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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/

 

Perils of a constitutional convention

Posted March 21st, 2018 to Budget, Economic Security, Health, Taxes

•  Article V authority gives no guidance

•  No control, great risk to freedom and representative government. 

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By Mike Owen, Executive Director, Iowa Policy Project

Throughout our nation’s history, Americans have been able to depend on the Constitution to be at once our guidepost and our ultimate arbiter of disputes over the bounds of authority. Resolutions now before the Iowa Legislature — ostensibly for specific purposes — actually could put our entire Constitution at risk.

What is Article V?

The Constitution does provide in Article V for states to call for a convention to address changes to the Constitution. However, the authority came with no rulebook. In fact, as many have noted, the original Constitution was called by states to amend the Articles of Confederation that had established a weak national governing structure following the American Revolution. Rather than accept that charge, the convention set its own course and wrote an entirely new governing document that has stood the test of time. And it has been amended in an orderly manner as circumstances —and the nation — demanded. Twenty-seven amendments to the Constitution have been made, from the first 10 establishing a Bill of Rights, to others such as abolishing slavery, establishing voting rights for women and 18-year-olds, repealing Prohibition, barring congressional pay raises during a current term, and providing for an orderly transition of power in the event of a President incapable of serving or a need to fill a vacancy for vice president. As needs have been identified, and support established for change, the Constitution has evolved.

Changes would have to be ratified by states. However, this does not protect against rash decision-making by a rogue convention; a convention could make new rules for ratification, or make its own rules to govern how or whether future changes could be made.

In Iowa

There are joint resolutions in both the Iowa House (HJR12) and Senate (SJR8) calling for a constitutional convention. They would have to pass in identical form. Both have very broad language for an Article V convention “to propose amendments to the Constitution of the United States that impose fiscal restraints, and limit the power and jurisdiction of the federal government, …” It is hard to imagine any federal authority that would not fit under that language — in other words, all bets are off for which issues might be considered.

The vast uncertainties are indisputable. A fiscal note on HJR12 from the nonpartisan Legislative Services Agency notes the uncertainties with such a convention: “The fiscal impact of HJR12 cannot be determined as it unclear how a constitutional convention would be administered, assuming the required number of states successfully petitioned Congress to initiate such a convention. In addition, it is uncertain how many Iowa delegates would be appointed to attend, how much the delegates would be compensated, or how long a convention would last.”[1]

This is not a home-grown movement, but one pushed by national forces — it is a priority of ALEC, the American Legislative Exchange Council, a corporate friendly bill mill for model legislation it puts in state lawmakers’ hands to get passed in their states. Only two organizations, both ideologically right-wing organizations, including the out-of-state “Convention of States,” have registered in favor of the resolution — while an ideologically diverse mix of organizations are registered against it.

This is not a partisan issue. While the Iowa House approved its resolution on party lines in March 2017, the move has failed in a floor or committee vote in seven Republican-controlled state legislatures (Kansas, Idaho, South Dakota, North Carolina, Utah, New Hampshire, Wyoming) in 2017 or 2018.

Convention of States is a Constitutional Convention. Scholars have noted that convention advocates appear to have adopted a specialized language in which the term “constitutional convention” is reserved for conventions that write constitutions from scratch, not conventions that amend existing constitutions. One of these scholars, David A. Super of Georgetown University Law Center, has noted that there is no authoritative support for this definition. But even if one accepts this peculiarly narrow terminology, what Convention of States proposes is, in fact, a constitutional convention. Once convened under Article V of the Constitution, this convention could propose any amendments it pleased, including the wholesale replacement of our existing Constitution. In any event, the distinction is meaningless, as the convention is proposed under Article V, and as noted, there are no rules set in the Constitution for such a proceeding.

 

 

Mike Owen is executive director of the nonpartisan Iowa Policy Project (IPP) in Iowa City, and project director of the Iowa Fiscal Partnership, a joint public policy analysis initiative of IPP and another nonprofit, nonpartisan organization, the Child and Family Policy Center in Des Moines.


