Iowa Fiscal Partnership / Iowa Policy Project
SHARE:
Policy Points from Iowa Fiscal Partners

Posts tagged Iowa Policy Project

Fisher: With economic development, some bad ideas never die

Peter FisherBy Peter Fisher, Iowa Policy Project

On Wednesday, the Iowa House proved that bipartisanship is no guarantor of good policy.

On a vote of 87-9, the House approved House File 641, which would authorize a new and wasteful incentive program that would divert money from the state general fund to support hotel and retail projects in cities. So we will be taking money that should be supporting state investments in education, health, the environment, public safety and other services and using it to subsidize hotel developers and retail strip malls. All in the name of “economic development.”

Cities already have more than enough ability to divert taxes to development projects through property tax TIFs and abatements. There is no need for additional diversions of revenue from other jurisdictions.

The House bill would authorize any city or county to establish “Reinvestment Districts.” From the date of establishment onward for the next 25 years, 4 cents of the 6-cent statewide sales tax, and all 5 cents of the state hotel-motel tax, from all “new” sales or room rentals would be diverted from the state general fund to the city for use in the district.

What uses? Pretty much anything; any building, public or private, could qualify for a subsidy, and there is no limit on how much of the cost of a project can be subsidized.

“New sales” are sales from a business that first got a state sales-tax permit (or hotel-motel tax permit) after the date the district was established. Given the high rate of turnover among retail businesses, it is not hard to imagine a scenario in which most of the sales taxes in a district are diverted from the state general fund even though there has been little additional economic activity, or even decline. All that is needed is that old businesses are replaced by new ones, even if that means replacing an Applebees with a pawn shop.

Why will a city ever again be content to finance commercial redevelopment on its own, or with property tax TIFs alone? Why will a developer ever again finance a project entirely from private sources — try to remember, if you can, when that was the norm — when he or she can just ask the city to get the money from the state?

More importantly, what will become of market standards? While every legislator who voted for the bill surely believes in free markets and private enterprise, this measure undermines markets.

There was a time, before the incentive wars got out of hand, when a project had to stand on its own — there had to be a sufficient market to support it, and banks had to be convinced that revenues would be sufficient to repay the loans.

No more. Now local government officials are determined to force development to happen when it can’t stand on its own, creating oversupply that hurts existing businesses. Or the private sector happily rakes in all the new incentive cash to do something it would have done anyway.

Those are really the only two alternatives for a local market activity: either market conditions support it and it can be financed privately, or the market can’t support it, and the city uses taxpayer money to force overbuilding.

We can hope that this bill gets careful scrutiny before it goes any further.

 

Peter S. Fisher is research director of the Iowa Policy Project in Iowa City. He is professor emeritus of urban and regional planning at the University of Iowa.

This guest opinion ran in the April 29, 2013, Iowa City Press-Citizen, and also appeared on the Iowa Policy Points blog, www.iowapolicypoints.org.

Some bad ideas never die

Posted April 24th, 2013 to Blog
Peter Fisher

Peter Fisher

The Iowa House today proved that bipartisanship is no guarantor of good policy. On a vote of 87-9, the House approved HF 641, which would authorize a new and wasteful incentive program that would divert money from the state general fund to support hotel and retail projects in cities. So we will be taking money that should be supporting state investments in education, health, the environment, public safety, and other services, and using it to subsidize hotel developers and retail strip malls. All in the name of “economic development.”

Cities already have more than enough ability to divert taxes to development projects through property tax TIFs and abatements. There is no need for additional diversions of revenue from other jurisdictions.

The House bill would authorize any city or county to establish “Reinvestment Districts.” From the date of establishment onward for the next 25 years, 4 cents of the 6-cent statewide sales tax, and all 5 cents of the state hotel-motel tax, from all “new” sales or room rentals would be diverted from the state general fund to the city for use in the district. What uses? Pretty much anything; any building, public or private, could qualify for a subsidy, and there is no limit on how much of the cost of a project can be subsidized.

