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Iowa’s Problem of Priorities

IFP BACKGROUNDER / 
Costly Business Property Tax Cut Excessive — Hurts Family, Kids’ Services 

2-page PDF 

Tax cuts have consequences. In the case of the massive commercial property tax cut enacted two years ago, those consequences have become all too real.

Iowa’s economy continues to rebound and state revenues are projected to rise nearly 5 percent next year, yet we find ourselves struggling to finance our most important basic services, like education. Why? Because we are giving away most of the increased revenue to commercial property owners, with no public benefit to show for it.

The commercial property tax cut will result in an estimated $277 million hit to the state budget next fiscal year, more than double this year’s cost as provisions phase in.[1] This means that the property tax cuts will consume 68 percent of the estimated $408 million in increased state revenue.[2] The small amount remaining is far too little to cover even the normal increases in the cost of providing public services due to inflation.

While the legislation has been sold as a general property tax cut, only 11 percent of the property tax reductions will flow to residential and agricultural property owners next year.[3] The rest goes to owners of commercial property, apartment buildings, industrial facilities, railroads and utilities.

The legislation has two major provisions. A Business Property Tax Credit is entirely state funded and is of more benefit to owners of small properties, since the maximum value of the credit represents a larger share of their taxes. The most costly provision reduces the assessed value of commercial and industrial property to 90 percent of actual value, with the state reimbursing localities for the resulting revenue lost.[4] This provision lavishes the majority of its benefits on large property owners.

About $5 million will flow next year to the 11 largest big-box retailers, none of them Iowa companies.[5] While this is real money flowing out of the Iowa treasury, a few hundred thousand a year to the likes of Wal-Mart or Target is of little import to them, and will have no effect on their decisions to build in Iowa, which are driven by the size of the consumer market here. There was never a case for commercial tax reductions; overall business tax levels in Iowa for a long time have been below the national average — a point you rarely hear, and never from the business lobby.[6]

What exactly are the consequences?

The cost of running schools will keep rising faster than state aid, resulting in layoffs, increased class sizes, program reductions, and more years of outdated textbooks.

The Governor’s budget proposes sizable cuts to state health care programs and requires state agencies to finance salary increases by reducing staff, thus reducing state services.

Once again we will not expand the state’s preschool program for 4-year-olds, a measure that has been shown to be an effective economic development tool yet fails to help many low-wage workers needing full-time preschool.

Our child care assistance program, with one of the lowest income cutoffs in the country, will keep penalizing families for earning more. Bi-partisan support for funding to improve water quality and expand access to mental health care will likely be for naught.

We have a problem of priorities. We keep underfunding services for average Iowa families — education, health, work supports, natural resources — in order to finance massive tax reductions to businesses that don’t need it. And we spend in excess of $350 million each year on business tax credits that continue on autopilot, with no sunset, despite the state’s own analyses that fail to find evidence of appreciable benefit to the state from some of the largest of these subsidies.[7] 

It is time to admit that the tax cuts enacted in 2013 were excessive, and are causing long term damage to the state. At the very least, the $50 million increase in the business property tax credit portion of those tax cuts scheduled for next year should be delayed or eliminated.

But that is not enough. There should be a moratorium on any further tax cuts or tax credits. All business tax credits should be subject to effective caps and sunsets to force a serious evaluation.

Without such measures, we will continue down the road of tax-cutting our way to mediocrity and shortchanging our children’s future. 

                      

2010-PFw5464A shorter version of this piece appeared as a guest opinion by Peter Fisher, Research Director of the Iowa Policy Project, in The Des Moines Register on March 6, 2015. This version has been updated to reflect March estimates by Iowa’s Revenue Estimating Conference. (See endnote 2)

The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit Iowa-based organizations, the Iowa Policy Project and the Child & Family Policy Center. Reports are at www.iowafiscal.org.



