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The limits of transparency

Posted April 3rd, 2013 to Blog
Peter Fisher

Peter Fisher

You can’t fix problems you can’t find. That’s why transparency is so important in public policy and especially spending through the tax code.

You would never find some of this information just going to the Iowa Economic Development Authority website — you have to know where to look. And even then, there are limitations on what is available from the state for its citizens to see.

The Iowa Policy Project and Iowa Fiscal Partnership have long argued for greater transparency with regard to the state’s expenditures on economic development through the tax code. We are happy to see a new report from the Iowa Public Interest Research Group that brings attention to this issue, properly including business tax credits and other tax expenditures among the categories of state spending that citizens have a right to know about.

But it’s very important to look at the deficiencies that remain in Iowa. In our view, those problems tell far more about the state’s interest in transparency than the items that are given a favorable rating by PIRG.

While the PIRG report gives Iowa credit for having a website that allows a citizen to find economic development subsidies awarded by company name (including the amount, the jobs promised, the jobs created, and the location), two problems in particular should be addressed in the future.

  • First, only tax credits that must be awarded are listed; similar information should be available for all economic development tax credits, including those that are automatic.
  • Second, the database of subsidies is buried deep in the website of the Iowa Economic Development Authority (for those interested it is here: It’s hard for the public to find. A link to this database should be posted on the state’s DataShare website, where only aggregate information on tax credits is available.

The Legislature did pass a notable transparency improvement in 2009 that requires the state to identify by name the recipients of Research Activities Credits in excess of $500,000. The bill failed, however, to require identification of how much of a company’s credit was in the form of a refund check. Taxpayers have a right to know how much of their tax dollars are going to subsidize corporations that are paying no state income tax.

It should be clear by now that the disclosure of company-specific subsidy information does no harm to the company or to the state’s economic development efforts; there is no excuse not to make all of our business tax subsidies transparent.

Posted by Peter S. Fisher, Research Director

Flat tax plan legalizes cheating on Iowa taxes

Posted March 11th, 2013 to Blog
Peter Fisher

Peter Fisher

The Iowa House of Representatives will soon take up a bill that would legalize cheating on your Iowa income taxes. While that isn’t the intent, it will certainly be the effect, at least for anyone who has an accountant or who can figure out how to do it on their own.

Officially, the bill is HF3, which would create an alternative flat tax of 4.5 percent. The taxpayer could choose between the current system and the flat rate. If you choose the flat rate, you get a standard deduction but cannot deduct federal income taxes, itemize deductions, or take any credits. But if you currently pay a higher rate than 4.5 percent, and don’t have a lot of deductions or federal income taxes, you might come out ahead picking the alternative flat rate.

To see how this opens the door to massive tax avoidance, you need to understand one important feature of Iowa’s income tax: federal deductibility.

Let’s say you earn $75,000 in Iowa adjusted gross income (AGI) for 2013 and you had $5,000 in federal income taxes deducted from your paycheck during the year. You can deduct the $5,000 from your AGI, leaving you with that much less income to pay tax on. But if you also got a refund check from the federal government in 2013 (because you had too much withheld during 2012, and deducted too much federal tax on your 2012 Iowa return), you have to add that back to your taxable income. This ensures that, over the years, you always end up deducting exactly what you actually paid in federal taxes.

HF3 changes the rules — and here’s how any taxpayer could game the system under HF3. Let’s call it, “Follow the 20,000.”

•  First stop, your W-4. During 2013 you file a W-4 to have five times as much federal income taxes withheld from your paycheck as you really need to. (Or, if you are self-employed, pay quarterly estimated taxes five times what is required.) So when you go to file your 2013 Iowa tax in April 2014, you can deduct $25,000 from your income instead of $5,000. This lowers your Iowa tax bill considerably. If you were in the top 8.98 percent bracket, the extra $20,000 deduction would save you $1,796 on your state income tax. So you choose to file under the current system instead of using the flat rate.

•  Why that’s a bad idea now. Under the current system, your strategy would bite you in the back the next year, because now the $20,000 excess withheld in 2013 comes back as a refund check in 2014. The $20,000 refund check from the feds in 2014 would have to be added back to your 2014 income. You have to pay state tax on it.