“New sales” are sales from a business that first got a state sales-tax permit (or hotel-motel tax permit) after the date the district was established. Given the high rate of turnover among retail businesses, it is not hard to imagine a scenario in which most of the sales taxes in a district are diverted from the state general fund even though there has been little additional economic activity, or even decline. All that is needed is that old businesses are replaced by new ones, even if that means replacing an Applebees with a pawn shop.

Why will a city ever again be content to finance commercial redevelopment on their own, or with property tax TIFs alone? Why will a developer ever again finance a project entirely from private sources – try to remember, if you can, when that was the norm – when he or she can just ask the city to get the money from the state?

More importantly, what will become of market standards? While every legislator who voted for the bill surely believes in free markets and private enterprise, this measure undermines markets. There was a time, before the incentive wars got out of hand, when a project had to stand on its own – there had to be a sufficient market to support it, and banks had to be convinced that revenues would be sufficient to repay the loans. No more. Now local government officials are determined to force development to happen when it can’t stand on its own, creating oversupply that hurts existing businesses. Or the private sector happily rakes in all the new incentive cash to do something it would have done anyway. Those are really the only two alternatives for a local market activity: either market conditions support it and it can be financed privately, or the market can’t support it, and the city uses taxpayer money to force overbuilding.

We can hope that this bill gets careful scrutiny before it goes any further.

Posted by Peter Fisher, Research Director


Reducing Iowa Commercial Property Taxes

Will Lawmakers Target Benefits to Small Businesses or Across the Board?

By Heather Milway and Peter S. Fisher

For the past two legislative sessions the Iowa House and Senate have proposed different approaches to reducing taxes on commercial, industrial and railroad properties (CI&R). The House and Senate failed to reach agreement in 2011 and 2012, but are trying once again to produce a bill that can pass both houses.

The House and Senate proposals, which have set the stage for late-session negotiations, have two important things in common. First, both are costly, and therefore affect the ability of the state to meet its residents’ essential needs. They would use a very significant share of the projected overall growth in state revenue, some of which is needed simply to maintain existing services. Second, both also play to a myth about Iowa taxes on business, which in reality are below business taxes in most states when considered comprehensively, and which already include substantial loopholes and preferences that disproportionately benefit select industries.

But these plans also would have very different impacts on small businesses vs. large businesses. In this brief, we illustrate those differences with examples from Iowa businesses across the state.

Changing property assessments

Under the current tax system, CI&R property in most years is taxed on 100 percent of the actual value of the property. Residential property is treated differently, as a rollback formula reduces assessed values — to just 52.8 percent of actual value in the most recent year. Both the Senate bill (SF295) and the House bill (HF609) use different strategies but address this disparity in an effort to both reduce property taxes and treat business property in ways similar to residential property.

The Senate approach would do this with a tax credit to property owners. The Senate provides funds for the credit starting at $50 million for FY2015 and then increasing by $50 million every year that there is a 4 percent increase in General Fund tax revenue, until it reaches $250 million. For FY2015, the Legislative Services Agency (LSA) has estimated that this funding will result in CI&R properties being assessed like residential property for the first $29,000 of valuation; this amount is called the Credit Base. When funding reaches $250 million, the Credit Base would be $323,000, according to the LSA projections. Thus a business with property valued at $323,000 or less would be taxed the same as residential property. Larger businesses would receive the residential rollback on the first $323,000 of value, and pay taxes under the existing CI&R system (generally 100 percent of value) for all value above that.

The House bill, backed by Governor Branstad, would replace the current rollback with a phased reduction in the assessment ratio for CI&R property; the ratio would decrease by 5 percent each year for four years until it reached 80 percent of actual value. (Because of the rollback formula still in place, it would then start to rise again if CI&R property valuation increases by less than 2 percent per year.) The House bill also phases in changes to the rollbacks for all classes of property; by FY2019, the rollback for each class is calculated to ensure that the statewide taxable value for that class grows no more than 2 percent (instead of the current 4 percent). This will further decrease taxable values.

Local impacts

Choices by the Legislature potentially carry implications for local services offered across Iowa — by cities, counties and school districts — and the House and Senate proposals differ there as well.

