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Child’s Play: Creating a Path to the Middle Class

Improving Child Care Assistance Can Facilitate Parent Education

EXECUTIVE SUMMARY

Full policy brief (PDF — 13 pages)
This executive summary (PDF — 2 pages)
News release (or PDF — 2 pages)

By Lily French and Peter Fisher

The surest pathway into the middle class is post-secondary education. Both the individual and state government reap substantial benefits whenever a low-wage worker can complete further education and move into a higher-paying, self-supporting job. Yet significant barriers stand between a low-wage worker and better education or a degree. Chief among these is the high cost of child care. Iowa’s Child Care Assistance (CCA) program could be reformed to improve parents’ access to greater educational attainment.

In 2012, the average annual tuition in Iowa for a 2-year-old in a child care center reached $7,061, higher than the annual tuition at one of Iowa’s Regents institutions.[1] While difficult for most low-income families to pay, it is considerably more challenging when one parent is in school and is not bringing in any income. Nationally, 13 percent of all undergraduates are low-income parents, and the majority of these are single parents.[2]

Young people who acquire post-secondary education are likely to earn more in the future, to pay more taxes, and to rely less on public assistance. Their children are less likely to grow up in poverty. The increased taxes paid to the state of Iowa over 40 years of working life by someone with an associate degree is about $23,000 more than the average for a person with just a high school diploma. A bachelor’s degree means additional lifetime tax payments of nearly $51,000.

Iowa wages have been virtually stagnant since 2000; the median wage (adjusted for inflation) was $15.86 per hour in 2000, but by January 2012 had actually fallen slightly to $15.62.[3] Making ends meet has been getting more difficult for those with no post-secondary credentials. Iowans limited to a high school degree can expect to earn $23,000 to $27,000 in the early stages of their career, and no more than about $35,000 in their prime earning years — age 40 to 54.[4] This does not support a family with more than one child at a basic standard of living in Iowa.[5]

Studies have found concerns around child care to be a major obstacle to low-income parents’ ability to complete their post-secondary studies.[6] One study on community college enrollment and attendance employed focus groups, and in every one child care topped the list of factors affecting the decision to attend college.[7]

Conclusions and Recommendations

Our analysis reveals several potential obstacles to a successful and effective child care assistance program, and potential gains to the state as low-wage Iowans attain post-secondary education.

A fundamental issue is that Iowa’s TANF (Temporary Assistance to Needy Families) and CCA programs are geared toward maximizing work — at any wage — rather than encouraging participants to further their education and make it possible to achieve self-sufficiency and an adequate standard of living. Any change in the state CCA program that results in more people attaining an associate or bachelor’s degree will produce a substantial long-term return to the state in higher income and sales taxes as a result of the higher lifetime incomes of those with post-secondary education.

The state has good options for better policy.

  • Because Iowa’s child care assistance program is underused for non-welfare parents who are pursuing higher education, Iowa should take steps to encourage greater rates. The state should work actively to inform those parents that child care funds are available.
  • State policy and practice should encourage caseworkers in Iowa’s Promise Jobs program to explore education and child care options with their clients, and the training and evaluation of caseworkers should reward a focus on education plans instead of only a work-first approach. While Promise Jobs is designed to move clients away from public assistance, without an education component self-sufficiency may be an elusive goal.
  • The 24-month time limit on education makes it difficult to attain even a community college degree because the second year of assistance can be only for non-credit programs and requires 20 hours per week of work. Clearly it does not allow a parent to attain a bachelor’s degree. The 24-month limit should be scrapped. If just one in nine participants in the extended subsidy attained a BA and remained in Iowa, the child care subsidies would pay for themselves in higher tax revenue.
  • Iowa’s reimbursement rate to child care providers should not be lower than the federally recommended level of the 75th percentile of current market rates. To encourage parents to pursue further education, the reimbursement should be high enough for them to use it with ease, to find a nearby child care provider willing to accept the state reimbursement.
  • A student receives child care assistance only for the hours actually spent in class or in organized advising or studying on campus; no time is allowed for getting to and from class, to and from child care, or for individual study time. Additional hours should be covered to more realistically account for the time necessary to be a successful student and a parent.
  • A parent who has skills appropriate only for low-wage jobs but who wants to pursue post-secondary education will typically need to work part time and attend school part time. But such a person, if not in the Family Investment Program or FIP (Iowa’s TANF program), would be required to work 28 hours per week in addition to class and out-of-class schooling hours. We recommend that classroom hours count toward the 28-hour requirement; the more classes attended the lower the work requirement. This would place more realistic demands on a person’s time and allow more individuals to pursue education by not forcing a choice between work and school.

