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Posts tagged Peter Fisher

Ignore ideologues — IPERS sound, stronger

Posted May 21st, 2016 to Blog

Time seems to be running out on those who do not want a stable, secure and sustainable retirement program for public employees. IPERS, the Iowa Public Employment Retirement System, is well on the way to recovery before its opponents can kill it. But they’re still trying.

The criticism this time comes in a Des Moines Register opinion piece, from a familiar source, the Public Interest Institute (PII) in Mount Pleasant.

In its latest ideological attack on IPERS, PII offers no data — not a single financial indicator — to demonstrate a problem. In fact, IPERS is rebounding from troubles brought on by the Great Recession and inadequate state contributions in the latter half of the last decade.

According to the latest IPERS annual report, IPERS’s ratio of funded actuarial assets to liabilities — which had dropped from 89.1 percent in FY2008 to a low of 79.9 percent in FY2011 — has continued to rebound, rising in FY2015 from 82.7 percent to 83.7 percent.

In an Iowa Policy Project report in late 2013, Imran Farooqi, Peter Fisher and David Osterberg showed that contrary to high-profile examples of public pension problems with the city of Detroit and the state of Illinois, the public employee pension systems in Iowa and most states were generally healthy and well-managed for the long term.

“Iowa’s public pension plans have sufficient assets to pay benefits now and well into the future. And recent improvement in the plans’ designs have already enabled them to begin recouping losses incurred during the recessionary stock market decline,” they wrote. Now, 2 1/2 years later, there is no indication of a change in that positive trend.

That report did recommend ways to strengthen IPERS and other public employee retirement plans in Iowa, such as increasing contributions and meeting actuarial recommendations for those contributions.

What we need to remember is that the purpose of IPERS is not to see how little we can pay public employees, but to attract good employees partly with a promise of a secure retirement. It is to “improve public employment within the state, reduce excessive personnel turnover, and offer suitable attraction to high-grade men and women to enter public service in the state.” This is the stated purpose of the law, Chapter 97B.2.

The biggest problem for PII is that IPERS may fully recover before PII gets the law changed to a less secure “defined contribution” system. A defined benefit system provides financial security by pooling risk in the group — more efficient than having everyone on their own based on defined contributions that they might outlive.

So let’s be clear: Shifting from a defined benefit plan like IPERS to a defined contribution plan, such as a 401(k), is a way to cut benefits and reduce retirement security.

We can spend our time better addressing real concerns to assure our public employees can deliver on public education, overseeing human services, policing our streets and guarding prisoners — and making sure they can retire securely when they are done working for us.

owen-2013-57Posted by Mike Owen, Executive Director of the nonpartisan Iowa Policy Project
mikeowen@iowapolicyproject.org

Ignore ideologues — IPERS sound, stronger

Posted May 21st, 2016 to Blog

Time seems to be running out on those who do not want a stable, secure and sustainable retirement program for public employees. IPERS, the Iowa Public Employment Retirement System, is well on the way to recovery before its opponents can kill it. But they’re still trying.

The criticism this time comes in a Des Moines Register opinion piece, from a familiar source, the Public Interest Institute (PII) in Mount Pleasant.

In its latest ideological attack on IPERS, PII offers no data — not a single financial indicator — to demonstrate a problem. In fact, IPERS is rebounding from troubles brought on by the Great Recession and inadequate state contributions in the latter half of the last decade.

According to the latest IPERS annual report, IPERS’s ratio of funded actuarial assets to liabilities — which had dropped from 89.1 percent in FY2008 to a low of 79.9 percent in FY2011 — has continued to rebound, rising in FY2015 from 82.7 percent to 83.7 percent.

In an Iowa Policy Project report in late 2013, Imran Farooqi, Peter Fisher and David Osterberg showed that contrary to high-profile examples of public pension problems with the city of Detroit and the state of Illinois, the public employee pension systems in Iowa and most states were generally healthy and well-managed for the long term.

“Iowa’s public pension plans have sufficient assets to pay benefits now and well into the future. And recent improvement in the plans’ designs have already enabled them to begin recouping losses incurred during the recessionary stock market decline,” they wrote. Now, 2 1/2 years later, there is no indication of a change in that positive trend.

That report did recommend ways to strengthen IPERS and other public employee retirement plans in Iowa, such as increasing contributions and meeting actuarial recommendations for those contributions.