Because the House bill reduces the taxable value of CI&R property, and probably of all property through the changes in the rollback, it reduces revenue to local governments. HF609 appropriates funds to fully compensate cites, schools and counties for the loss in revenue due to the forced rollback of CI&R property for the first four years; there is no compensation for revenue losses due to a change in the rollbacks for all classes due to lowering the growth in taxable valuation from 4 percent to 2 percent. The amount appropriated is $77.6 million in the first year, increasing to $339.5 million in fiscal year 2018 and remaining fixed at that level thereafter. As actual valuations increase after that, local governments will increasingly bear part of the cost of the reduced CI&R assessment ratio. The Senate proposal does not roll back CI&R assessments so there is no loss of tax base or revenue to cities, counties or schools and hence no need to appropriate state funds to reimburse all or part of the loss to the local government entities.

The House bill also increases the general appropriation to schools through the state aid formula, raising the state’s share and reducing the property-tax share of a school district’s cost per pupil, which governs local school budgets. Currently, the state requires school districts to levy $5.40 per $1,000 valuation on property before state aid is applied. State funds begin at that point and continue until the total of the two is equal to 87.5 percent of the state cost per pupil; this is known as the “foundation” level for the district’s budget. Property tax is then levied to cover the remainder of the district’s full cost per pupil. The House bill would raise the foundation level from 87.5 percent to 95 percent. This would cost the state an estimated $75.1 million in fiscal year 2015, increasing to $349.7 million by fiscal year 2019. It would reduce school property tax rates for all classes of property.

If the House bill reduced the CI&R assessment ratio to 80 percent, the effect on CI&R property tax payments by Year 4 would simply be a 20 percent reduction. However, the other features of the bill will affect tax rates for all property classes. The reduced valuation through other features in the bill may cause cities and counties to raise property tax rates, if they are not at the limit. On the other hand, the change in the school aid formula will lower rates for school districts. The LSA projections assume that the net effect is a slight reduction in property tax rates over the next four years, compared to what would happen under current law.

Why businesses are watching

The Senate and House bills would have very different impacts on different kinds of CI&R properties. To understand the differences at an individual property level we have calculated the net taxes paid under the two plans for a variety of small and large commercial properties in cities and small towns in Iowa. The results for 80 different properties can be found at www.iowafiscal.org/2013research/130415-IFP-proptax-appendix.html or in the appendix to this report. We examine the effects over the first five years of implementation (fiscal years 2015 through 2019), as if valuations and tax rates for each property were unchanged from fiscal year 2012 to 2014. We assume also that the value of each property increases each year, and assume growth or decline in the tax rate each year; both assumptions follow the LSA analysis in its Fiscal Notes for SF295 and HF609. The results for four small and four large properties, located in eight cities, are shown in Table 1 below.

To illustrate two examples, consider the Walmart Supercenter in Cedar Rapids vs. the Becker-Milnes Funeral Home in Fayette. Walmart, with a projected taxable valuation of $10.7 million in FY2019, would receive a credit of $5,356 with the Senate proposed changes in Year 5, when the credit is fully phased in. To calculate this figure, begin by determining if the value of the property is above the $323,000 cap (the estimated “credit base” for FY2019). The next step is to multiply the actual property valuation or $323,000 (whichever is less) by one minus the residential rollback for that year (assumed to be .572), and then multiply the result by the total property tax levy rate. This results in a credit of $5,356 that year, which represents the excess of commercial over residential taxes on the first $323,000 of value. For Walmart, the credit saves the company 1.3 percent of the taxes it pays to local governments in Linn County.

Under the House bill, Walmart’s taxes would be calculated differently. The House plan takes the value of the property and multiplies it by the rollback (.80 for FY2019) to get the taxable valuation. The taxable valuation is then multiplied by the total levy rate and that product is divided by 1,000. The levy rate under the House bill is projected by LSA to be lower than under current law, for the reasons described above. The resulting tax bill for Walmart for the fifth year would be $321,793, which is a 22 percent reduction in tax payment — 20 percent due to the lowered rollback, the additional 2 percent because of the lower rates.