[1] Child care costs from: Iowa Child Care Resource and Referral, Statewide Report, July 2012.  http://www.iowaccrr.org/resources/files/State%20Data%20Sheet/FY12%20Iowa%20Summary%20Report.pdf. Resident tuition for academic year 2012-13 at the University of Iowa was $6,678, at ISU and UNI, $6,648; this does not include mandatory fees.

[2] Kevin Miller, Barbara Gault and Abby Thorman. Improving Child Care Access to Promote Postsecondary Success Among Low-Income Parents. Institute for Women’s Policy Research, 2011.

[3] The State of Working Iowa 2012. http://stateofworkingiowa.org/the-bigger-picture/

[4] Authors’ calculations based on the American Community Survey, 2006-2010, and the Current Population Survey, various years.

[5] Lily French, Peter Fisher and Noga O’Connor, The Cost of Living in Iowa, 2011 Edition. Iowa Policy Project, May 2012.

[6] See, for example, Adair, V. C. (2001). “Poverty and the (broken) promise of higher education.” Harvard Educational Review, 71(2), 217-239 http://www.history.ucsb.edu/projects/labor/documents/AdairHarvardEducationalReviewArticle.pdf

Thompson, J. (1993). “Women, welfare and college: The impact of higher education on economic well-being.” Affilia, 8(4), 425-441.                      

Hyperbole Alert: The drumbeat to cut corporate taxes in Iowa

Posted July 24th, 2013 to Blog
Mike Owen

Mike Owen

TWELVE PERCENT!

The figure practically screams at you, even when it’s not in all caps, when the conversation comes to corporate tax rates in Iowa.

Here’s the thing: It’s not a real number. Not really.

That is what is known as Iowa’s “top marginal rate” on corporate income tax. And it’s not a real number because it simply does not — cannot — reflect what a business pays on all its profits. Yet that is the implication when people (especially politicians) or corporations complain about it.

A top Iowa columnist, Todd Dorman of the Cedar Rapids Gazette, this week discussed the political battles over Iowa’s latest gigantic subsidies to Egyptian fertilizer company Orascom. In his piece he expressed a note of concern about the hyperbole in those battles. Then, he turned the discussion to Governor Branstad’s desire for cuts in corporate income taxes.

It is in that discussion where the hyperbole typically has been the strongest in Iowa. We are often told — as Dorman noted — that Iowa’s top corporate income tax rate is the nation’s highest. Note the emphasis added on “top.” More on that in a moment. Dorman also noted, accurately, that Iowa “has four brackets and a tangle of special interest credits.”

Because of the latter, any serious concern for our corporate friends should evaporate. Because they’re really being taken care of quite nicely, thank you, by their friends in the General Assembly and the Governor’s Office.

Now, about that “top rate.” It applies only to Iowa-taxable corporate profits above $250,000. Iowa doesn’t tax any profits from sales outside the state, so the rate doesn’t apply at all there, which for many businesses is a significant share of profits. For all taxable profits below $250,000, rates are lower — 6 percent on the first $25,000, 8 percent on the next $75,000 and 10 percent on the next $150,000.

Before these rates kick in, the business gets to deduct half its federal income tax from taxable income, and may have other deductions or ways to shelter income from state tax.

Then, after the rates are computed and the taxes determined, the tax credits enter the picture — and state revenues exit. The state just expanded the potential for those credits by $50 million, raising the cap on a select group of credits. In the case of the Research Activities Credit, these credits not only erase all tax liability, but offer state checks for the remaining amount of the credit. Through that program in 2012, Iowa paid out almost $33 million to 130 firms that paid no income tax, because those companies had more credits than tax liability.

And you can bet the corporate execs and their accountants fully understand all these nooks and crannies in our tax code. But if you want to give them a free million or so, they’ll take it. They are smart folks, and they have proven themselves to be more skilled negotiators than Iowa’s economic development moguls.

Want to talk reform? Then recognize the real problems — that we receive less in corporate tax than we used to, and that a lot of corporate tax is not collected because of the swiss-cheese nature of our tax code. That gives us all something to talk about.

Just be ready for the hyperbole from those who don’t want to change that part of our system.