What we need to remember is that the purpose of IPERS is not to see how little we can pay public employees, but to attract good employees partly with a promise of a secure retirement. It is to “improve public employment within the state, reduce excessive personnel turnover, and offer suitable attraction to high-grade men and women to enter public service in the state.” This is the stated purpose of the law, Chapter 97B.2.

The biggest problem for PII is that IPERS may fully recover before PII gets the law changed to a less secure “defined contribution” system. A defined benefit system provides financial security by pooling risk in the group — more efficient than having everyone on their own based on defined contributions that they might outlive.

So let’s be clear: Shifting from a defined benefit plan like IPERS to a defined contribution plan, such as a 401(k), is a way to cut benefits and reduce retirement security.

We can spend our time better addressing real concerns to assure our public employees can deliver on public education, overseeing human services, policing our streets and guarding prisoners — and making sure they can retire securely when they are done working for us.

owen-2013-57Posted by Mike Owen, Executive Director of the nonpartisan Iowa Policy Project
mikeowen@iowapolicyproject.org

Wrong again: ALEC can’t pick its own ‘winners’ among states

Posted April 12th, 2016 to Blog

ALEC — the American Legislative Exchange Council — persists in peddling “research” that knocks down its own policy ideas.

In its latest edition of Rich States, Poor States, just released, ALEC’s Economic Outlook Ranking scores states on 15 measures reflecting ALEC’s preferred policies towards business. Our Grading the States analysis has exposed the flawed methodology of ALEC’s report, but the authors have not changed it for the 9th edition.

ALEC’s dilemma: The index purports to predict which state economies will perform the best, but in fact there is no relation between a state’s score and how well the economy grows subsequently.

Since the first edition in 2007, it remains the case that ALEC’s “best” states — the ones with the highest rankings — are actually poorer on several measures than the supposedly “worst” states. The graph below has been updated to reflect the 9th edition rankings and the latest income data.

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The 20 states that performed best on the four measures of income (the actual rich states) actually score much worse on ALEC’s ranking than the 20 states with the lowest income (the actual poor states).

In its fervent anti-government bias, the report offers a package of policies — for fiscal austerity, suppressing wages and imposing proportionately higher taxes on low-income people — with a promise of economic growth, when it really is a recipe for economic inequality, declining incomes for most citizens, and starving public infrastructure and education systems of needed revenue.

2010-PFw5464Posted by Peter Fisher, Research Director of the nonpartisan Iowa Policy Project and developer of IPP’s Grading the States website, GradingStates.org.

 

 


Wrong again: ALEC can’t pick its own ‘winners’ among states

Posted April 12th, 2016 to Blog

ALEC — the American Legislative Exchange Council — persists in peddling “research” that knocks down its own policy ideas.

In its latest edition of Rich States, Poor States, just released, ALEC’s Economic Outlook Ranking scores states on 15 measures reflecting ALEC’s preferred policies towards business. Our Grading the States analysis has exposed the flawed methodology of ALEC’s report, but the authors have not changed it for the 9th edition.

ALEC’s dilemma: The index purports to predict which state economies will perform the best, but in fact there is no relation between a state’s score and how well the economy grows subsequently.

Since the first edition in 2007, it remains the case that ALEC’s “best” states — the ones with the highest rankings — are actually poorer on several measures than the supposedly “worst” states. The graph below has been updated to reflect the 9th edition rankings and the latest income data.

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The 20 states that performed best on the four measures of income (the actual rich states) actually score much worse on ALEC’s ranking than the 20 states with the lowest income (the actual poor states).

In its fervent anti-government bias, the report offers a package of policies — for fiscal austerity, suppressing wages and imposing proportionately higher taxes on low-income people — with a promise of economic growth, when it really is a recipe for economic inequality, declining incomes for most citizens, and starving public infrastructure and education systems of needed revenue.

2010-PFw5464Posted by Peter Fisher, Research Director of the nonpartisan Iowa Policy Project and developer of IPP’s Grading the States website, GradingStates.org.

 

 


IPP’s Cost of Living: A better measure

Posted April 6th, 2016 to Blog

Cost of Living Threshold Is More Accurate than Federal Poverty Guideline

Why do we produce our Cost of Living in Iowa research at the Iowa Policy Project? One reason is accuracy — to offer a better picture of what it takes to get by, rather than a vague concept of “poverty.”

