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Don’t emulate North Carolina, either

Posted March 7th, 2018 to Blog

The ideologues advocating for large state income tax cuts haven’t given up defending the Kansas experiment, despite overwhelming evidence that it forced drastic budget cuts while doing nothing to stimulate growth. Now they would have us believe that North Carolina provides an even better example of the benefits of the tax-slashing strategy. It doesn’t.

Two recent analyses of the North Carolina tax cuts, which took effect in 2014, show pretty clearly that the cuts did not boost the economy, and that they will soon precipitate large budget shortfalls. Prior to the tax cuts, the state’s economy generally grew at a comparable rate to the surrounding states, despite North Carolina having higher personal income tax rates than its neighbors. And it outpaced the national economy, jobs in North Carolina growing at 5.8 percent from late 2001 through the end of 2013, compared to 4.2 percent for the nation.

Since the tax cuts took effect in 2014, has North Carolina’s economic performance become even more impressive? On the contrary; since 2014, North Carolina has lagged behind the nation in growth in jobs and GDP, and has also lagged behind neighboring Georgia and South Carolina.

The tax-cut advocates are fond of saying simply that since the tax cuts, North Carolina has experienced rapid growth. The state has certainly grown faster than Kansas, but nothing in the evidence suggests that the tax cuts boosted growth; in fact, relative to its neighbors and to the nation its performance declined after taxes were cut.

The North Carolina tax cuts were phased in from 2014 through 2019, and by next year will cost the state 15 percent of the general fund budget. Major fiscal challenges now loom on the horizon. The state’s budget analysts project a structural budget shortfall of $1.2 billion in 2020, with the shortfall rising after that.

Tax and budget cuts are a formula for decline, not prosperity. Over the past decade, North Carolina has cut per student funding for education — K-12 by 7.9 percent, higher education by 15.9 percent, when adjusted for inflation — and the tax cuts will make it difficult, if not impossible, to restore those funds, no less to increase its investments in the state’s children. They are putting the long-term prosperity of the state at risk.

These results are not surprising. Tax cuts have budget consequences; they do not pay for themselves through growth. In fact, the preponderance of serious research finds that the effects of state income taxes on state growth are negligible.

Let’s hope Iowa does not follow either Kansas or North Carolina down the path of chronic budget crises and underfunding of the state’s responsibilities for education, health and public safety.

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

A poisoned process

Posted February 28th, 2018 to Blog

As early as today, a bill may be debated in the Iowa Senate to drastically slash revenue for public services — phased in at a cost of over $1 billion a year, or about one-seventh of the state’s General Fund.

The Senate bill, as does any legislation with a fiscal impact, comes with a “fiscal note.” This analysis by the Legislative Services Agency, using Department of Revenue data, was made available sometime late Tuesday. The legislation itself was introduced a week ago today, and passed out of subcommittee and full committee the following day.

The legislation is so complex that it took the state’s top fiscal analysts a week to put together their summary, which includes four pages of bullet points in addition to tables of data about various impacts. The nonpartisan analysis finds that the wealthiest individuals and most powerful corporations once again are the big winners.

The timing of the official fiscal analysis was only the latest example of cynical approach to public governing that has slapped brown paper over the windows of the gold-domed sausage factory in Des Moines.

This General Assembly was elected in 2016. It is an understatement to suggest that this legislation could easily have been developed through the 2017 legislative session or the months leading up to this session. The public who will be affected, and advocates across the political spectrum, could have weighed in, and independent fiscal analysis considered.

Many have tried to educate the public about what is at stake for Iowa — including the Iowa Fiscal Partnership, which among other activities brought in experts from Kansas last year to show what has happened there with similar tax slashing. IFP also offered a reminder in October of what real tax reform could include, and later about both open government and the folly of Kansas’ course. Last week, we warned about the fiscal cliff ahead.

Everyone knew the legislative leadership and Governor wanted to do something to cut taxes, but no specifics were available, just a couple of hints with no real context. The session opened in the second week of January, and it wasn’t until most had left the building on the second-to-last day of February that a fiscal analysis magically appeared.