[1] Iowa Legislative Services Agency, Fiscal Note on HJR12, March 19, 2018. https://www.legis.iowa.gov/docs/publications/FN/955813.pdf

Taxing seniors: Retirees benefit already

Tax reform and seniors: Better focusing on the real need

Over age 65, Iowans already benefit without unneeded, unfair tax breaks

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By Peter Fisher and Charles Bruner

Tax bills in the Iowa Legislature offer substantial new tax breaks for seniors without any demonstration of need or recognition of existing preferences. Seniors have the lowest poverty rate of any age group in Iowa. Furthermore, tax preferences for those age 65 or older already mean that seniors collecting just an average Social Security benefit could pay no tax even with a total income of up to $40,000 for a single person, or up to $69,000 for a couple. Further tax breaks will only serve to benefit the most well-off seniors, who already pay substantially less in taxes than working families with the same income. 

Seniors are now the age group least likely to live in poverty and most likely to have substantial wealth, providing very ample revenue for the later years. Iowa’s seniors are half as likely to be in poverty as Iowa’s children, and almost four in ten have current incomes above 400 percent of the federal poverty level ($65,800 for a married couple living alone).

Moreover, Iowa has adopted a number of special provisions benefiting seniors. While the elderly and disabled property tax credit is available only for those with low income, the other tax preferences are not based on ability to pay:

  • All Social Security benefits are exempt from tax.
  • The first $6,000 in pension benefits per person ($12,000 per married couple) is exempt from tax.
  • Those age 65 or older receive an additional $20 personal credit.
  • While non-elderly taxpayers are exempt from tax on the first $9,000 of income, for those age 65 or older, the exemption rises to $24,000. For married couples, the threshold is $13,500 for the non-elderly, but $32,000 for seniors. [1]

The average annual Social Security benefit for retired workers in Iowa was  $16,360 as of December 2016. [2] However, the maximum amount possible (for those who earned very high incomes during their working years) is currently a little over $44,000.[3] In most instances, those receiving this maximum also have other pension income and earnings from investments. Assuming at least $6,000 in pension benefits, that means the first $22,360 in income for the average earner and the first $50,360 in income for the highest earner would not be taxed. This compares with working-age adults, who would be taxed on all their earnings.

In short, under current Iowa tax law, seniors get very substantial breaks. The table below shows what a single retiree or a retired couple could earn in Social Security and pension income without paying any Iowa income tax. As illustrated, a single retiree earning the average Social Security benefit could receive as much as $24,050 in pension income, for a total income of $40,410 — over three times the poverty level — and pay no Iowa income tax. A married couple, each with the average Social Security benefit, could have $36,220 in pension income, for a total income of almost $69,000 — over four times the poverty level — and still pay no Iowa income tax. 

In contrast, a family of four with both parents working and the same total income $68,940 entirely from wages and salaries would pay over $2,000 in Iowa income taxes.[4] For a retired couple with the maximum Social Security benefit, their combined income could reach $129,900 and still be tax exempt.

180321-IFP-seniors-table

Calculations are based on current law for the 2017 tax year. Households are assumed to own their homes outright and to claim the standard deduction. They pay annual Medicare Part B and Medicare Supplement Plan F premiums of $3,689 annually, which they deduct on line 18 of the Iowa return. Income is split evenly between the filer and spouse for couples. The low earner receives monthly Social Security benefits of $650, approximately the 10th percentile of benefits nationally in 2017. The average earner receives $16,360 per year, the average retiree benefit in Iowa in 2016. The Iowa tax free income levels vary because taxpayers will pay some federal income tax on Social Security benefits, and federal tax is deductible on the Iowa return. Also, low earners may benefit from the high retiree tax free threshold, the alternate tax calculation (married couples) or the income tax reduction (singles).  