Federal poverty guidelines are the basis for determining eligibility for public programs designed to support struggling workers. But those official guidelines have challenges that we address with basic-needs budget calculations in The Cost of Living in Iowa.

The federal guidelines do not take into account regional differences in basic living expenses and were developed using outdated spending patterns more than 50 years ago.

For example, the calculations that compose the federal poverty guidelines assume food is the largest expense, as it was in the 1960s, and that it consumes one-third of a family’s income. Today, however, the average family spends less than one-sixth of its budget on food.

Omitted entirely from the guideline, child care is a far greater expense for families today with 23.5 million women with children under 18 in the labor force.[1] Transportation and housing also consume a much larger portion of a family’s income than they did 50 years ago.[2]

Considering the vast changes in consumer spending since the poverty guidelines were developed, it is no wonder that this yardstick underestimates what Iowans must earn to cover their basic needs. Figure 1 below shows that a family supporting income — the before-tax earnings needed to provide after-tax income equal to the basic-needs budget — is much higher than the official poverty guidelines.

Figure 1. Cost of Living is Much Higher than the Poverty Level

Fig 1 pov guideline comp

In fact, family supporting income in the absence of public or employer provided health insurance ranges from 2.1 to 3.3 times the federal poverty guideline for the 10 family types discussed in this report. Most families, in other words, actually require more than twice the income identified as the poverty level in order to meet what most would consider basic household needs.[3]

[1] Hilda L. Solis and Keith Hall, Women in the Labor Force: A Databook, Bureau of Labor Statistics (December 2011).
[2] Sylvia A. Allegretto, Basic family budgets: Working families’ incomes often fail to meet living expenses around the US, Economic Policy Institute (August 30, 2005).
[3] Even with public health insurance, the family supporting income exceeds twice the poverty level in all cases except the two parent family with one worker. (That family type not shown here.)
2010-PFw5464Posted by Peter Fisher, Research Director of the nonpartisan Iowa Policy Project and author of The Cost of Living in Iowa, 2016 Edition.
Peter Fisher is a nationally recognized expert on tax and economic development policy. He holds a Ph.D. in Economics from the University of Wisconsin-Madison, and he is professor emeritus in the School of Urban and Regional Planning at the University of Iowa.

 

 


Unspoken budget choices for Iowa

Posted March 2nd, 2016 to Blog

DSCN5662-detail240200There’s a reason we can’t have the things we need. We keep giving money away, often without a good understanding of why we’re doing it.

A good example is the so-called “coupling” legislation now moving through the Iowa Legislature. It would do some sensible things, but others — not so much, and not for the reasons being promoted. Read more about it in this Iowa Fiscal Partnership policy brief.

Most of the cost of the coupling bill is for a business tax break. The Farm Bureau recently quoted one of its local leaders, Washington County Farm Bureau vice president Tye Rinner, that this provision is “really important to us right now.”

“We’re all in limbo right now waiting to see what’s going to happen and that’s keeping us from making the investments in equipment, buildings and other capital purchases, which would also create jobs in our rural communities,” Rinner was quoted.

Unfortunately, that message has little to do with the legislation under consideration. What is missed is that the bill at the Statehouse would make changes for only one tax year — and it’s one already past. The changes are retroactive to tax year 2015.

So if farmers or other business people wanted to make a capital investment that would benefit from the kind of tax provisions being proposed, they would not get the break. They’d be too late.

On the other hand, the bill would reward decisions already made. It’s not an incentive to do something they would not have done anyway — and it’s very costly. It’s about $98 million that was not in the budget for the current year, and would hit the ending balance.

In perspective, this must be seen as a budget choice, put up against other ways to use that $98 million, which would go against the resources on hand for the new fiscal year. You might have noted the difference between the House and Senate on a school aid number is 2 percent in supplemental state aid, whether to set per-pupil cost growth at 2 percent or 4 percent. The difference is about $85 million, according to the Iowa Association of School Boards.

So as you can see, we can subsidize business people to do something they already did without a subsidy, or for less money we can have a 4 percent increase in school aid. The House speaker says we can afford the first choice, but not the second. Both positions cannot be so.