•  Flat tax changes the game. If you can take the alternative flat tax for 2014, you will see a huge break. While you would not be able to deduct federal taxes withheld during 2014 under that scheme, you don’t have to add back the $20,000 refund check either.

So for 2014, you pick the flat tax alternative, and pay 4.5 percent on “all” your income — but in the state’s eyes, it’s like that $20,000 never existed.

•  An endless payoff. By doing this, you magically avoid ever paying Iowa income taxes on that $20,000. You didn’t pay tax on it the year it was withheld, because that year you filed the old way and took federal deductibility. And you didn’t pay tax on it the next year, either, because that year you chose the flat tax alternative and didn’t have to add in the $20,000 refund check.

You could argue that if the Legislature makes it legal, it can’t be called cheating. But it sure smells like it. That’s a “tax avoidance” strategy useful only to those in the higher tax brackets.

And that strategy can be avoided if HF3 gets no further in the Iowa House.

Posted by Peter Fisher, Research Director

Fisher: Commercial property taxes — reform first

Posted March 1st, 2013 to IFP in the News, Op-eds

Peter FisherBy Peter S. Fisher, Iowa Policy Project

The annual debate about commercial property taxes in Iowa is under way, and once again the discussion ignores the larger picture — that overall business taxes in Iowa are below average among states — and fails to consider reforms that should be addressed first.

It has become routine practice throughout Iowa, for example, to grant large property tax rebates to new commercial properties through Tax Increment Financing (TIF). Millions of dollars per year flow back to commercial projects, sometimes eliminating nearly all property taxes for 15 or 20 years — which can be to the disadvantage of an existing commercial project not in the TIF.

At the same time, some of Iowa’s largest and most profitable companies are paying no state corporate income tax due to the generosity of Iowa’s business tax credit programs. And many large multistate companies continue to exploit loopholes in Iowa’s corporate tax system to shift profits out of state and avoid paying their share of Iowa’s corporate tax, while instate business competitors cannot.

Rockwell-Collins has not paid any state corporate income tax for at least the last three years, and in fact, received state subsidy payments of as much as $13.8 million last year through the Research Activities Credit, yet it would benefit substantially from the property tax rollbacks and credits being discussed in the Legislature.

At the same time, local services could suffer from the loss of revenue, at least under some proposals. Similarly, Wal-Mart and its stores throughout Iowa, which exist because they are profitable, would receive a reduction on the $12 million in property taxes they currently pay to support state and local services.

Other national companies that use tax loopholes to escape Iowa income taxes would benefit as well. Nearly identical companies doing business in Iowa may have dramatically different property taxes based upon whether they are part of a TIF district, with TIFs often eroding local property taxes and playing one Iowa community off against another.

That violates a primary tax principle of fairness — that taxes should be based on ability to pay, and that those of similar standing and with similar ability to pay should have similar tax responsibilities.

Is Iowa really not competitive for new commercial investment, as some claim, given the ability of cities to reduce their property taxes to almost nothing? Should corporations not paying their share of the corporate income tax benefit from further state largesse in the form of property tax cuts?

TIF reform, caps on the refundability of tax credits, and measures to close the loopholes in Iowa’s corporate tax system (which could be corrected by combined reporting, as is done in the majority of states with corporate income taxes) should be undertaken before any further reduction in business taxes at a cost of cuts to local services.

Recent legislative proposals: In fiscal year 2009, property taxes levied amounted to $4,023 billion, with 31.2 percent, or $1.254 million, coming from commercial and industrial property. During the 2012 session, the Iowa House and Senate passed different versions of commercial and industrial property tax rollbacks — either of which could significantly affect the ability of both state and local governments to address health, education, and safety needs of Iowans (which make up 80 percent of the Iowa budget).