With a more transparent and deliberate process, everyone — including and especially the legislators who will be voting on it — would have had a chance to get full information about its impacts.

Instead, it is being rammed through. Regardless of whether the legislation itself is good or bad, the process has poisoned it. And perhaps it has poisoned governance in Iowa for years to come.

There are elements of the commentary defending and opposing this legislation that show general agreement on two key points of what meaningful, responsible tax reform would entail. On both sides, there is recognition that:

•  removing Iowa’s costly and unusual federal tax deduction would enable a reduction of top tax rates that appear higher than they really are; and

•  corporate tax credits are out of control and costing the state millions outside the budget process, while education and human services suffer.

The process, however, has shielded from public view a clear understanding of how the specifics of this legislation would affect two principles central to good tax policy: (1) the purpose of raising adequate revenues for critical services, and (2) raising those revenues in a way that reflects ability to pay — basic fairness of taxation, where Iowa (like most states) has a system that shoves greater costs on low-income than high-income taxpayers.

It also has raised to the altar of absurdity a ridiculous image of the competitiveness of Iowa taxes, which independent business consultants’ analysis has shown to be lower than half the states and in the middle of a very large pack that differs little on the state and local business taxes governed by state policy. (chart below)

Ernst&YoungFY2016

As the process moves from the Senate to the House, these concepts of good governance need to be central to timely debate, not just fodder for editorial pages afterward.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project, and project director of the Iowa Fiscal Partnership, a joint initiative of IPP and the Child & Family Policy Center in Des Moines. mikeowen@iowapolicyproject.org

 

Cliff ahead: Learn from Kansas

The Iowa Senate is poised to move a massive tax cut bill out of committee today, in the belief that somehow what was a disaster in Kansas will be a big success in Iowa.

Despite chronic revenue shortfalls that have forced a series of mid-year budget cuts over the past two years, and the prospect of a tight budget for next year, Senate Republicans propose to cut $1 billion a year from the state budget. They are moving the bill forward without even an analysis of its impact.

Proponents claim this will make Iowa more competitive and boost the economy. There are two problems with this claim. First, two major accounting firms that rank states on their level of business taxation continue to put Iowa right in the middle of the pack, or even better. We are already competitive. Ernst & Young (below) ranks Iowa 29th, while Anderson Economic Group’s measure ranks Iowa 28th — in both cases, showing little difference across a broad middle range of the scale.

Second, there is good reason to expect the bill to have negative effects on the economy, not positive. When Kansas enacted major cuts to state income taxes in 2012 and 2013, the Governor and his friends at ALEC (the American Legislative Exchange Council) lauded this experiment — which five years later has proven to be a dramatic failure.

Abundant evidence shows the tax cuts failed to boost the Kansas economy. In the years since the tax cuts took effect Kansas has lagged most other states in the region and the country as a whole in terms of job growth, GDP growth, and new business formation.

When confronted with the Kansas failure, the bill’s proponents respond that the only problem in Kansas was that they failed to cut services sufficiently to balance their budget. But here’s the problem: Their constituents were up in arms over the cuts they did enact; they would not have stood for anything more drastic.

In order to bring the budget somewhat back in balance, Kansas borrowed from the future, using up reserves, postponing infrastructure projects, and missing contributions to the pension fund. Schools closed weeks early when state funding ran out. Had they cut spending further, that would have put a bigger dent in the economy, as recipients of government contracts were forced to retrench and workers laid off spent less in the local economy.

A supermajority of the Kansas Legislature voted to end the experiment last year, recognizing it as a failure and responding to the demands of Kansas citizens to restore funding to education, highways, and other state services they rely on. That decision no doubt saved the state economy from performing even worse in the years to come.

The Senate bill would harm Iowa in much the same way. Education accounts for over half of the state budget. Tax cuts of this magnitude would have very serious consequences for our public schools, and would force tuition up drastically at community colleges and regents institutions. Our court system would be forced into further personnel cuts, meaning long delays for those seeking justice. We would see more children suffer as family service workers face ever higher caseloads.