2010-PFw5464Posted by Peter S. Fisher, Research Director for the Iowa Policy Project.
Contact: pfisher@iowapolicyproject.org

High Cost of Conformity

Coupling with Federal Tax Changes Would Dent Iowa’s General Fund

Instead of incentives to invest, the proposals reward decisions made with no subsidy needed

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By Peter S. Fisher

Introduction

Late last year Congress passed a law extending various federal income tax deductions and credits that were set to expire and preserving more generous versions of those deductions and credits. If the State of Iowa chooses to “couple” with these changes in federal law, the more generous provisions would be available on Iowa income tax returns wherever Iowa has a corresponding deduction or credit that is specifically tied to the federal credit. If the state does not couple, then those deductions and credits would be available on Iowa state tax returns either at the old rates or levels, or not at all.

The Iowa House passed a bill (HF2092) that would couple Iowa with all of the federal tax changes (with the exception of something called bonus depreciation) for the 2015 tax year. The changes would be retroactive to January 1, 2015, and so would affect the tax returns that are due this April 30 based on last year’s income. (For farmers, taxes are due March 1 if they want to avoid a penalty for underpayment.) The bill does not couple Iowa law with the federal changes for 2016 or beyond, though of course that could be done later this session or early in 2017.

The Department of Revenue has estimated that HF2092 would reduce current year revenues by nearly $100 million. Because it increases deductions Iowans can take on returns filed this spring, it increases refunds that must be paid this fiscal year and reduces collections. This current-year reduction cuts funds available for the Fiscal Year 2017 budget by nearly $100 million, and thus has an impact on funding for education and other priorities.

By far the most costly provision of the tax change is the so-called “Section 179 expensing” of business assets, where coupling will cost the state $79.8 million, nearly 80 percent of the total cost of the coupling legislation. Six other provisions together produce about $17 million in revenue losses.  We discuss each of these provisions in turn. 

Expensing Business Assets

Normally, when a business purchases assets such as buildings or machinery, the cost of those assets must be spread over a number of years (in theory, over the useful life of the building or machine). A share of the cost is deducted each year as depreciation. Section 179 of the Internal Revenue Code, however, allows businesses to “expense” some assets — that is, to deduct the entire cost in the first year — instead of deducting annual depreciation.  It is usually to a business’s advantage to deduct a cost now rather than later.[1]

Without the federal “extender” legislation, businesses would have been allowed to expense up to $25,000 of assets in 2015. This cap is phased down for businesses with more than $200,000 in total purchases of assets that qualify for 179 expensing. The cap is reduced by $1,000 for every $1,000 in asset purchases above $200,000, so that a business with $225,000 in asset purchases can no longer expense any assets. Though any business can use Section 179 expensing, the cap and phaseout effectively target expensing at smaller businesses, since large businesses will tend to purchase more than $225,000 in assets each year.

The federal legislation extended and made permanent a temporary increase in Section 179 limits to $500,000 in asset purchases in any given year. Furthermore, this limit begins to phase out only when total asset purchases exceed $2 million. By coupling with the federal law, Iowa businesses would be able to expense up to $500,000 in purchases of machinery and equipment, buildings and software for the 2015 tax year, instead of $25,000. Businesses with asset purchases of under $2.5 million would be able to use expensing.

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In the absence of coupling for 2015, Iowa businesses filing taxes this spring can still take full advantage of the federal changes on their Federal returns. The ability to expense a larger share of asset purchases is worth far more in terms of federal tax savings than Iowa tax savings. In the absence of coupling the typical small business[2] still gets over three-fourths of the combined federal-state tax benefit.

coupling-boxIt is also worth emphasizing that this increase in the Iowa expensing provisions has nothing to do with incentives to invest. Taxpayers who would take advantage of it when they file their taxes this spring can do so only for assets purchased last year. Those assets were bought presumably because they were needed at the time and made economic sense for the farm or business, and the purchase decision was made when an enhanced Iowa tax benefit did not exist.

Canceled Home Mortgage

Some homeowners who were unable to make payments on their home during the recent financial crisis had all or a portion of their mortgage debt canceled. If the home was a principal residence and the cancellation occurred after 2006, the amount of principal canceled (up to $2 million) does not have to be added to income for tax purposes. (Normally, a canceled debt is considered a form of taxable income.) The federal bill extended this provision to cancellations that occur through 2016. In the absence of coupling, debt cancellations occurring during 2015 will not qualify for the exclusion in Iowa and the amount of debt canceled will be added to Iowa gross income.