The House version, when fully phased in by FY2022, would have resulted in $486 million less in property tax collections and $237 million less in funding available to local governments, provided the state honored new commitments for $249 million in property tax replacement from state sources. The Senate version, when fully phased in by FY2022, would have resulted in $419 million less in property tax collections and $91 million less in funding available to local governments, provided the state honored new commitments of $328 million in property tax replacement funds from state sources. Since they did not reach agreement, neither version was enacted into law, but these issues are again before the General Assembly.

Iowa’s business taxes already are low. When one considers the whole range of state and local taxes that fall on businesses, Iowa is a low-tax state. In a report on overall taxes, including property taxes, paid by businesses, the nationally recognized accounting firm of Ernst and Young recently showed that only 15 states taxed businesses at a lower rate than Iowa as a percent of private-sector GDP.

Commercial property tax break will spur little or no growth. A state or local government’s tax rate — be it corporate income or commercial property or the combination of all taxes on business — is a tiny portion of a business’ overall costs. Taken together, state and local taxes on business are, on average, only about 1.8 percent of total business costs. The commercial property tax by itself would be an even tinier fraction of a business’ overall costs. The notion that cutting commercial property taxes further by reducing assessments will bring in new economic activity and new revenue is a pipe dream.

If Iowa is to make changes in its property tax treatment of commercial and industrial property, the first thing it should do is look to finance the cost of these changes through closing existing tax loopholes and subsidies. There are many provisions within Iowa’s tax code that are designed to stimulate economic activity but also substantially erode overall tax collections, often to the benefit of very narrow business interests. Because these credits are part of the tax code, they are not subject to annual appropriation or review. Before lawmakers consider changes to commercial and industrial property taxes or to corporate or individual income taxes, they need to review and consider reforms to and eliminations of special business tax exemptions and credits.


Peter Fisher is research director of the Iowa Policy Project, part of the Iowa Fiscal Partnership, a joint public policy research and analysis initiative of IPP in Iowa City and another nonpartisan, nonprofit organization, the Child & Family Policy Center in Des Moines.

This guest opinion ran in the March 1, 2013, Iowa City Press Citizen.

A $40 Million Budget Hole: Persistent and Growing

Posted February 25th, 2013 to Budget, Corporate Taxes, Tax Credits, Taxes

IFP Backgrounder — Research Activities Credit: Poster Program for Reform

Read backgrounder (2-pg PDF) February 25, 2013

rac boxEach year, Iowans learn a little bit more about the use of the state’s most lucrative business tax credit program, the Research Activities Credit (RAC). And each year, they also learn a little more about what they do not know — but could know, with better accounting in a public format.

As the Iowa Fiscal Partnership has reported for years, Iowa’s RAC is in practice a far different benefit from the one envisioned when it originally passed, in 1985. Designed to support start-up companies to do research, this increasingly costly program primarily benefits very large companies, with little scrutiny. Since 2009 more information has been available about the RAC, because a new law requires a state report by each February 15 on both individual and corporate claims against income tax.

The reports show this tax credit is used relatively little in the way one might expect of a tax credit: to reduce taxes. Rather, the credit is used mostly to provide subsidies, sometimes in the millions of dollars, to corporations that actually pay little or no income tax.

All annual reports filed as a result of the 2009 law are on the Department of Revenue’s Tax Credits Tracking and Analysis System page, at The first report was for a partial year; reports for calendar year 2010 and after offer full-year information. The tables below provide a summary of the full-year reports.

In summary, the 2012 report showed that 178 corporations claimed a total of $46.1 million from the RAC — covering both the regular RAC and the supplemental credit. Of those credits, $32.5 million was paid to 130 claimants as refunds, which means the recipients paid no state income tax because they had more credits than tax liability.

The law also requires reporting the identities of claimants of more than $500,000. Table 3 provides information from the 2010[1], 2011[2] and 2012[3] annual reports disclosing big claimants and amounts claimed. A stronger disclosure would also state how much of each of those large claims was paid as a “refund,” (a check). It also would require corporations to report on changes in economic activities and investments in the state (the primary purpose for any business subsidy). These large claimants are highly profitable companies. Rockwell Collins, for example, had $609 million in profits in 2012, while Deere posted over $3 billion in profits and Dupont $2.8 billion.[4] This raises serious questions about the need for state help to cover what may be considered normal expenses, and whether the credits have resulted in any benefits to Iowa.