[1] The Legislative Service Agency projects that general fund appropriations resulting from the property tax legislation will total $277.1 million for FY2016: $162 million to replace local revenue lost because the bill reduced commercial and industrial assessments to 90 percent of actual value, $14.9 million in state foundation aid to schools triggered by the reduction in assessed value, and $100 million for the business property tax credit. LSA, Fiscal Services Division, Summary of FY 2016 Budget andDepartment Requests, December 8, 2014, page 53. https://www.legis.iowa.gov/docs/publications/LADR/435197.pdf

[2] The $408 million represents the increase in state’s net receipts plus transfers, according to the Revenue Estimating Conference, March 19, 2015. The increased revenue was estimated at $338 million in December. However, the larger increase comes about not because the March revenue estimates for FY2016 are higher (they are actually a little lower) but because the revenue estimate for the current fiscal year dropped $90 million. Thus while the increase looks bigger it is a result of a worse fiscal situation for the state. https://www.legis.iowa.gov/docs/publications/BL/656455.pdf

[3] Legislative Services Agency, Fiscal Note on SF 295, May 22, 2013. https://www.legis.iowa.gov/DOCS/FiscalNotes/85_1464SVv2_FN.pdf

[4] The state promised to reimburse these losses fully only through FY 2017; after that, local governments will be on the hook for an increasing portion of the lost revenue. In addition, the state is not reimbursing localities for any of the revenue lost from a third provision that reduces the assessed value of residential rental property.

[5]Estimate based on January 2012 taxable values and the statewide average property tax rate on commercial property of 3.77 percent for FY2015.  The 11, in order by 2012 valuation statewide and with the location of the corporate headquarters, are Wal-Mart (AR), Target (MN), Menard’s (WI), Lowe’s (NC), Walgreen’s (IL), Kohl’s (WI), Younkers (PA), Home Depot (GA), K-Mart (IL), Best Buy (MN), and Sears (IL). The 11 had $1.33 billion in taxable valuation, so that the reduction to 90 percent for January 2014 values amounts to $133 million, assuming valuations before the reduction remained about the same.

[6] Iowa: Where Business Taxes are Low. Iowa Fiscal Partnership, March 5, 2014.  http://www.iowafiscal.org/iowa-where-business-taxes-are-low/

[7] Iowa Department of Revenue, Contingent Liabilities Report, December 2014 https://tax.iowa.gov/sites/files/idr/Contingent%20Liabilities%20Report%201214.pdf. For evaluations of tax credits by the Iowa Department of Revenue see https://tax.iowa.gov/report/Evaluations?combine=Study; also of note is the State of Iowa Tax Credit Review Report, prepared by the Governor’s Tax Credit Review Committee, January, 2010. http://www.dom.state.ia.us/tax_credit_review/files/TaxCreditStudyReviewReportFINAL1_8_2010.pdf

When Iowa Wages Fall Short, Do Policy Choices Fill the Gap?

What does it take to get by these days? The Cost of Living in Iowa, 2014 Edition, from the Iowa Policy Project answers this question, and connects the answer to public policy choices that are in the hands of state and federal lawmakers. We present this report in three installments, outlined below, with links to the three pieces and support materials.

Part 1 — Basic Family Budgets

View full report or download 22-page PDF
News release
County data (map, printable tables)
County and regional data (spreadsheet)

Iowans pay differing amounts for the basic living essentials depending on where they live. A family living in Linn County and a family living in Clay County will face different housing costs, commuting times and health insurance premiums; child care costs will differ as well. Part 1 of this report details how much families throughout the state must earn in order to meet their basic needs and underscores the importance of public work support programs for many Iowans, who despite their work efforts, are not able to pay for the most basic living expenses.