In contrast, the Becker-Milnes Funeral Home in Fayette, with a projected taxable value of $85,195 in FY2019, would pay $3,444 under current law. That business would receive a credit of $1,474 with the Senate bill: $85,195 × (1-.572) × 40.42/1000. This results in a net tax of $1,970, which is a 42.8 percent savings compared to current law. The net tax bill for the Funeral Home with the House bill would be $2,679, (85,195 × .80 × 39.30/1000) which is a 22 percent reduction. (The tax rate of $39.30 reflects the reduction in the rate under the House bill.) Thus, Becker-Milnes Funeral Home would benefit substantially more from SF295 than HF609.

Examining a medium-sized business and the effects of the Senate and House proposal we can see a dividing line in reductions. John’s Grocery in Iowa City has a taxable value of $448,800, slightly above the cap in valuation for the Senate tax credit. The grocery store could save 29 percent with the Senate proposal, which is marginally higher than the 22 percent it would save with the House proposal.

The House bill would reduce all businesses’ tax payments by 22.2 percent. Savings under the Senate bill would vary by the size of the business. From Table 1 we can see that CI&R properties that have lower net values benefit more from the Senate proposal than the House bill, and that CI&R properties with higher net values benefit more from the House changes than the Senate changes. The break-even assessed valuation for FY2019 is $622,500; properties worth less than that benefit more from the Senate bill, while those worth more fare better under the House bill.

While we have argued that the case for substantial property tax cuts for commercial property is exaggerated,[1] if some tax reduction measure is undertaken it should focus on inequities. The House bill, in fact, would provide large benefits to the big box retail chains.

Over $1 billion in taxable value in Iowa is owned by just seven national retail chains: Target, Walmart, Lowe’s, Home Depot, Menard’s, Kohl’s and Sears. These store locations are driven by local demand; they are in Iowa because the state’s residents are customers and potential customers. No economic reason exists to subsidize these national companies, which know they must locate in Iowa to sell products to Iowans. They also compete with local businesses.

We doubt that companies, large or small, will change prices or wages because of these tax cuts. Before proceeding with either tax reduction plan, legislators should ask themselves these questions. Will Walmart pay its associates more because of their property tax cut? Will it lower “everyday low prices”? Where do these wage and price decisions get made, here in Iowa or in Arkansas? Even assuming a company may provide consumers with cheaper options, it is difficult to conclude this will drive economic growth.

By 2019 under the Senate bill, fully phased in, owners of any business property worth $5 million or more in taxable value would see a reduction of less than 3 percent in their property taxes. This includes the vast majority of the seven big box retailers’ stores. In contrast, any small business with $323,000 or less in taxable value would see a 42.8 percent reduction. The House bill, on the other hand, would provide a 22 percent reduction to all.


[1] Peter Fisher, “Commercial Property Taxes: Reform First.” Iowa Fiscal Partnership, February 28, 2013. http://www.iowafiscal.org/2013research/130228-IFP-proptax-bgd.html

 

Heather Milway is a research intern for the nonpartisan Iowa Policy Project. She is a student in the Graduate program of the Department of Urban and Regional Planning at the University of Iowa.

Peter S. Fisher is research director of the nonpartisan Iowa Policy Project. He is co-director of the Iowa Fiscal Partnership and is professor emeritus of Urban and Regional Planning at the University of Iowa.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fisher: Tax hike not too much to ask of rich

Posted April 20th, 2013 to IFP in the News, Op-eds

Peter FisherBy Peter Fisher, Iowa Policy Project

The Great Recession officially ended almost four years ago. You would know that if you’re at the top of the economic heap, because corporate profits have rebounded very nicely, along with stock prices and dividends. But for millions of Americans recovery remains elusive. Jobs are scarce, wages stagnant.

This pattern of prosperity at the top and declining or stagnant living standards for the rest is not new. Over the past 40 years, our economy has been riding on healthy gains in productivity; American workers are producing 80 percent more per hour than they did in 1973.