According to the Department of Revenue, the cost of this program — about $50.5 million for individual and corporate claims in 2012 — is projected to push above $70 million by FY2017.[5]

[4] Profits posted for 2012 by companies. Rockwell Collins:
Deere:; Dupont:
[5] Tax Credits Contingent Liabilities Report, December 2012, Iowa Department of Revenue.; Table 9.

Fisher: Heightened concern about business tax incentives

Posted February 24th, 2013 to Economic Development, IFP in the News, Op-eds

Peter FisherBy Peter Fisher, Iowa Policy Project

Headlines in last weekend’s editions of The Gazette say so much:
•  “State leaders didn’t do their homework” (Feb. 16 column by Jennifer Hemmingsen).
•  “State’s business lures don’t measure the net catch” (Feb. 17 Gazette Editorial Board editorial).
•  “Incentive cash down the drain?” (Feb. 17 front-page news story).

This trifecta is all the more disturbing when you realize the three stories focused on different issues with Iowa’s economic development programs.

The first was a glaring lack of “due diligence” by state officials in offering the biggest subsidy package in state history to the Egyptian company Orascom that, it turns out, has an affiliated firm under the cloud of fraud accusations by the U.S. government.

The others refer to the need to better establish what taxpayers are getting in return for their generosity to corporations, and to an investigation showing weaknesses in the state’s ability to recover subsidies from companies that don’t hold up their end of a development deal.

When you add in a fourth issue — the disclosure about more than $40 million in annual state giveaways to giant companies under the guise of stimulating research — you can see we have problems with accountability in Iowa.

The Research Activities Credit is an example of a business spending program crying out for reform. Designed in the 1980s to spark small startup operations, its primary beneficiaries are very large and profitable companies.

For each of the last three years, the Department of Revenue reports that Rockwell Collins, Deere & Co., Dupont, John Deere Construction and Monsanto have been the top recipients of the “credit.” In those three years, the state has sent more than $120 million to corporations in direct taxpayer subsidies, above the elimination of any corporate taxes the beneficiary corporations would have owed, at the expense of other taxpayers.

To this list could be added the film tax credit scandal in 2010 and the Iowa Fund of Funds debacle last fall.

Unfortunately, Iowans are left without much critical information needed to understand these tax provisions, who benefits from them and what Iowans receive as a result. If lawmakers are going to continue these tax provisions or enact new ones, they need to put in place much more transparency and accountability than we have currently.

We expect and receive that information from any public agency that spends state money. If we had that information on tax expenditures, we could make reasonable evaluations of whether the public was getting a return, whether dollars were spent with a public purpose, whether it was creating new economic activity.

Instead of calls for reform from the Branstad administration and the General Assembly, we see new proposals floated for fewer restrictions on corporate tax credits. Gov. Terry Branstad has proposed raising the cap that limits a select group of business tax credits from $120 million to $185 million a year.

Rather than finding more ways to give money away, the first order of business in the General Assembly should be to ensure that existing tax credits achieve the public goals for which they are intended. Lawmakers need to be stewards of the state treasury, and this includes tax expenditures every bit as much as appropriations of funds.


Peter S. Fisher is research director of the Iowa Policy Project and co-director of the Iowa Fiscal Partnership. Reports on the Research Activities Credit and other corporate tax subsidy programs are available at Comments:

 This guest opinion appeared in The Gazette, Cedar Rapids, on February 24, 2013.

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

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

Rockwell Collins, Deere & Dupont Again Lead RAC Beneficiaries

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

Osterberg agreed.