Deductibility of Home Mortgage Insurance Premiums

This provision of the tax law allows the premiums that homeowners pay for mortgage insurance to be counted and deducted as home mortgage interest. The deduction phases out as a taxpayer’s adjusted gross income reaches $110,000. This is of benefit only to taxpayers who itemize deductions. The 2015 federal law extended the deduction through 2016. In the absence of coupling, Iowa taxpayers who itemize would not be able to include mortgage insurance premiums paid in 2015 as deductible interest.

Tuition Deduction

Under this provision, taxpayers can deduct up to $4,000 in higher education tuition and related expenses. The deduction is an adjustment to gross income, so it can be taken regardless of whether the taxpayer uses the standard deduction or itemizes. The federal legislation extended this deduction through 2016.

Deduction for State and Local Sales Taxes

Federal taxpayers have in recent years had the option of claiming an itemized deduction for state and local income taxes, or for state and local sales taxes, but not both. The taxpayer can deduct actual sales taxes paid or use a schedule of deductible taxes specified by the IRS. The sales tax option was set to expire but was made permanent by the 2015 federal law. The Iowa law allowing Iowa itemizers to choose the sales tax deduction instead of an income tax deduction, if they chose the sales tax deduction on their federal return, has expired. HF2092 would extend the provision to 2015. In the absence of this bill, Iowa taxpayers who itemize and who take the federal sales tax deduction instead of the income tax deduction, will not be able to deduct state and local sales taxes on their Iowa return.

IRA Charitable Distributions

Individuals who are at least 70½ years of age and who have a distribution from an IRA go directly to a charitable organization can avoid paying any income taxes on that distribution. The distribution, up to $100,000 per taxpayer, is excluded from income. The 2015 federal legislation extended this provision permanently. Coupling would allow Iowa taxpayers to exclude the distribution from Iowa taxable income. It should be noted that the advantage of this provision is not as large as it may appear; a taxpayer may still take the IRA distribution personally, and then use the proceeds to contribute to a charitable organization and deduct that when itemizing Iowa deductions.

Deduction for Classroom Expenses

Elementary and secondary school teachers may deduct up to $250 in classroom and professional development expenses. This is an adjustment to gross income, so it is of benefit whether or not the teacher itemizes deductions.  This deduction was set to expire, but the 2015 federal legislation made it permanent. In the absence of coupling, Iowa teachers would not be able to take this deduction on their 2015 Iowa return.  Note that the maximum effect, for a teacher in the 8.98 percent tax bracket with $250 in deductible expenses, is $22.45.

Bonus Depreciation

Federal bonus depreciation has allowed business with larger asset purchases that are unable to take full advantage of Section 179 expensing because of the phaseout, to take additional first year depreciation on qualified asset purchases. Iowa has not coupled with bonus depreciation in the past, and this bill excludes it from coupling. In the absence of the bill, Iowa taxpayers would still not be able to use bonus depreciation on their Iowa returns. For that reason, there is no fiscal impact associated with the bonus deprecation provision of HF2092.

Fiscal Impacts Beyond FY2016

Should Iowa couple with all of the federal changes (except bonus depreciation) in future years, we can expect the fiscal impact to be similar. However, HF2092 couples only for tax year 2015. As a result, the fiscal effect of the bill for 2016 and beyond is positive rather than negative. This is because the additional Section 179 expensing that will occur for 2015 as a result of coupling will automatically increase state revenue over the next several years. A business can deduct the cost of a business asset only once; any asset expensed in 2015 does therefore not generate a depreciation deduction in 2016 or later. In the absence of coupling, the business would be depreciating that asset over several years, spreading the reduction in its tax liability (and the state revenue loss) over those years.

An Alternative Approach to Coupling

The Department of Revenue has drafted a bill that would couple with most of the tax credits extended by the 2015 federal legislation.  A major difference with HF2092 is that this bill (SSB3107) would not couple with those changes retroactively, but would start in 2016. The changes would be permanent. Most importantly, this bill does not couple with either bonus depreciation or the enhanced version of section 179 expensing.