Proponents claim the Senate plan is “bold.” So is jumping off a cliff.

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

 

Related from Peter Fisher:

The Lessons of Kansas

The Problem with Tax Cutting as Economic Policy

Governor’s budget: More details needed

IFP Statement — IPP’s Peter Fisher: Eliminating federal deductibility and adding sales tax for online transactions are good starts. Still, many reasons to question Governor Reynolds’ plan.

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IOWA CITY, Iowa (Feb. 13, 2018) — The Iowa Fiscal Partnership today released the following statement from Peter Fisher, research director of the nonpartisan Iowa Policy Project, about Governor Kim Reynolds’ tax proposals.

Governor Reynolds today reinforced her commitment to eliminate federal deductibility, which has long distorted a clear picture of what Iowans pay in income taxes. Iowa is one of only six states that permit a state tax deduction for federal taxes paid, and one of only three that allow a 100 percent deduction. Ending that archaic provision is a good start.

So is her proposal to collect sales tax from online retailers, to level the playing field between national retail giants and brick-and-mortar Main Street businesses. But there is much to question.

Our initial review indicates her plan misses the mark of what is needed for true, responsible reform of Iowa individual income taxes, let alone the overall system that taxes lower-income Iowans more heavily than the wealthy.

State taxes need to be more fair to low-income Iowans and need to better assure adequate revenue for critical services, such as education. There is no assurance of the latter in the Governor’s plan, which promises cuts in income taxes by $1.7 billion by 2023 with no impact on expected revenue growth; this claim demands more information and scrutiny.

Past analysis has shown Iowa could eliminate federal deductibility and reduce its top rate of income tax below 7 percent while remaining revenue-neutral and — with the right combination of other changes — retain or enhance the fairness of the income tax. Missing from the plan is a crackdown on Iowa’s rampant spending on business tax credits and any effort to plug corporate tax loopholes, which could gain the state as much as $100 million.

The proposal acknowledges that Iowa’s tax system does far less than the federal to acknowledge the cost of raising a family. But nothing is proposed to remedy that problem beyond eliminating federal deductibility; the meager $40 per child “exemption credit” remains.

In addition, the proposal opens a potentially costly — the numbers were not provided — back door to the controversial issue of taxpayer subsidies of private schools, offering a deduction for private K-12 tuition through the 529 plan. Families who already can afford to send their children to a private school would receive a benefit they do not need, at a time public schools are being held back.

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Kansas poses warnings for Iowa

IFP News:

Failed tax-cut experiment shows states how not to proceed
New report exposes the danger of supply-side tax-cutting by states

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IOWA CITY, Iowa (Jan. 24, 2018) — A new report shows Iowa lawmakers should pay attention to the failed experiment in Kansas and focus any tax changes on fairness and stabilizing revenues for education and other critical services.

“Kansas tried cutting taxes to promote economic growth in 2012 and instead wound up lagging its neighbors — including Iowa — and the nation, forcing cuts in school funding and other needs,” said Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP).

The new report from the Center on Budget and Policy Priorities is the latest illustration of why Kansas shows how not to proceed. And now that this is clear, tax-cut proponents have backed off their earlier celebration of Kansas.

“It’s a bad risk for our state,” Fisher said. “It is being driven by outside forces and ideology, and we already know it does not work.”

In 2012, tax-cut supporters said Kansas would boost its economic competitiveness by sharply curtailing taxes on high-income people and businesses. While Kansas Governor Sam Brownback had called the cuts a “shot of adrenaline into the heart of the Kansas economy,” the result left tax-cut supporters scrambling for excuses, saying that the Brownback experiment was tainted.

CBPP, however, found the Kansas tax cuts to be a valid test of supply-side economics. That they failed the test is not a surprise. The CBPP report as well as previous IPP research by Fisher, available at www.gradingstates.org, shows that the preponderance of academic research has found that personal income tax cuts typically produce little if any economic growth.

From December 2012 (just before the tax cuts took effect) to May 2017 (just before they were repealed) jobs in Kansas grew only 4.2 percent, below all of its neighbors except Oklahoma and less than half of the 9.4 percent job growth in the United States.