Posted by Mike Owen, Executive Director


For more information about Iowa business taxes, see these Iowa Fiscal Partnership reports:
— “Reducing Iowa Commercial Property Taxes,” by Heather Milway and Peter Fisher, April 24, 2013.
— “Amid Plans to Relax Limits, Business Tax Credits Grow,” by Heather Gibney, April 16, 2013.
— “Corporate Taxes and State Economic Growth,” by Peter Fisher, revised April 2013.
— “A $40 Million Budget Hole: Persistent and Growing,” IFP backgrounder, February 25, 2013.
— “Tax Credit Reform Glass Half-Full? Maybe Some Moisture,” IFP backgrounder, revised March 23, 2010.
— “Single Factor to Consider,” IFP backgrounder, April 2, 2008.


We promise: We won’t cook burgers

Posted July 18th, 2013 to Blog
Mike Owen

Mike Owen

So, McDonald’s and VISA have teamed up to tell low-wage workers how to make ends meet.

We have a proposal for McDonald’s and VISA: Leave economic and policy analysis to us, and we won’t compete with you on burgers and debt.

The McDonald’s/VISA plan is ironic on two fronts.

First, McDonald’s is an example of a low-wage employer — the folks who have profited mightily while their employees have not. In fact, the McDonald’s/VISA plan expects the worker to have two jobs, to make ends meet on an unrealistically low budget and have money left over — “spending money,” the plan happily calls it. That “spending money” would have to cover all food, among other things.

As Iowa Policy Project research has shown, the cost-of-living assumptions by McDonald’s are too low. A bare-bones budget for a single person in Iowa with no kids is just over $20,100 (2011 figures), requiring a job that pays about $24,000 before taxes. It assumes absolutely nothing for eating out (even at McDonald’s), let alone saving for school or retirement.

Second, McDonald’s/VISA doesn’t assume any cost of consumer credit for debt incurred, other than a car payment. VISA depends upon low- and middle-income folks taking on debt and seeing it pile up. Sometimes it’s consumer debt, but debt also can come from health-care out-of-pocket costs when your budget is on the edge. This is a very real cost for low- and middle-income families, and it can be made even worse with predatory lending practices that are dealt with feebly by state and federal lawmakers.

McDonald’s/VISA’s tortured compilation of expenses, it should be noted, comes fairly close to the one-person, total basic-needs budget we computed for 2011 — but a single person without kids would not come close to making that total budget by following the McDonald’s/VISA plan. Add child-related expenses, and — whoa! — there’s a fire in the kitchen!

McDonald’s and VISA also include some handy money-saving tips in their brochure to help low-wage workers get by, like riding your bike to work. How about these tips for saving money: Don’t eat out, and tear up your VISA card.

Click here to see how our researchers — Peter Fisher, Lily French and Noga O’Connor — came up with our numbers. Setting money aside for savings? Not possible. Health insurance at $20 a month? Actual insurance and out-of-pocket costs are far greater. The idea of having “spending money” left over? Laughable at best.

From “The Cost of Living in Iowa,” on IPP website

From “The Cost of Living in Iowa,” on IPP website

But none of this is funny. It illustrates that in the real world, choices for working people in Iowa are often about how to make ends meet when income falls short. And that is the situation for about three-fourths of single-parent families and about 23 percent of all families in our state.

Instead of assuring better ways to boost income, including a higher minimum wage, much of the public policy discussion is focused on cutting back supports such as food and energy assistance, not to mention Social Security, and holding down child-care assistance. We don’t seem to recognize the need for a living wage, however that may be computed. In the end, are we even willing to support a low-wage economy?

Posted by Mike Owen, Executive Director


Job Creationism

Posted June 12th, 2013 to Blog
Peter Fisher

Peter Fisher

In the beginning, there was a CEO. And he said, “Let there be jobs.” Because he wanted to be a Job Creator, since he had heard that Job Creators get all kinds of public praise and respect, not to mention some significant perks, like being able to flash the Job Creator ID card whenever anyone threatens to raise your taxes. Others touted the ability of the Job Creator card to transfix governors and state legislators, who would then intone “We will grant you any incentives you ask for, oh wonderful Job Creator.” And amazingly, spending public money indiscriminately on Job Creators helps those public officials get re-elected. A win-win situation, at least if you leave ordinary working citizens out of the equation.

And his board of directors said, “Hey wait a minute; how about a new product first, and consumers who are willing and able to buy it.” So the CEO bought up an innovative start-up company, and conducted market studies. And it turned out that indeed there was a market for this product, and sales to be had, and profits to be made.