Below, see how costs compare for families in your county and neighboring counties; click on any county for the data.

map

Union Shelby Woodbury Ringgold Van Buren Wapello Scott Sioux Sac Tama Webster Warren Washington Wayne Wright Worth Winnebago Winneshiek Muscatine Mahaska Poweshiek Jasper Marion Monroe Lucas Page Montgomery Pottawattamie Mills Monona Marshall Story Humboldt Pocahontas Palo Alto O'Brien Plymouth Mitchell Hamilton Hardin Grundy Guthrie Franklin Madison Keokuk Louisa Iowa Lee Henry Fremont Ida Jones Linn Howard Kossuth Hancock Johnson Jackson Harrison Greene Jefferson Decatur Davis Emmet Floyd Delaware Dubuque Fayette Dallas Dickinson Des Moines Butler Buena Vista Boone Bremer Clayton Chickasaw Cerro Gordo Cass Crawford Calhoun Clay Cherokee Clarke Carroll Buchanan Black Hawk Benton Clinton Cedar Audubon appanoose Adair Adams Osceola Allamakee Lyon Taylor Polk

Part 2 — Many Iowa Families Struggle to Meet Basic Needs

View full report or download 6-page PDF
News release

Part 2 shows that over half the jobs in Iowa pay less than what is needed by many families to achieve basic self-sufficiency. How many Iowa families earn below the family supporting income levels reported here? How many families, in other words, must rely on work supports to get them closer to the basic needs budget level?

Fig 2 graph: basic needs vs. median

Part 3 — Strengthening Pathways to the Middle Class: The Role of Work Supports

View full report or download 21-page PDF
View executive summary or download 3-page PDF
News release or download 2-page PDF

Part 3 examines what are known as the “cliff effects” that occur when a family makes just enough to lose eligibility for various work support programs — creating an “income cliff” that costs far more than they gain from a meager pay increase.

Fig 2 graph: basic needs vs. median

Issues in Waiting: Tax-Increment Financing Reform

Posted October 2nd, 2014 to Blog

Basic RGBThis is an excerpt from an interview with IPP’s Peter Fisher on “The Devine Intervention,” KVFD-AM 1400, Fort Dodge. Host Michael Devine discussed tax-increment financing, or TIF, with Fisher, whose reports on this issue have prompted many to call for reform. TIF is one of Iowa’s “Issues in Waiting” — issues discussed year after year, but not resolved. The quotes below are actual quotes from the interview; the questions are paraphrased.

What was the idea behind tax-increment financing, or TIF?

It was originally a tool to help cities redevelop blighted or declining areas and what it did was allowed a city to capture more of the tax revenue from redevelopment when the city undertook some project to try to turn around a declining neighborhood. If they were successful, businesses would come in, the tax base would go up.

And what TIF did was allow the city to use not just the city taxes on all that growth, but the county and school taxes as well for some period of time to pay the city back for their expenses for this project, for redevelopment. And in the long run the county and school districts were better off. The cities got their money back, they got more tax base. That was the idea.

How did the implementation of TIF look?

It worked that way for quite a while. And then about 20 years ago we opened the door to just about anything cities wanted to do by saying well it doesn’t have to be a blighted area, it doesn’t have to be a redevelopment. It just has to be “economic development.” And just about anything cities do it turns out they can call “economic development” and finance with TIF.

Is there a consequence if TIF is abused?

Not really — as long as they are doing something within the law. The county and the school district don’t have any say on whether the city is going to divert their taxes to the city’s TIF fund. And there’s no state regulation either, other than the court system.

To hear the full interview, click here.

For more resources from Peter Fisher and the Iowa Fiscal Partnership about TIF, click here.


Iowa Uninsured at 8 Percent in 2013

One of nation’s best rates leading up to ACA and Medicaid expansion

A greater percentage of Iowans had health insurance than in most other states leading up to the implementation of the new health care law, Census data showed Tuesday.

Data from the Census’ American Community Survey showed 248,000 Iowans, or 8.1 percent, were uninsured in 2013, down from 254,000, or 8.4 percent, in 2012. The change was not statistically significant, as it was within the margin of error.

Only three other states and the District of Columbia had lower percentages of people who identified themselves as uninsured.