But unlike previous periods, the gains from increased productivity have not been shared with working people. Real wages are only 10 percent higher than they were 40 years ago. From 1973 until the start of the Great Recession, about two-thirds of the income gains accrued to the top 1 percent. During the first two years of recovery, the top 1 percent not only captured all of the gain in income, but took some from the other 99 percent of us as well.

It is not asking too much of those who have reaped the benefits of our economy to contribute a little more to help pay for the education system and the public infrastructure that have supported our economy and that are needed to improve the prospects of working people. The so called “fiscal cliff” bargain in January took a tiny step toward addressing this problem by restoring tax rates on the top 0.7 percent of taxpayers to near the level that prevailed during the economic boom of the 1990s.

But even this weak measure affecting less than 1 percent seems to be too much for some. Steve Hammes complained on these pages (“When Taxes Go Up on Wealthy, Everyone Pays,” April 4) that taxing high earners costs everyone. He dismisses as a “populist attitude” the idea that the rich have reaped most of the economic gains. This is not an attitude; it is an indisputable fact.

Hammes asserts that taxing the rich will force them to raise the prices of things we buy, so the general public will end up paying their tax bills. This is nonsense.

Hammes seems to think that business owners have found a way to repeal the law of supply and demand. That might be their dream, but any business owner would be very surprised to learn that raising prices has no consequences. Basic economics tells us that people buy less when the price rises and that business owners will choose the same profit-maximizing price regardless of how much of that profit gets taxed.

Hammes also perpetuates the myth that a higher income tax on the rich is really a tax on business income. This is wrong for two reasons. First, a tax increase for the top 1 percent hits only households with total incomes of roughly $500,000 or more. Fewer than 3 percent of small businesses would be affected. Second, for households with incomes of $1 million or more, only 2.5 percent comes from operating a business. The rich get most of their income from capital gains, rent, interest and dividends — from owning assets, not from running a business.

The average car dealership owner, grocery store owner or insurance agent is not, as Hammes claims, among those who would pay more under the fiscal cliff deal or other proposals affecting those with incomes over $500,000. For that very small fraction of business owners who would pay higher taxes, let’s be clear: We are asking them to pay more because they are rich and can afford to.

There was a time from the end of World War II to about 1970 when economic growth was fueled by middle class prosperity. If we are to find a path back to shared prosperity, a good place to start is by taxing some of the income gains that have been captured overwhelmingly by the richest among us and using those funds to invest in our workforce and our economy in a way that benefits all of us.

 

Peter S. Fisher is research director of the Iowa Policy Project in Iowa City. He is professor emeritus of urban and regional planning at the University of Iowa.

This guest opinion ran in the April 20, 2013, Des Moines Register.

Amid Plans to Relax Limits, Business Tax Credits Grow

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

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

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

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

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

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

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

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

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

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

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

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

Little Progress Has Been Made Reforming Credits

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

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

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

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

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

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

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

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

Tax Expenditure Committee

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

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

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

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

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

 

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

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

Iowa’s decline in job-based health insurance

Posted April 11th, 2013 to Blog

The Cedar Rapids Gazette today offered an interesting look at the question of where Iowans get their insurance. It’s less and less something that comes through employment. And when the costs of insurance keep rising, that makes it tougher on the household budget — or results in people not having insurance.

This is a trend we’ve been watching and reporting on at the Iowa Policy Project for many years, as have several good research organizations such as the Economic Policy Institute.

The Affordable Care Act offers at least a partial remedy. As health insurance exchanges are developed, affordable insurance should be more readily available. Tax credits for employers providing insurance will provide a targeted incentive to offer employees a better option than what employees might find on the individual insurance market.

Colin Gordon

Colin Gordon

Our State of Working Iowa report for 2012 offers another good look at this issue. As author Colin Gordon observes, wage stagnation, erosion of good jobs and recession have combined to batter workers, at the same time non-wage forms of compensation, health and pension benefits, also have declined. This has eroded both job quality and family financial security, and increased the need for public insurance. In Chapter 3, “The Bigger Picture,” Gordon writes that Iowa is one of 15 states, including five in the Midwest, to lose more than 10 percent of job-based coverage in a decade. He continues:

These losses reflect two overlapping trends. The first of these is costs. Health spending has slowed in recent years, but still runs well ahead of general inflation. Both premium costs … and the employee’s share of premiums have risen sharply — especially for family coverage — while wages have stagnated.

