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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.

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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

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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.

Leveling sales-tax playing field

Modernizing Iowa’s sales tax: Leveling the playing field 
•  Governor Reynolds’ plan would secure needed revenue from e-commerce and remote sales 
•  Further measures could ease regressive impact to lower- and moderate-income families

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By Charles Bruner for the Iowa Fiscal Partnership

IMG_3798Sales tax plays a core role in funding Iowa’s general fund budget, contributing about one-third of the revenue for Iowa’s current $7.2 billion budget.[1] One-sixth of Iowa’s 6 percent state sales tax is earmarked for a state fund for K-12 school infrastructure.[2] Cities and counties also receive sales tax with 1 percent local-option tax referendum votes, with revenues directed to specific projects.

Over the last several decades, Iowa’s and the nation’s economies have shifted toward greater purchases of services rather than goods and toward greater purchases online and through remote locations rather than direct, local sales. To retain revenue from the sales tax, either the sales tax needs to be raised in size or broadened and modernized to reflect these changes.

Iowa periodically has updated its sales tax to cover new services and has a fairly broad tax base in that respect. Until recently, however, Iowa has not had a viable way to collect sales tax from many out-of-state vendors who make sales in Iowa, particularly through e-commerce.

Despite efforts by states, including Iowa, the federal government has not enacted legislation to clarify how state sales taxes can be imposed on out-of-state retailers. Recently, however, Colorado and a growing number of states have adopted provisions that make such collections possible, and these have been upheld in federal court.[3] Not only do such actions increase sales tax revenue; they also create a level playing field for in-state businesses that must compete with out-of-state retailers and are at a competitive disadvantage when they must collect sales tax and remote sellers do not.

The Governor’s proposed tax package would expand the Iowa sales tax and the enforcement and collection of that tax, as some other states have done. SF2383 also contains similar provisions, although amendments adopted substantially reduce their scope and revenue generation. The Department of Revenue’s fiscal note on the Governor’s proposal focuses upon six key elements:

  • Digital Goods: Ending the exemption for goods purchased and delivered online, such as e-books, games, and phone apps. The exemption was enacted when the internet was new and few goods were delivered digitally.
  • Ride Sharing: Establishing taxation of all ride services including traditional taxi services and internet-based ride-sharing businesses such as Uber and Lyft.
  • Subscription Services: Expanding the sales and use tax to capture the change in consumption from tangible good purchases such as video game cartridges and CDs to subscription services including streaming audio and video and software as a service.
  • Online Sellers: Expanding the definition of sales tax nexus to include any retailer selling more than $100,000 of products or making more than 200 separate sales into the state, whether or not through an online marketplace.
  • Online Marketplaces: Expanding the definition of retailer to include any marketplace provider (Google Play Store is an example) that facilitates sales into the state, to rectify the current disadvantage faced by traditional retailers required to charge sales tax on in-person sales while retailers in online marketplaces claim to have no such requirement.
  • Online Travel Company Websites: Clarifying auto rental and hotel/motel tax obligations, in particular including online travel companies.

The Department of Revenue estimates these changes together will result in increased state sales tax revenues of $46.7 million in FY2019 growing to $137.5 million in FY2023. SF2383, as passed from the Ways and Means committee, had these six provisions but also included several new sales tax exemptions (for grain bins, agricultural consolidation, and construction equipment dealers), reducing its impact by about one-half. Adopted amendments further reduced the estimated revenue impact, to $1.1 million in FY2019, going up to $23.7 million in FY2023. 

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The full provisions in the Governor’s proposal help to cover a large share of the revenue reductions proposed in the state income tax, while the provisions in SF2383 do not even begin to cover the revenue reductions in its corporate tax cuts, let alone individual income tax cuts. The Governor’s proposal also, through LOST and SAVE, provides greater assistance to local government and school districts.

Like most sales tax measures, the proposed increases are somewhat regressive, taking a larger share of income from moderate and middle-income Iowans than from high-income Iowans. This, however, can be offset by other changes (particularly in the individual income tax) that are progressive. Other IFP backgrounders examine this aspect with respect to the Governor’s proposal and SF2383.

Overall, the Governor’s proposal, if retained in its current form, does modernize Iowa’s sales tax and makes it fairer to Iowa retailers. It better assures the sales tax will maintain its role in financing the General Fund and supporting, in a small but significant way, schools and local jurisdictions with a local option sales tax.


[1] Governor’s Budget in Brief, FY2019. The current year general fund budget of $7.2 billion has been adjusted and is further being adjusted during the 2018 legislative session due to projected shortfalls. The Governor has proposed a $7.4 billion general fund budget for FY19. About $3 billion, or 33 percent, of projected general fund revenues come from sales tax.

[2] This is known as the Secure an Advanced Vision for Education fund, or SAVE. This revenue source began as local-option tax authority, later merged into a statewide tax and pooled for more equitable distribution statewide.

[3] While currently upheld, the Supreme Court may rule further on this case.

 

Charles Bruner, Executive Director, CFPCCharles Bruner is director emeritus of the Child and Family Policy Center in Des Moines. CFPC and another nonpartisan, nonprofit organization, the Iowa Policy Project in Iowa City, together form the Iowa Fiscal Partnership.