“As good as the Iowa numbers look in comparison to other states, we still had a quarter of a million people without insurance heading up to implementation of the Affordable Care Act,” noted Peter Fisher, research director of the nonpartisan Iowa Policy Project, which is part of the Iowa Fiscal Partnership.

“The Census report demonstrates a need for policies that provide access to health insurance such as ACA, or Obamacare, and Iowa’s Medicaid expansion. Both can be expected to have reduced the number of uninsured. It will be interesting next year to see how these numbers have changed after more people have enrolled.”

Fisher noted one reason for optimism of better numbers in the future is that the state with the lowest uninsurance rate is Massachusetts, which has had a state plan for a number of years. The uninsurance rate in Massachusetts was 3.7 percent in 2013.

“As the ACA is implemented and we have a public policy response to the problem of uninsurance, you have to wonder if we’ll approach the Massachusetts number,” Fisher said.

Besides Massachusetts, only Hawaii and Washington, D.C., at 6.7 percent and Vermont at 7.2 percent had lower rates than Iowa. Minnesota at 8.2 percent was about the same as Iowa’s 8.1 percent, as both had a 0.3 percentage-point margin of error.

In the region, Iowa and Minnesota were well ahead of neighboring states, with uninsurance in Wisconsin at 9.1 percent and all others in double digits: Nebraska and South Dakota both at 11.3 percent, Kansas at 12.3 percent, Illinois at 12.7 percent, and Missouri 13 percent.

The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit organizations — the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines. Reports are at www.iowafiscal.org.

Beware the “business climateers”

Posted August 18th, 2014 to Blog

Fisher-GradingPlacesIowa’s business lobby appears to be preparing a new assault on the ability of our state to provide public services.

It would be the latest in a long campaign, in which lobbyists target one tax at a time under a general — and inaccurate — message about taxes that we will not repeat here.

Suffice to say, Iowa taxes on business are low already. Many breaks provided to businesses are rarely reviewed in any meaningful way to make sure that taxpayers are getting value for those dollars spent, ostensibly, to encourage economic growth. Rarely can success be demonstrated.

The Iowa Taxpayers Association is holding a “policy summit” this week and promoting a new report by the Tax Foundation to recycle old arguments that are no better now than they have been for the last decade.

Fortunately in Iowa, we know where to turn to understand claims from the Tax Foundation, and that resource is Peter Fisher, our research director at the Iowa Policy Project. Fisher has written two books on the so-called “business climate” rankings by the Tax Foundation and others, and is a widely acknowledged authority on the faults in various measures of supposed “business climates” in the states.

Fisher, in this guest opinion in the Cedar Rapids Gazette, noted weaknesses in the Tax Foundation’s claims, not the least of which is that the anti-tax messages are not supported by the foundation’s own report. Fisher notes this about the Tax Foundation’s “State Business Tax Climate Index”:

It is a mish-mash of 118 tax features … weighted arbitrarily and combined into a single number for the index.

This number has no real meaning. It produces wacky results because it gives great weight to some minor tax features (such as the number of tax brackets) while leaving out completely two things that have a huge impact on corporate income taxes in Iowa: single sales factor, and federal deductibility.

This past spring, this Iowa Fiscal Partnership two-pager noted:

A variety of factors influence the decisions businesses make about whether they want to locate or expand within a given state. These factors include available infrastructure, the proximity to materials and customers, the skill of its workforce, and whether the state has good schools, roads, hospitals, and public safety. As we have shown elsewhere, state taxes play at best a minor role.

In Iowa, we constantly hear the same old argument … used to enact large tax cuts for commercial and industrial property this past year and continues to be an excuse used to justify giving away large tax credits to businesses throughout the state.

But this argument just isn’t true…

Whether we are looking at the entire range of taxes that fall on businesses or just the corporate income tax, the fact is that business taxes in Iowa are low.

Only if Iowa policy makers and the public ignore the reality on Iowa business taxes will these special interests get their way again.