In 1999, a full-time median-wage worker in Iowa needed to work for about 10 weeks in order to pay an annual family premium; by 2011, this had swollen to nearly 25 weeks. Steep cost increases have pressed employers to drop or cut back coverage, or employees to decline it when offered. High costs may also encourage more employees to elect single coverage — counting on spousal coverage from another source and kids’ coverage through public programs. The second factor here is the shift in sectoral employment outlined above: Job losses are heaviest in sectors that have historically offered group health coverage; and job gains (or projected job gains) are strongest in sectors that don’t offer coverage.

This graph looks at the rate of employer-sponsored coverage, by industry sector, from 2002 to 2012.

job-based coverage comparison, Iowa 2002-2012

An interactive version of that graph in the online report allows the reader to toggle between those two years; the colored balloons sink on the graph in moving from 2002 to 2012, as if they all are losing air — the result of declining rates of coverage.

Good public policy could help to fill them again.

2010-mo-blogthumbPosted by Mike Owen, Assistant Director

 


Owen: State approaches incentives in upside-down fashion

Mike OwenBy Mike Owen, Iowa Policy Project

The world is upside down when state subsidies of business are presumed to be essential, and when a leading newspaper criticizes those who dare to question it.

In that world, the Sioux City Journal’s March 24 editorial (“Iowa must be a player in the economic incentive game”) might not be surprising, but is no less misdirected.

The Journal’s editorial brushes off critics of the state’s Orascom scheme — a $200 million subsidy to an Egyptian company to build a fertilizer plant in Iowa. It reluctantly concedes that “legislators not only have the right, but in some cases the obligation to ask questions about economic development deals involving state money for incentives.”

Yet in that sentence the Journal lays bare the weakening of fundamental checks and balances in our state on the question of corporate subsidies.

Lawmakers should ask questions “in some cases,” the Journal believes? How very wrong. State legislators have the obligation in every single case to ask questions about economic development deals involving state money, or at least to hold state agencies accountable on all Iowans’ behalf. Among those questions just for starters: First, is it a good project? Second, is there a public benefit? And third, is a subsidy even necessary?

Iowans must be assured that tough questions are being asked and the answers evaluated before the checkbook is opened in surrender to the mindset of a “need to offer state incentives, sometimes big incentives, to attract large capital projects to Iowa within the intensely competitive arena of economic development.”

The proper default position when a corporation comes hat in hand for a subsidy is at best, “maybe.” And if the answer becomes “yes,” it must be defended and defensible, especially for big deals such as Orascom.

If we cannot always count on development officials to be so careful, we should be able to count on a newspaper, which has as great an obligation as legislators to ask questions about development deals.

Orascom offers one of those poster-child examples of poor practices, where the state very simply offered more than was necessary, even if you believe “big incentives” are sometimes necessary. Iowa had Illinois beat: The state offered more than Illinois could do because of a $1.2 billion low-interest loan available to Iowa and not Illinois through a federal flood-relief program. That was enough to bring the firm to our state. Then Iowa sweetened its offer and roped local property taxpayers into it, as well.

If you believe in a market-oriented economic system, as many claim to do, a subsidy is a last resort — not the starting place — for public-sector involvement in a private-sector project. All such deals demand questioning. Some deals will pass as sensible, and some may even be optimal approaches as targeted, careful investments that will produce a return on the public dollar.

Orascom already has failed the test.

 

Mike Owen is assistant director of the Iowa Policy Project, a nonprofit, nonpartisan organization founded in 2001 to produce research and analysis on state policy decisions. IPP focuses on tax and budget issues, economic opportunity and family prosperity, and energy and environmental policy.

This guest opinion ran in the April 3, 2013, edition of the Sioux City Journal.

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: http://www.iowaeconomicdevelopment.com/annualrpt/?cmd=default&rptyear=2011). 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.