Both the Governor’s proposal and SF2383 offer additional preferential treatment for seniors without regard to their overall income. The Governor’s proposal increases the standard deduction to $4,000 for an individual and $8,000 for a married couple, and then adds an additional $1,500 for seniors and the blind. The Senate bill, SF2383, doubles the pension income exclusion from $6,000 for an individual and $12,000 for a married couple to $12,000 for an individual and $24,000 for a married couple.  The cost of this provision for FY2023 may be in excess of $50 million annually.[5]

Because seniors already receive substantial preferential tax treatment under the Iowa income tax, most are not subject to any tax until their incomes are well above the poverty level. They also pay substantially less than individuals or couples with the same income, but from earnings. Moreover, many of the greatest benefits accrue to very high-income seniors, who have big Social Security checks and pension income in addition to other investment income and earnings.

To follow principles of tax fairness — ability to pay and equal treatment of people in similar economic circumstances — at least some of the current benefits and the exclusion of income from Social Security and pension income from tax should be phased out at high income levels. The Governor’s proposal, and to a greater degree SF2383, goes in the opposite direction.

By that standard, lawmakers would not offer additional tax benefits either through expanding the pension fund exemption or additional deductions solely for the reason of being over 65. Eliminating these additional preferences items would also prevent a further reduction of tax revenue that threatens the adequacy of Iowa General Fund revenue, which benefits programs that support all Iowans but especially those that support low-income Iowans at any age.



[1] The income used to determine whether this threshold is met is “modified adjusted gross income.”

[3] $44,376 ($3,698 per month) for the highest income earners retiring at age 70 in 2018 (Social Security Administration)

[4] Each earns $32,247, two school-age children (no child care expense), $4,445 in employee contributions to health insurance from a job, standard deduction, $5,071 in Federal taxes for 2017 deducted on Iowa return.

[5] The revenue estimate for the increase between the original bill and the amendment from $10,000 to $12,000 and $20,000 to $24,000 was over $16 million, with the increase from $6,000 and $12,000 at least 3 times that amount.

 

Peter Fisher is research director of the Iowa Policy Project (IPP) in Iowa City and Charles Bruner is director emeritus of the Child and Family Policy Center (CFPC) in Des Moines. IPP and CFPC are nonpartisan, nonprofit organizations that collaborate on public policy analysis as the Iowa Fiscal Partnership. Find reports at www.iowafiscal.org.

Passing through a special break

Passing through a special break for wealthiest filers

•  Individual filers with business income win with special deduction in Iowa tax proposals
•  Qualified Business Income Deduction (QBID) adds complexity, cost

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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.

 

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

Kansas poses warnings for Iowa

IFP News:

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

Basic RGB

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Rest/best/worst of the story

Posted January 2nd, 2018 to Blog

redink-capitol

Senator Joni Ernst is using Facebook to gin up support for the new tax bill. It is a one-sided picture, to say the least.

So, what does it really mean for Iowans that the tax bill is law?

  • Middle and low-income Iowans will see temporary ​tax cuts in the short term that are ​drastically smaller​​ than those high-income taxpayers will see — and these will be taken away or turned into tax increases by 2027 to help pay for permanent tax cuts for corporations.
  • Millions of people nationwide will lose health insurance coverage as elimination of the individual mandate drives up costs for all.
  • The wealthy will keep more millions of dollars that have never been taxed due to further exemptions in the estate tax.
  • The Child Tax Credit will be extended to affluent families who do not need assistance, while 86,000 children in working families in Iowa receive a token increase of $75 or less — both expansions to evaporate after 2025.
  • Businesses will get enormous, permanent tax breaks with no requirements to create jobs.

Some might recall a longtime radio commentator, Paul Harvey, and his “Rest of the Story” pieces. The points above are the “rest of the story” that you might not hear from backers of the latest tax giveaway in Congress. You might be OK with them and call them the “best of the story.”

Or, you might be concerned about the impact they will have on U.S. and Iowa families, on national debt and new challenges they bring to the safety net, and call them the “worst of the story.”

But they are the real story, and they should not be forgotten as the spin continues.

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project in Iowa City. mikeowen@iowapolicyproject.org