The Department of Revenue has not produced a fiscal impact estimate for this bill. However, the overall cost in FY2017 would be just a fraction of the FY2016 estimate for HF2092 because the most costly component of the House bill — section 179 expensing — is not included in SSB3107.

Conclusion

Federal coupling legislation has been portrayed as little more than an accounting change designed to make it easier to file taxes this spring, and to encourage new investment, but that is not really the impact of the federal coupling legislation that has been proposed in the House. The bulk of the benefits are essentially bonuses to specific taxpayers for decisions they already made, with a significant cost that affects revenues available for the coming fiscal year.

Legislators must decide if the boon to specific Iowans is more important than improving the lives of Iowans in general by doing such things as funding schools and other General Fund items with the revenue otherwise lost.


[1] To see why this is so, imagine that expensing a $1,000 machine reduces taxes by $300 this year. (By taking the deduction the business saves the taxes on $1,000 worth of income, so if the marginal tax rate were 30 percent, it saves $300). In future years, the firm will not have depreciation deductions because they were in effect all used up by expensing this year. So future taxes will be higher by the same amount: $300. However, the $300 taken now could be invested and earn interest, with the principal used up gradually to pay the higher taxes in the future. This still leaves the firm ahead by the amount of interest earned.

[2] An Iowa small business or farm with taxable income (after all deductions and exemptions) of $50,000-$65,000, for example, would be in the 7.92 percent Iowa tax bracket but the 25 percent federal bracket. The new federal expensing provision is thus worth over three times the Iowa provision.

 

 

2010-PFw5464Peter S. Fisher is Research Director for the Iowa Policy Project. He holds a Ph.D. in economics from the University of Wisconsin-Madison and is professor emeritus of Urban and Regional Planning at the University of Iowa. A national expert on public finance, Fisher is frequently quoted in the Iowa and national media on issues involving tax policy and economic development strategies. His two published critiques of various state business climate rankings have resulted in a new website, Grading the States, at www.gradingstates.org.

 

State aid up 13 percent — for business breaks

Posted January 28th, 2016 to Blog

What do you expect would be the outcry if Iowa’s public schools asked for 13 percent growth in state aid?

Yet few bat an eye when this happens with business tax breaks, as we can expect for FY2017.*

The early scorecard gives business tax breaks the big edge, a 13 percent increase, vs. between 2 and 4 percent for schools.

The Senate approved 4 percent for FY2017 (covering next school year), but the Iowa House on Monday approved 2 percent — even though schools have averaged less than 2 percent for six years, from FY2011-16.

In fact, the Iowa Association of School Boards this year did not even ask for a specific growth number, but rather, that it be set in a timely manner (it’s almost a year late already), and “at a rate that adequately supports local districts’ efforts to plan, create and sustain world-class schools.”

That hasn’t happened for some time. Over the last six budgets, per-pupil growth has been held to 2 percent or below in all but one year. Depending on enrollment trends, some districts even see less.

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Business tax breaks do not face the same budget constraints — ironic, since the cost of those breaks limits what lawmakers permit themselves to spend on services that their constituents demand, not the least of which is education. Other areas — environmental quality, child care, health care and public safety — also are constrained.

A much greater percentage increase in business tax breaks is set in place, as shown below. The total increase of $71 million from this budget year to the one lawmakers are working on now actually may be understated. The $35 million for a new sales-tax exemption for manufacturers is considered a conservative estimate. Even at $71 million overall, however, it represents a 13 percent increase.

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Spending on business tax breaks is rarely burdened by the public scrutiny and debate that comes with spending on schools and water programs, which must be approved annually.

Most business tax breaks, once passed, are never touched again unless they are expanded. And as shown by the sales-tax break for manufacturers scheduled to begin this summer, a break may never receive legislative approval but still become law. The Governor is implementing this one on his own, with a split legislature unable to stop him.

Budget choices? Instead of that $35 million in FY2017 for the new sales-tax break, the Legislature could provide about 1 percent growth in per-pupil school funding. We can expect to find another 1 percent in what we’ll spend in checks to companies that do not pay any state income tax, but have more research tax credits than they owe in taxes.