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

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

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

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

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

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

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ALEC’s ‘Tax Myths Debunked’ Misses the Mark

Posted February 11th, 2013 to Budget, Corporate Taxes, Taxes

3-page PDF of this report

By Peter Fisher

The American Legislative Exchange Council has for several years attempted to provide factual underpinnings for its right-wing policy agenda through an annual publication called Rich States, Poor States. This report and similar ALEC documents have come under increasing attack in recent years for their shoddy research methods and misleading conclusions. ALEC has now struck back at its critics in a report by Eric Fruits and Randall Pozdena called Tax Myths Debunked.[i] A portion of that document is devoted to research released last November by Good Jobs First and the Iowa Policy Project in the report Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity.[ii] Some of the key findings in that report were released in the summer of 2012 in a short piece called The Doctor is Out to Lunch.[iii] It is the latter piece that is referenced in Tax Myths Debunked rather than the full research report; we refer herein, however, to the full document and use its shorthand title, Selling Snake Oil. The full report was known to ALEC well before Tax Myths was released.[iv]

The first criticism leveled in Tax Myths is directed at an analysis in Selling Snake Oil of the factors leading to economic growth and rising incomes among the states between 2007 and 2012. In that analysis we argued that state economic structure — the composition of a state’s economy — is likely to play an important role in the short run in determining how well the economy fares; states more heavily invested in 2007 in sectors poised to grow in the succeeding five years would be expected to do better than states with a concentration of jobs in sectors that would be hit hard by the recession. Thus it was important to control for economic structure in a statistical analysis that attempts to identify whether the policy prescriptions of ALEC performed as advertised, leading to growth and prosperity. ALEC, in Tax Myths, appears to have completely misunderstood what was done in our analysis; their criticism seems to be based on the assumption that our model was predicting changes in the share of employment by sector. Instead we were simply using 2007 economic structure — measured by employment shares — to predict rates of growth in overall state GDP, employment, and personal income. Their criticisms make no sense and are completely off base; 2012 state GDP cannot be a cause of 2007 economic structure, which is the circularity they argue undermines our analysis.

Second, they argue that economists have found a strong relationship between tax policy and economic health, and cite two pieces of research in support. In Selling Snake Oil, we devote several paragraphs to a discussion of the many reviews of dozens of research articles over the past 30 years that have led to the conclusion that business taxes have, at best, a small effect on business location decisions. In our piece, we looked at the consensus among a large number of economists who have examined this question; in Tax Myths, they found two that supported their position and ignored the rest.

The third criticism is directed at several scatter plots and associated correlations that were presented in Selling Snake Oil.  In those charts we were illustrating how states that were ranked high or low by ALEC in the first edition of Rich States, Poor States in 2007 actually performed in the time since then. Did the states that ALEC ranked high on their Economic Outlook Ranking (EOR) actually perform better than others? Since all ALEC provided was the state rankings (not an index number showing their relative strength or weakness), we correlated those rankings with the measures of performance that ALEC emphasizes: growth in GDP, employment, and income. ALEC argues a technical point here: The formula used to calculate the correlation between two continuous variables (the Pearson coefficient) is different from the formula used to calculate the correlation between two rankings (the Spearman coefficient). We had one ranked variable (the EOR), and one continuous variable, and used the Pearson coefficient.

130211-table1To respond to this criticism, we converted all of the performance variables to ranks first, and then calculated the Spearman coefficient. The conclusions were the same (Table 1). Where there was no statistically significant relation using the Pearson formula (as was the case when we looked at the EOR as a predictor of growth in GDP or jobs), there was also no significant relation using the Spearman. Where there was a statistically significant and negative relation (high ranked states have lower per capita and median family incomes) using the Pearson measure, the same result occurred with the Spearman. In only one instance did results change: Our original analysis showed a negative but not statistically significant relation between EOR and the growth in state revenues. The analysis substituting the state rank in revenue growth and using the Spearman coefficient found a negative effect as well, but this time the effect was stronger and statistically significant.

Finally, Tax Myths presents an alternative to the analyses in Selling Snake Oil, correlating the state EOR each year with the June value of the “state coincident indices” published monthly by the Federal Reserve Bank of Philadelphia for each state. The coincident indices are based on four measures of the health of the state economy: non-farm employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements. ALEC found a strong correlation between a state’s EOR and the value of the coincident index.