 

Costly frills: Extending 529 deduction

A largely insignificant benefit to Iowans who already can afford private K-12 school

• Analysis of the proposed expansion of Iowa’s 529 program to K-12

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By Peter Fisher, Iowa Policy Project

The Governor’s Tax Plan (HSB 671) and the Senate-passed plan (SF2383) both would expand the current deduction for contributions to a college savings account — a 529 plan — by allowing the funds in those accounts to be used for private K-12 school tuition. It does this by conforming to the new federal definition of allowable withdrawals.

Conformity to the IRC here is something of a misnomer. A taxpayer who makes a contribution to a 529 plan receives a federal benefit: The interest or other earnings on the contribution are not taxed when the money is withdrawn to pay college education expenses. The tax advantage exists only to the extent that there is genuine savings involved over a period of time, with interest earnings or capital appreciation that would otherwise be taxed.

Iowa law currently goes beyond the federal law by allowing the taxpayer to deduct the contribution to the plan, up to a dollar limit of $3,239 per child per contributor, for the year when the contribution is made.[i] It thus provides an immediate tax benefit, which can be taken whether or not the funds are left in the account to earn interest. By conforming to the federal definition of what is an allowable use of 529 plans, Iowa would be extending this state deduction benefit to parents of children in private K-12 schools.

If the goal is to increase access to private schools, extending the 529 plan tax benefits is a very weak tool for several reasons:

  • Many low-income families will receive no benefit because even without the 529 deduction they have little or no taxable income. This will be even more common if a tax bill is passed that raises the Iowa standard deduction, because that would put many more families, primarily those with lower than average income, in the zero taxable income category where a further deduction is of no value.
  • Even for low-income families with taxable income the deduction will be worth very little and will not make private school tuition appreciably more affordable. Consider a family with $40,000 total income, taxable income of $30,000. The additional deduction for private school tuition would reduce their state income tax by just $210. Even a family with $80,000 total income and $60,000 in taxable income would save just $257 by taking the maximum deduction for one child of $3,239.
  • Fiscal impact estimates by the Iowa Department of Revenue indicate that 71 percent of the benefit of the 529 plan extension would go to the 20 percent of taxpayers with incomes above $100,000 per year — those who can afford private school tuition already.

Extending the 529 savings plan to cover K-12 private school tuition, in other words, is little more than a tax subsidy to parents already sending their children to private school, most of them with incomes well above the average.

The current 529 plan for college tuition does operate as a savings incentive for some. But there is no requirement that a family actually put money aside for future college expenses. A family with a college tuition bill due Sept. 4 can put $3,239 in a 529 plan on Sept. 3, and take it all out again the next day to pay tuition. When they go to pay taxes the following April, they will be able to deduct that $3,239 from their income just as if they had put it in a savings account years ago. Still, it is likely that most families use the 529 Plan today to save for higher education, particularly as those costs can be $10,000 a year for a state university and more for a private college.

The extension of the 529 tax benefit to K-12 tuition largely applies to people who already are enrolling their children in private school. Currently, there are about 32,600 K-12 students enrolled in private schools[ii] with parents of most of them paying tuition and also paying state income taxes. The extension of the 529 plan offers, in essence, a backdoor way for Iowa to subsidize this nonpublic education. There is little time to actually save for a child’s K-12 education, making it likely that this extension of tax benefits will simply be used to get an immediate taxpayer-financed subsidy to cover tuition bills of these 32,600 students.

Iowa already provides some support for nonpublic education through the Tuition and Textbook Credit (TTC), and the proposed bill does not appear to prevent double dipping. For example, a couple paying $6,000 in private-school tuition for their 10-year-old could each put $3,000 in a 529 plan, then take it out a few days later to pay the tuition bill. Come tax time, they could deduct the $6,000 on line 24 of the Iowa 1040, reducing taxable income by $6,000. Then on line 44 they could take the maximum Tuition and Textbook Credit (TTC) of $1,000, for the same tuition payment.

The Iowa Department of Revenue estimated that extending the 529 plan to K-12 education would cost the state $5.2 million in tax year 2019,[iii] while the State Treasurer’s Office put the estimate at $7.5 million.[iv] It would add to existing uses of the public’s tax subsidies for private education: the tuition and textbook credit, and the $12 million tax credit for contributions to private school tuition organizations. There are longstanding issues and concerns regarding the extent to which Iowa should provide any assistance to students enrolled in nonpublic education. This approach, however, adds administrative complexity and cost to the 529 program, reduces state revenue available for other needs, and adds to the subsidies of nonpublic education in a way that also disproportionately benefits high-income families. In terms of tax principles of fairness, simplicity, revenue adequacy, and public purpose, this extension of the 529 program fails on all counts.



[i] A married couple with two children, for example, could contribute $12,956 per year  (two contributors, times two children). In addition, grandparents or others could each contribute $3,239 per child, and would get the same Iowa tax benefit.

[ii] State Treasurer’s Office: “Expanding 529 State Tax Treatment to K-12.” January 19, 2018

[iii] Letter from the Iowa Department of Revenue, Research and Analysis Division, to the Legislative Services Agency, January 17, 2018.

[iv] State Treasurer’s Office: “Expanding 529 State Tax Treatment to K-12.” January 19, 2018

 

2010-PFw5464  Peter Fisher is research director of the Iowa Policy Project.

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.

Basic RGB

 

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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