Yet in Iowa, promises of tax changes are coming with a heavy dose of the failed supply-side, trickle-down approach. And work on the changes is — so far — behind closed doors.

“Iowa’s tax discussion from start to finish belongs out in the open. The impacts will be felt by all Iowans, and all Iowans should be at the table — with legitimate analysis like that from CBPP, IPP’s Peter Fisher and other respected Iowa economists, to be front and center,” said Mike Owen, executive director of IPP.

The Iowa Fiscal Partnership has identified keys to responsible tax reform, which includes eliminating federal deductibility as Governor Reynolds has proposed to reduce tax rates that appear higher than they are — but only if that change comes without a reduction in revenue, and does not increase the overall inequity in Iowa taxes that favors the wealthy.

“At a time of budget shortfalls, we cannot afford to lose more resources for schools and vulnerable families, and in any case we need to introduce more fairness in taxes to reflect Iowans’ ability to pay,” Owen said.  “Currently, the bottom 80 percent of Iowa working-age households pay — on average — 10 percent of their income in state and local taxes, and the wealthier pay steadily less. New income-tax cuts at the top would make this worse.”

CBPP’s research found that Kansas’s tax cut experiment was a valid — and failed — real-world test of supply-side economics for the following reasons:

  • Kansas sharply curtailed spending after enacting the tax cuts. Some argue that the tax cuts didn’t produce economic growth because lawmakers didn’t follow it with spending cuts, but this does not match reality. State spending was tightly restricted in the aftermath of the tax cuts. Between fiscal years 2012 and 2016, Kansas’s General Fund spending rose only 0.3 percent without adjusting for inflation and fell 5.5 percent after adjusting for inflation and population growth. If Kansas had cut spending more, its economic and job growth would have been even more lackluster as teachers, nursing home aides paid with Medicaid funds, private road maintenance contractors compensated with Highway Fund dollars, and others employed by the state would have had less money to spend locally.
  • Downturns in agriculture, energy, and airplane manufacturing don’t explain the tax cuts’ ineffectiveness. Some have cited the decline of oil, gas, and commodity prices, as well as a decline in Kansas’s energy sector to help explain the state’s poor economic performance. But the aircraft manufacturing and energy sectors are too small a part of the Kansas economy for their downturns to appreciably affect the state’s job creation record. The two sectors lost 2,500 and 3,100 jobs, respectively, between 2012 and mid-2017 — well under 1 percent of the state’s total employment. And, while combined earnings of farmers fell significantly in Kansas in the years following the tax cuts, all of the state’s neighbors except Nebraska had even bigger declines, as did the country overall. Despite this, Kansas’ job growth still lagged behind all but one of its neighbors.
  • Kansas’s exemption of “pass-through” income from the income tax led to only modest tax avoidance. The exemption for pass through income — that is, income from businesses such as partnerships, S corporations, and sole proprietorships that filers report on individual tax returns — did create an incentive for various kinds of tax avoidance strategies. But the Kansas Department of Revenue’s own data shows that there was, at most, only a small and temporary uptick in the number of pass-through business formations that might have been due to tax avoidance.

“Some will continue to argue that Kansas’s fiscal and economic struggles after its tax cuts aren’t relevant to other states, but plenty of evidence says that they are. Other states should be very cautious in pursuing tax cuts in the name of supply-side economics because time and time again we have seen this approach fail,” said Michael Mazerov, author of the report.

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Beware corporate tax con job

Posted November 29th, 2017 to Blog

EDITOR’S NOTE: A version of this piece appeared in the Wednesday, Nov. 29, 2017, Cedar Rapids Gazette. Online version here.

Those pushing the tax bill now before Congress have a tough job. They have to convince ordinary taxpayers that they should embrace a bill that gives massive tax cuts to corporations and rich people, raises the national debt, results in millions losing health care, and sets the stage for huge cuts in programs, from Medicare to food assistance to education.

Their principal argument — that trickle-down economics is going to bestow jobs and wages on the middle class — is a con job.