But the CEO discovered that his board of directors and his shareholders really wanted him to focus on that last point: profits. It turned out that maximizing profits required minimizing costs, which actually meant hiring as few people as possible. Workers, it seemed, could be a pain; they wanted to be paid, and to get benefits like health insurance, and work in safe and reasonable conditions, and maybe join a union. So the CEO set about creating as few jobs as he could, at the lowest wages that would get the skills he needed, with as little job security as he could get away with. He hired consultants to tell him how to keep them from joining unions. And he dreamed of a company that had no employees whatsoever.

As consumers spent more, the company produced more, and hired more workers. (Hmmm; seems like consumers are creating jobs. We can’t call everyone a Job Creator, though; sorry folks.) But then there was a recession, and consumers stopped buying and the CEO had to lay off half his work force. And when the economy recovered he found he could make more profits without hiring them all back, by mechanizing some operations and outsourcing others to low-paid workers overseas.

The CEO fretted for a moment. Would they repossess his Job Creator card, because he was actually destroying jobs? Well, not to worry. It turns out that you can destroy jobs right and left and that has no effect on your status. In fact, you can ship 1,000 jobs overseas and then get praised for opening a new U.S. branch that employs 50. Not just praised, but rewarded, with tax exemptions and credits and such. Things that really help that profit maximizing thing that your board is so worried about.  In fact, it seemed that the more Job Creators laid off workers, the more desperate people became for jobs, and the more lavishly they showered benefits on the Job Creators. How could you lose with a deal like this?

When he read the fine print on the back of the card the CEO understood how membership actually worked: Anyone in a position to hire (and fire) was a Job Creator. Your actual record didn’t matter. Nor did anyone seem to worry about the actual source of job gains being traced to innovation, and research, and public support of universities, and public investments in transportation and other infrastructure, and broadly shared income that allowed consumers to buy the products and services that workers were producing.

So the CEO quit worrying, and sipped his martinis on the beaches of various tax havens in the Caribbean, contemplating how well deserved was his status as a Job Creator, and how nice it was to be worshipped for who you were instead of what you did.

Posted by Peter Fisher, Research Director


Who benefits? No doubts — the ‘1 Percent’

Posted June 4th, 2013 to Blog
Peter Fisher

Peter Fisher

For whose benefit is this country run? The events of the past 10 years should have erased any doubts about the answer to that question. Let’s recap for a minute just what happened.

First, federal regulators sat idly by while banks and investment funds, with help from their friends the bond rating agencies, put billions into high-risk mortgages that should never have been made, and mortgage brokers raked in closing fees. Millions of families became heavily in debt, and housing prices shot up at unsustainable rates. When all this collapsed, it drove the economy into the deepest recession since the 1930s. Millions lost their jobs and their homes, as banks chose to foreclose rather than work out a way for homeowners to remain in their homes.

There was a little seeming good news: Interest rates were at an all-time low. People could refinance at incredibly low rates. But wait: The banks reacted to the criticisms of their previous loose lending practices by drastically tightening credit rules. Ordinary people who were making house payments with mortgages at 5 or 6 or 7 percent were denied refinancing because their credit was bad — because of the recession and loss of jobs. So the banks were saying, in effect: Yes, we see that you are making your payments at 6 percent but we don’t think you could make the lower payments at 3.5 percent. Banks kept their very profitable mortgages, earning twice what they could get on new mortgages, and prolonging the recession as consumers were unable to free up money for other purchases.

So finally, after five years of economic hardship for much of the population, housing prices have hit bottom and started back up again. Great news. People who have a job again may also be able to buy a house again, and at still very favorable prices and interest rates. But wait: We can’t have the formerly unemployed, forced out of their homes, becoming homeowners again and getting all the benefit from future rising prices and cheap credit. No, that’s clearly a job for the rich.

Families who struggled and suffered during the recession saw their credit ratings sink, and with the tight credit rules, they are shut out of the mortgage market (and in some cases the job market as well). And who steps in? Wall Street firms and wealthy house-flippers. One firm alone, the Blackstone Group, has purchased 26,000 homes in nine states.[i] In a few years they can re-sell to ordinary working folks at higher prices (with mortgages at higher interest rates). The rich, it turns out, are the ones in a position to buy at the bottom and reap the capital gains that will follow (taxed, of course, at a much lower rate than wages).