Perhaps one day we will treat all spending the same, whether the spending comes before or after revenues reach the state treasury. Then the wealthy corporations can compete directly for their tax breaks against education for the skilled people they want to work for them.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
Mike Owen is a member of the school board in the West Branch Community School District, first elected in 2006.
* For more about Iowa tax breaks for business, see Peter Fisher’s report for the Iowa Fiscal Partnership, “Here a tax break, there a tax break, everywhere a tax break.” http://www.iowafiscal.org/here-a-tax-break-there-a-tax-break-everywhere-a-tax-break/

Here a tax break, there a tax break, everywhere a tax break

Iowa’s revenue shortfall largely self-inflicted — education, other priorities suffer

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By Peter Fisher

Iowa legislators facing projections of scant revenue growth for next fiscal year will have a difficult time adequately funding education and other priorities, but their dilemma is largely self-inflicted. A penchant for tax cuts over the past 20 years has left the state with a long-term revenue shortfall.

As lawmakers anticipate meager revenue growth for a budget exceeding $7 billion, they face built-in and anticipated spending increases for existing programs, projected to total $269.5 million.[i] Furthermore, these increases assume no boost in per pupil state school aid because the 2015 Legislature failed to set that figure for FY2017 as required by law. The governor has proposed 2.45 percent growth in school aid, which would add another $100 million to the budget. Clearly that cannot be funded without large cuts elsewhere in the budget — or addressing the elephant in the room: rampant spending on business subsidies. 

Business tax credits create part of the problem

Why is revenue growth a problem in a state that has done better than most in recovering from the Great Recession? The answers can be found in the growth in business tax breaks. Business tax credits already on the books drained $178 million from the state treasury in fiscal year 2015, then grew by $94 million to $272 million in FY16, and are expected to remain at about that level next year. The six largest credits (or groups of credits) account for 84 percent of the total (Table 1).

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Spending on business tax credits has grown 263 percent since 2007. Caps on individual credits and groups of credits have done little to slow growth. The cost of credits has far outstripped growth in general fund spending overall.

New tax breaks have worsened the problem

Recent measures have added greatly to the problem. The massive commercial and industrial property tax bill passed in 2013 is responsible for a $268 million cut in funds that otherwise would have been available to adequately fund education, natural resource programs, and other priorities in the current fiscal year, FY16. Next year that figure is expected to grow to $304 million.[ii] The property tax breaks are larger than the sum of all business tax credits.

160108-IFP-Budget-Fig2

To make matters worse, the administration has enacted a rule, without legislative approval, that greatly expands a sales tax exemption for manufacturing. That will cost the general fund another $35 million next year, while depriving schools and local governments of another $13 million.[iii]

Altogether business tax breaks will drain $611 million in revenue from the state general fund next fiscal year. At a time when the state is struggling to fund education at all levels, those business tax breaks take on added importance. And they tell us something about the state’s priorities.

Iowa business taxes are already quite competitive

Iowa did not need these tax breaks, and certainly does not need to add to the damage to state services by enacting more. Iowa has been right in the middle of the pack in how it taxes business for a long time. The most recent study of state and local taxes on business as a percent of state GDP by Ernst and Young and the Council on State Taxation shows that Iowa taxes business at 4.5 percent of GDP, just below the national average.[iv]  A study by Anderson Economic Group in 2015 found Iowa’s effective tax rate on businesses to be 8.7 percent of profits, which placed it 32nd among the states, and again below the national average.[v]

State and local taxes have little effect on business location decisions

State and local taxes are less than 2 percent of total costs for the average corporation.  As a result, even large cuts in state taxes are unlikely to have an effect on the investment and location decisions of businesses, which are driven by more significant factors such as labor, transportation, and energy costs, and access to markets and suppliers.

Tax breaks erode support for public investments in our future

The proliferation of tax incentives and business tax cuts over the past two decades has resulted in several hundred million dollars each year cut from the state budget. This has undermined the state’s ability to support quality education, from preschool through public colleges and universities, which in the long run will have serious consequences for state economic growth and prosperity.

Fixing Iowa’s problem with unsustainable revenues

Long-term sustainability for Iowa revenues should begin with a recognition that business tax breaks have grown to unsustainable proportions. At the very least, the Legislature should reject any proposals for new tax breaks. Any bill to couple with the recently enacted federal tax changes should exclude coupling with the new depreciation rules. There is no justification for piling on additional business tax breaks at a time when basic state services cannot be adequately funded, breaks that will continue to erode revenues on into the future.