Why do U.S. corporations need a tax cut when they are already paying taxes at a lower overall effective rate than in other advanced economies? They don’t.

You have probably heard just the opposite: that our rates are the highest in the world, a skewed view that ignores only the nominal tax rate is higher than most other countries. In fact, a myriad of deductions and loopholes brings the actual rate corporations pay way down, to below average.[1]

The huge deficits created by this tax bill — $1.5 trillion over 10 years — would push interest rates up and would choke off investment, counteracting any tendency of the corporate tax cuts to increase investment. Furthermore, an examination of developed economies across the globe shows that corporate tax cuts over the past 15 years have not produced growth in capital investment. [2]

Nor is a cut in corporate tax rates going to lead to wage increases. U.S. corporate tax rates were slashed in the late 1980s, and in the years since we have seen the historic link between productivity and wages broken. In other words, the last corporate tax cut ushered in a period of stagnant wages, even though productivity continued to rise.

Think of it this way: Why would we expect tax cuts now would lead to corporations sharing productivity growth with workers through higher wages? It hasn’t been happening for the past 30 years.

It gets worse. The bill is supposed to be only $1.5 trillion because there are other tax increases that hold down the total. However one of those offsets won’t work as planned. A minimum tax on overseas profits, which sounds like a good idea, will actually provide an incentive for multinational companies to move American jobs overseas in order to escape the new tax.

Those who want us to believe in the magic of trickle-down economics are trying the oldest tactic in the books: misdirection. Focus on this shiny bauble — a small cut in your taxes in the short run — and this pie-in-the sky promise of jobs and higher wages; pay no attention to the billions of dollars going to corporations and the rich, and the inevitable cuts in programs, from health care to education to Medicare.

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

 

[1] U.S. corporation income taxes amount to 2.2 percent of GDP, while other advanced economies (the remaining countries in the Organization for Economic Cooperation and Development) collect 2.9 percent of GDP in corporate taxes. See “Common Tax ‘Reform’ Questions, Answered.” Josh Bivens and Hunter Blair, Economic Policy Institute, October 3, 2017.

[2] Josh Bivens, “International Evidence Shows that Low Corporate Tax Rates are not Strongly Associated with Stronger Investment.” Working Economics Blog, Economic Policy Institute, October 26, 2017.

Senate bill: Short of rhetoric

Posted November 28th, 2017 to Blog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Red ink, inequity and pain

Posted November 14th, 2017 to Blog

UPDATED NOV. 20*

redink-capitol

To dive into an ocean of red ink for a tax cut that will do little to boost the economy is one thing. To pretend it benefits middle-class families is, at the least, cynical.

It is impossible to view either the Senate or House tax bills moving in Washington as anything but a boost to the wealthy.

Responsible analysis by respected research organizations makes this apparent. The wealthy don’t just do the best in this legislation — they are the clear focus of it.

New data released by the Institute on Taxation and Economic Policy offer several key illustrations of how the Senate Republican proposal approved last week by the Finance Committee, which includes Iowa Senator Chuck Grassley, will affect Iowans:

  • The middle 20 percent of families, people making between $59,300 and $87,080 (average $72,400) receive only 12 percent of the overall tax cut in 2019. Meanwhile, the top 20 percent receive more than half — 62 percent.
  • In 2019, the top 1 percent has a larger overall tax cut than the bottom 60 percent, $483.1 million (average $32,200) to $407.9 million (average $450).
  • In 2027, as the small benefits at the middle phase out and structural changes at the top are made permanent, the bottom three-fifths of Iowa taxpayers will see $58.7 million in tax increases averaging $60, while the top 1 percent will keep an average $4,770 tax cut at a cost to the treasury of $67.7 million.

Those who are promoting this bill should at least have the honesty to call it what it is: a new handout to the wealthy — one that everyone will pay for, to the tune of $1.5 trillion over 10 years, and an almost certain loss of critical services that benefit all.