It should hardly come as a surprise that the net effect of the housing bubble, the financial collapse and prolonged recession, and the beginnings of recovery, was to bring about a substantial redistribution of wealth. For much of the population, what little wealth they had was concentrated in home equity, which was wiped out by the collapse of the housing market; wealth continued to decline for the bottom 93 percent of the population during the first two years of “recovery.”[ii] But for the richest 7 percent, wealth increased 28 percent, from 2009 to 2011.

Income inequality is rising again as well, as profits have surged since the recovery began while wages have stagnated. The top 1 percent got 121 percent of all the gains in income from 2009 to 2011.[iii] If you are in the 1 percent, things have worked out just swimmingly; causing an economic collapse can be very profitable if you are in the right position.

If you are part of the 1 percent, you are also free to spend as much of that new wealth as you want re-electing public officials who will blame Food Stamp recipients, unions, and public school teachers for our economic troubles, while slashing any program that benefits the poorer half of the population in the name of cutting the national debt. Those elected officials can also be counted on to weaken those pesky new financial regulations, modest to start with, and making sure your tax rate doesn’t go back up to anywhere near what it was in the 1990s. Of course, curbing spending while unemployment is still above 7 percent prolongs the jobs recession and the hardships of working families, but who cares? Keep those wages down, profits up, and stock prices hitting historic highs. Meanwhile, having helped destroy several millions jobs during the recession, and having found numerous ways to restore production levels since then without hiring back your former employees, you will now find that you can claim an exemption from tax increases and qualify for all kinds of state and local incentives on the grounds that you are a “job creator.”

Is this a great country or what?

Posted by Peter Fisher, Research Director


Fisher: With economic development, some bad ideas never die

Peter FisherBy Peter Fisher, Iowa Policy Project

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Some bad ideas never die

Posted April 24th, 2013 to Blog
Peter Fisher

Peter Fisher

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

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

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

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

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

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

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

Posted by Peter Fisher, Research Director


Reducing Iowa Commercial Property Taxes

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

By Heather Milway and Peter S. Fisher

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

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

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

Changing property assessments

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

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

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

Local impacts

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

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

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

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

Why businesses are watching

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

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

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

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

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

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

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

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

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

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


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

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fisher: Tax hike not too much to ask of rich

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

Peter FisherBy Peter Fisher, Iowa Policy Project

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

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

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

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

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

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

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

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

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

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

 

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

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

The limits of transparency

Posted April 3rd, 2013 to Blog
Peter Fisher

Peter Fisher

You can’t fix problems you can’t find. That’s why transparency is so important in public policy and especially spending through the tax code.

You would never find some of this information just going to the Iowa Economic Development Authority website — you have to know where to look. And even then, there are limitations on what is available from the state for its citizens to see.

The Iowa Policy Project and Iowa Fiscal Partnership have long argued for greater transparency with regard to the state’s expenditures on economic development through the tax code. We are happy to see a new report from the Iowa Public Interest Research Group that brings attention to this issue, properly including business tax credits and other tax expenditures among the categories of state spending that citizens have a right to know about.

But it’s very important to look at the deficiencies that remain in Iowa. In our view, those problems tell far more about the state’s interest in transparency than the items that are given a favorable rating by PIRG.

While the PIRG report gives Iowa credit for having a website that allows a citizen to find economic development subsidies awarded by company name (including the amount, the jobs promised, the jobs created, and the location), two problems in particular should be addressed in the future.

  • First, only tax credits that must be awarded are listed; similar information should be available for all economic development tax credits, including those that are automatic.
  • Second, the database of subsidies is buried deep in the website of the Iowa Economic Development Authority (for those interested it is here: http://www.iowaeconomicdevelopment.com/annualrpt/?cmd=default&rptyear=2011). It’s hard for the public to find. A link to this database should be posted on the state’s DataShare website, where only aggregate information on tax credits is available.

The Legislature did pass a notable transparency improvement in 2009 that requires the state to identify by name the recipients of Research Activities Credits in excess of $500,000. The bill failed, however, to require identification of how much of a company’s credit was in the form of a refund check. Taxpayers have a right to know how much of their tax dollars are going to subsidize corporations that are paying no state income tax.

It should be clear by now that the disclosure of company-specific subsidy information does no harm to the company or to the state’s economic development efforts; there is no excuse not to make all of our business tax subsidies transparent.

Posted by Peter S. Fisher, Research Director