In the 10 years from FY2005 to FY2015 state tax revenue actually declined as a share of the Iowa economy. State taxes represented 5.8 percent of state personal income in 2005, 5.6 percent in 2015.[vi] If taxes had grown along with the economy over this period we would have had an additional $279 million in revenue in FY2015. A real long-term solution to sustain Iowa’s critical public services, including education, will require that the state rejuvenate state tax revenues by reducing or eliminating unnecessary and ineffective tax breaks and seeking new sources of revenue. To do otherwise is to shortchange our future.




[i] Figures are based on Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, pp. 12-13, with some adjustments for the Revenue Estimating Council report of December 10, 2015 which was released after the LSA report.

[ii] Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, pp. 17 and 55. Includes the effect of SF 295 on state school aid as originally estimated.

[iii] Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, p. 59.

[iv] Ernst and Young and the Council on State Taxation, Total state and local business taxes: State-by-state estimates for fiscal year 2014. http://www.cost.org/Page.aspx?id=69654

[v] Anderson Economic Group, 2015 State Business Tax Burden Rankingshttp://www.andersoneconomicgroup.com/Portals/0/AEG%20Tax%20Burden%20Study_2015.pdf

[vi] Legislative Services Agency, Fiscal Services Division, Issue Review January 6, 2015.

 

 

 

2010-PFw5464Peter S. Fisher is research director of the Iowa Policy Project, which together with the Child & Family Policy Center formed the Iowa Fiscal Partnership, a nonpartisan initiative focused on helping Iowans to understand the impacts of budget choices and other public policy issues on Iowa families and services. IFP reports are at www.iowafiscal.org.

 

ALEC Gets it Backwards in Rich States, Poor States

Posted November 30th, 2015 to Blog

We hear a lot about business climates from people who are looking for ways to cut taxes. But they usually get it wrong. One example is the Rich States, Poor States analysis produced by the American Legislative Exchange Council, or ALEC, an organization frequently considered a “bill mill” for corporate-friendly legislation.

The centerpiece of Rich States, Poor States is the “Economic Outlook Ranking,” which ranks states on their conformance to ALEC’s preferred policies, with the best state ranked number one. But when we can compare states ranked the best by ALEC with states ranked the worst, it turns out that ALEC’s 20 “best” states have lower per capita income, lower median family income, and a lower median annual wage than the 20 “worst” states. ALEC’s “best” states also have higher poverty rates: 15.3 percent on average from 2007 through 2013, versus 13.7 percent in the “worst” states. The states favored by ALEC include the likes of Utah, South Dakota, and Idaho, whereas ALEC’s “worst” states include New York, California, and Vermont.

Basic RGB*Best and worst states according to the average Economic Outlook Ranking in Rich States, Poor States, 2007-2015. Income measures are an average over the period 2007 to 2014 (2013 for Median Income).

Looking at it another way, the 20 states that performed best on the four measures of income (the actual rich states) actually score much worse on ALEC’s ranking than the 20 states with the lowest income (the actual poor states).

151130-ALEC-poor-rich

*Average ALEC ranking of the 20 states that performed best on four measures of income — per capita income, median family income, median annual wage, and poverty rate — vs. average ALEC ranking of the 20 poorest states. An ALEC ranking of 1 is best. ALEC ranking is the average of the state’s rank in the first through eighth editions of the Economic Outlook Ranking; rich and poor states are defined on the basis of their average ranking on the four income variables from 2007 through 2013 or 2014.

While Rich States, Poor States purports to provide a recipe for economic growth and “policies that lead to prosperity,” it actually advocates measures to lower wages and reduce opportunity for most Americans. To attain the highest EOR would require a state to have no individual or corporate income tax, no estate or inheritance tax, no state minimum wage, severe tax and expenditure limits, limited public services, and weak labor unions. The evidence and arguments cited to support these policies range from deeply flawed to nonexistent.

We conclude that the actual purpose of Rich States, Poor States is to sell the ALEC-Laffer package of policies — fiscal austerity, taxing lower income people more than the wealthy and wage suppression — in the sheep’s clothing of economic growth. In actuality, the book provides a recipe for economic inequality and declining incomes for most citizens and for depriving state and local governments of the revenue needed to maintain public infrastructure and education systems that are the underpinnings of long- term economic growth.

2010-PFw5464Posted by Peter Fisher, Research Director of the nonpartisan Iowa Policy Project