* Note: The original post from Nov. 14 has been updated with figures from the Institute on Taxation and Economic Policy analysis of the bill passed by the Senate Finance Committee.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

 

More debt, inequity and pain

​FOR IMMEDIATE RELEASE, Tuesday, Nov. 14, 2017

Senate tax plan: More debt, more inequity, more pain
Like House bill, Senate plan stacks the deck against services and opportunity

IOWA CITY, Iowa (Nov. 14, 2017) — Senate Republicans’ new tax proposal in Washington carries many of the same problems of equity and fiscal irresponsibility of the House plan.

“This plan is not only unbalanced. The scales are being tipped all the way over,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project (IPP). “Adding $1.5 trillion in debt at the almost certain cost of food and health assistance for the vulnerable and educational opportunities across the board — really, did anyone promote doing that in the last campaign? Did anyone vote for it?”

In addition, the nonpartisan Institute on Taxation and Economic Policy has released new estimates showing that for Iowa, well over half of the tax reductions would go to the top 20 percent in both 2019 and 2027 under the Senate plan. Some taxpayers would pay more, but very few of those at the top — 2 percent — while in both years, 13 percent of the middle one-fifth of taxpayers would pay more. [Find the full ITEP report here]

“Overall, these are especially troubling implications for Iowa, with daunting fiscal challenges coming in only two months with the new legislative session. Besides penalizing low-income families at a steep cost to all taxpayers, this plan would shift new costs to the state, which is becoming a common theme in Washington,” said Mike Crawford, senior policy associate for the Child & Family Policy Center (CFPC) in Des Moines.

“This Congress, many will recall, also attempted to shift hard choices and big costs to the states with health-care proposals that, thus far, have been unsuccessful. The tax choices being offered in the House and Senate threaten state resources and services as well.”

Specifically, the Senate bill would eliminate the federal income tax deduction for state and local taxes paid. The largest beneficiaries of this deduction are high-income taxpayers.

“This change could pressure states to make new reductions in taxes for those taxpayers — who already pay a smaller share of their income in state and local taxes than do low- and moderate-income taxpayers,” Owen said. “Furthermore, this would cut into revenues, which already are running short of expectations and pose difficult choices for state legislators in January.”

The bill would provide nearly half of total tax benefits to the top 1 percent of households, which would receive tax cuts averaging over $50,000 by 2027. In addition, the legislation would:

  • Skew a critical tax credit now targeted for low-income working families, the Child Tax Credit (CTC), to couples with incomes between $110,000 and $1 million. While extending this benefit to those higher-income families, it would deny any significant help ($75 or less) to 10 million children in low-income working families. The Center on Budget and Policy Priorities estimates that in Iowa, the House bill would totally leave out 89,000 children in those working families, and either fully or partially exclude 203,000 from the bill’s increase in that benefit.
  • Further reduce the federal estate tax, which already carries significant exemptions from tax for the very wealthy — $5.5 million per person and $11 million per couple. Because of these already generous exemptions, the estate tax already only affects two-tenths of 1 percent of estates nationally and in the state of Iowa. It is the only way a small amount of tax is collected on certain income. (The House bill would fully phase out the estate tax.)
  • Cut taxes for millionaire households by lowering the top income tax rate compared with the House bill, and by providing a deduction for “pass through” businesses that mean big tax cuts for high-income households.

“Elements of the Senate bill make only slight improvements to the House bill, and like the House bill it is heavily skewed to the wealthy,” Owen noted.

“Take the example of the Child Tax Credit. This program is intended to be a work support, to assist people in low-paying jobs. In our low-wage state especially, it makes no sense to be extending this credit to wealthy families when low-income families are being left out of an improvement.”

Unlike the House bill, the Senate bill would not cut the wind production tax credit, which has been critical in making Iowa a leader in clean energy.

IPP and CFPC are nonpartisan, nonprofit Iowa-based organizations that collaborate as the Iowa Fiscal Partnership on analysis of public policy choices affecting Iowans, particularly those in working families and at low incomes. Find reports at iowafiscal.org.