The state coincident indices are designed for tracking the course of a state’s economy over time — whether it is sliding into recession or on a path to recovery — and are pegged to a value of 100 for every state as of 1992. They are used to compare states, but only in terms of the changes in the index over time. So the value of the index as of 2008 is a measure of that state’s growth rate from 1992 to 2008, since every state started at 100. However, a high value for state X in 2008 does not mean that state X has a healthier economy in some sense than state Y with a lower value in 2008, because state Y could have started out with a much higher level of prosperity in 1992 and still have higher incomes and wages than state X in 2008, despite growing more slowly. Furthermore, the correlations performed by Fruits and Pozdena are taken as evidence that ALEC policies, as represented by EOR, cause economic health, but they have done it backwards, in effect trying to demonstrate that conformance to ALEC policies in 2008 caused states to grow more rapidly from 1992 to 2008! So why didn’t they look at the policies in place as of 2008 and see if they predicted economic growth from 2008 to 2012? The answer is, because the correlations between the EOR in 2008 and changes in the state coincident index subsequent to that are near zero. This is not the result they were looking for.

In Selling Snake Oil, we argued that a more sophisticated approach to identifying the effects of a state’s EOR would entail a statistical analysis that controlled for economic structure, as described earlier.  In fact, a Philadelphia Federal Reserve Bank economist in an article about the state coincident index explains how state economic structure is an important determinant of the path of the state economy, as measured by changes in that index over time.[v] We decided to see how the coincident index measure of economic performance fared in our regression model. So we used our 2007 economic structure variables, along with either the EOR or several key measures that are components of the EOR, to predict the rate of improvement in a state’s coincident index from 2007 to 2012. The results were much the same as our previous analysis, using growth in GDP, employment, or income as the performance measures. In other words, when state economic structure is controlled for, none of the ALEC policy variables, including the EOR, had a statistically significant effect on the rate of improvement in the state’s economy over this period.

In sum, nothing in Tax Myths actually undercuts any of the analyses or conclusions in Selling Snake Oil. In fact the authors’ misinterpretation of our use of economic structure variables and misuse of the state coincident indices serves only to further confirm the shoddiness of the research sponsored by ALEC.

[i] Eric Fruits and Randall J. Pozdena, “Tax Myths Debunked.” American Legislative Exchange Council, 2013.

[ii] Peter Fisher with Greg LeRoy and Philip Mattera, “Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity.” Good Jobs First and the Iowa Policy Project, November 2012.

[iii] Peter Fisher, “The Doctor is Out to Lunch: ALEC’s Recommendations Wrong Prescription for State Prosperity.” Iowa Policy Project, July 24, 2012.

[iv] The author of the ALEC report evaluated by the “Selling Snake Oil” report was quoted in a news story the day of its release, November 28, 2012, by Mike Wiser of the Quad-City Times, Davenport, Iowa.

[v] Theodore Crone, “What a New Set of Indexes Tells Us About State and National Business Cycles.” Federal Reserve Bank of Philadelphia, Business Review Q1 2006.


Peter Fisher is Research Director of the Iowa Policy Project (IPP), a nonpartisan, nonprofit organization that engages the public in an informed discussion of policy alternatives by providing fact-based analysis of public policy issues.

Fisher holds a Ph.D. in economics from the University of Wisconsin-Madison and is professor emeritus of Urban and Regional Planning at the University of Iowa in Iowa City. He is a national expert on public finance and has served as a consultant to the Iowa Department of Economic Development, the State of Ohio, and the Iowa Business Council. His reports are regularly published in State Tax Notes and refereed journals. His book Grading Places: What Do the Business Climate Rankings Really Tell Us? was published by the Economic Policy Institute in 2005.


How to make Iowa’s tax system more unfair

Posted February 5th, 2013 to Blog
David Osterberg

David Osterberg

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

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

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

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

Posted by David Osterberg, Executive Director

Sound budgeting doesn’t include blanket tax credit

Posted January 28th, 2013 to Blog
Mike Owen

Mike Owen

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

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

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

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

Posted by Mike Owen, Assistant Director

EITC boost would help families who need it — and economy

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

Heather Gibney

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

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

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

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

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

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

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

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

Posted by Heather Gibney, Research Associate