic Policy, Washington, D.C.

The House bill goes beyond what would have been needed to restore the small tax increases due to federal deductibility. It makes a number of changes in the income tax, including an increase in the state standard deduction. Overall, it reduces income taxes for those in the middle three-fifths of Iowa taxpayers by about $100 to $155 a year. The bill also modernizes the state sales tax, and those measures would bring in about $73 million a year from Iowa residents, and cost the middle income taxpayer $37 to $60 a year.

The net effect of all of this is an average tax cut of just $29 to $53 a year for those in the middle three-fifths of Iowa taxpayers, and smaller amounts for others. In other words, despite all the hoopla, the average taxpayer is going to hardly notice the effects of this bill — another three or four dollars a month.

Let’s just walk that through for a household with income of $53,000, which would put them right in the middle of all Iowa households. They can expect to pay $860 less in federal taxes, with federal deductibility taking back just $26 of that in state income taxes — they get to keep 97 percent. Then they get a $122 income tax cut and a $47 sales tax increase from the House tax bill. Net effect: $860 less in federal taxes, $49 less in state taxes.

While the tax savings are insignificant — three or four dollars a month — the House bill will take all that back and much more for many Iowa families. Tuition at public universities and community colleges will continue to rise because public funding will not be able to keep up with costs. School districts will be forced to enact more cuts as state funding fails to keep pace with inflation. Mental health initiatives will remain underfunded.

[1] Iowa Department of Revenue memo to Jeff Robinson, April 17, 2018. This is the net revenue loss compared to projected revenues before the federal tax bill was passed. The revenue loss compared to Iowa tax revenue including the windfall gain from federal deductibility ($178 million) would be $269 million in FY2021.

2010-PFw5464Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Public hearing: Public concerns distracted

Posted April 10th, 2018 to Blog

If the goal of a “tax reform” public hearing Monday was to distract Iowans from the massive impact the Governor’s $1.7 billion tax cut would have on their lives, it succeeded.

The media attention on the hearing in the old Supreme Court Chamber in the State Capitol focused heavily on the perennial fight between banks and credit unions — one that won’t be settled whatever happens in 2018, and not the most important issue to be settled in 2018. Therefore, we won’t link to those stories here and add to the distraction.

But, those folks on both sides of the bank-credit union fight took many of the limited speaking slots, so the media focus followed. For their part, House Ways and Means Committee members listened politely, asked no questions and let 30 or so people — including this writer — have their say in three-minute chunks.

It was the public’s only chance thus far to speak on a bill that was introduced two months ago … that may barely resemble what House leaders actually plan to pass … with no disclosure about which of the public speakers may be getting more than three minutes behind closed doors as well.
We should all have been brought to the table long before this, and attention directed to what is really on that table about the future of our state.

Iowans need to focus on the very real threat to public services, from education to law enforcement to water quality to human services that have gone lacking as our state has increasingly directed subsidies and tax breaks to corporations and the wealthy, neither of whom need help.

One good resource for all lawmakers, advocates and the public at-large is a series of concise, fact-based two-pagers in the 2018 Tax Policy Kit from the Iowa Fiscal Partnership. Find those pieces here.

If they were listening closely, lawmakers on Monday will have gleaned some important perspectives on the monumental tax changes that are being contemplated without sufficient review.

Lawmakers still have an opportunity to do this right — to steer Iowa’s tax system to a more stable, accountable and fair system that assures giant companies are paying their fair share and the poor are not penalized for their low incomes. Iowa can have responsible tax reform that does not lose money needed for traditional, critical public services that benefit all Iowans. Our focus should be there.

Mike Owen is executive director of the Iowa Policy Project. mikeowen@iowapolicyproject.org
Also see:

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.

180321-IFP-seniors-table

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

Basic RGB

 

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.