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Against tax spin: Wealthiest benefit

​IFP News

Against the spin: Wealthy benefit most from House plan
In Iowa and nationwide, federal tax proposal skewed to benefit millionaires

 

IOWA CITY, Iowa (Nov. 6, 2017) — New national and state-level analysis shows the wealthiest taxpayers are the biggest beneficiaries of the House tax reform proposal, exposing exaggerations of middle-income benefits in a package that could threaten critical services to low- and moderate-income families.

The Institute on Taxation and Economic Policy (ITEP — itep.org) released its analysis today. Its national findings follow estimates by Congress’ nonpartisan Joint Committee on Taxation late last week that also show benefits of the plan are heavily skewed to the wealthy.

Among ITEP’s findings for Iowa:

  • In 2018, the middle 20 percent of Iowa taxpayers will see an average tax cut of $790, compared to a $36,100 tax cut for the top 1 percent, a benefit 46 times higher for the very rich, whose annual income averages $1.2 million.
  • The inequity grows by 2027, as the average middle-income cut falls to $340 (less than half of the 2018 figure) while the very rich get a $48,520 tax cut — a third greater than in 2018, and a benefit 143 times greater than the middle-income average. (graph below)
  • The top 20 percent take 61 percent of the tax benefit in 2018, and 69 percent of the tax benefit in 2027.
Tax Cuts Skewed to the Wealthy in House Plan, 2018 and 2017
171106-ITEP-taxreform
Source: Institute on Taxation and Economic Policy
 
“So much for boosting the middle class. The rich in Iowa do far better than middle and lower-income taxpayers in our state under the House tax plan,” said Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP), part of the Iowa Fiscal Partnership with the Child & Family Policy Center (CFPC) in Des Moines.

CFPC interim director Anne Discher agreed.

“While focusing rightly on who actually benefits from this legislation — and who does not — we should not miss the impact on services and the difficult choices that will be forced upon states by federal tax cuts,” Discher said. The tax package will cost an estimated $1.5 trillion over 10 years.

Discher agreed with ITEP that low- and middle- class families likely will pay for these tax cuts for the wealthiest through reduced investments in education, health care, infrastructure, scientific research, environmental protection, and other priorities.

The ITEP analysis examines the difference in tax benefits at various incomes both in 2018 and 2027.

Fisher noted the ITEP analysis shows the legislation does not mean tax cuts for everyone, and in some cases means tax increases. Five percent of all Iowa taxpayers would see a tax hike in 2018, rising to 13 percent in 2027, according to ITEP.

“This plan benefits the wealthy immediately, but disguises even greater benefits and disparities that will become apparent well after the next election,” said Mike Owen, executive director of IPP.

“What might appear to some to be a substantial benefit at the middle next year — an average tax cut of $790 — will vanish by more than half in 2027, as even greater benefits to the very wealthy are phased in over the decade. The benefit at the top 1 percent, on average, is projected to grow from a $36,100 tax cut in 2018 to $48,520 in 2027.”
The ITEP analysis shows, in fact, that the value of the average tax benefit drops over the nine years for every income group in Iowa except the very top 1 percent. But this bias to the very rich would take place long after the 2018 and 2020 elections when policy makers might have to defend them.

“A closer look at the details of this tax plan indicates that lawmakers are most serious about ensuring that they lower tax bills for the highest-earning households,” said Alan Essig, executive director of the Institute on Taxation and Economic Policy.

ITEP and others have noted specific disparities in the treatment of various taxpayers under the proposed bill.

For example, after five years, the bill would eliminate a $300 non-child dependent credit that benefits low- and moderate-income families while reducing and eventually eliminating the estate tax, which benefits only the wealthiest two-tenths of 1 percent of estates in Iowa and the nation.

“The estate tax assures at least some taxation of extremely large amounts of income that otherwise are never taxed,” Owen said. “The estate tax already is effectively very low for even enormous estates — the first $5.5 million of an individual’s estate, or $11 million of a couple’s estate, is exempt from tax. And no family inheriting an estate of less than those amounts faces any estate tax at all, so the scare tactics that are used with small businesses and farm families are very misleading.”

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

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