Owen-2013-57 Posted by Mike Owen, Executive Director of the Iowa Policy Project

*View Peter Fisher’s reports for Good Jobs First on business climate rankings:

 


Bargain, schmargain

Posted July 30th, 2014 to Blog

It’s back again: Iowa’s SALES TAX HOLIDAY.

What a charade. Retailers love it, because it’s a gimmick to lure people into their stores to buy things at full price, instead of waiting for a back-to-school sale.

The happy-talk label disguises its real impact: to throw away revenue while pretending to, as one report put it, “help boost the economy and give consumers a break.” It does neither.

Iowa’s policymakers are selling you a pig in a poke. You’re told you’re saving money, but you’re buying dirty water, underfunded schools and fees for amenities such as parks. The cost is estimated at over $4 million.

For two days, Iowans will spend money on the same things they would have spent money on anyway, in those two days or others, so it doesn’t boost the economy. Sales taxes do hit low-income folks hardest, but those families would be better served by a break that went all year. They still have only so much to spend in these upcoming two days.

Let’s also recognize that consumers won’t save all that much, if at all — and may in fact pay more. How many times have you rushed off to a “6 Percent Off” or “7 Percent Off” sale? Who’s to say a retailer, with this officially sanctioned “holiday” marketing, won’t bump prices by 10 percent or call off a 20 Percent Off sale that might have been in place?

But it is a deal for politicians who like to brag about cutting taxes, while pointing fingers at others when they cut teachers and police officers because budgets are tight.

If we were honest with ourselves, we would welcome Tax Day and loathe the first weekend of August.

2010-PF-sqPosted by Peter Fisher, IPP Research Director

 

 


Bad research never gets good

Posted May 13th, 2014 to Blog

It might be a stretch to say that good research never gets old — at some point you might need an update — but one thing is certain: Bad research never gets good.

Fisher-GradingPlacesIPP’s Peter Fisher is one of the nation’s experts on rankings of state business climates. In two reports published in the last two years by our colleagues at Good Jobs First, Fisher lays out irretrievable problems with the Rich States, Poor States analysis periodically offered by the American Legislative Exchange Council, or ALEC.

Fisher tested ALEC’s claims against the actual economic performance of states, finding that states following ALEC-favored policy did more poorly than other states.* He also found serious flaws of methodology, including comparisons of arbitrary states instead of all 50.

As Good Jobs First’s executive director, Greg LeRoy, wrote in the preface to the 2013 Grading Places report:

Indeed, the underlying frame of these studies — that there is such a thing as a state “business climate” that can be measured and rated — is nonsensical. The needs of different businesses and facilities vary far too widely. … Given these realities, “business climate” studies must be viewed for what they are: attempts by corporate sponsors to justify their demands for lower taxes and to gain public-sector help suppressing wages. …

To borrow Oscar Wilde’s witticism about cynics, these “business climate” studies know the cost of everything and the value of nothing.

In the case of ALEC, others are noticing. Michael Hiltzik of the Los Angeles Times has written twice in recent days about the ALEC problem, citing the work of both Fisher and Professor Menzie Chinn of the University of Wisconsin.

See these pieces by Hiltzik:

In the latter, Hiltzik notes a recent “response to the critics” by ALEC:

It’s a curious document that ends up proving the critics’ point. Take the point made by Chinn and by Peter S. Fisher of the Iowa Policy Project that the correlation between ALEC’s policies and economic growth is largely negative.

When the ALEC “analysis” is dissected, it becomes clear that its conclusions are faulty, and its policy prescriptions are no more valid. And it is good for Iowa to have Peter Fisher on the case.

Owen-2013-57  Posted by Mike Owen, IPP Executive Director

 

 

*View Peter Fisher’s reports for Good Jobs First on business climate rankings including the ALEC claims:


Reducing Cliff Effects

Changes in child care assistance program could better help lower-income Iowa families meet basic needs.

Reducing Cliff Effects in Iowa Child Care Assistance

Policy brief, 7 pages (PDF)
Appendix
News release

By Peter S. Fisher and Lily French

One of the most significant roadblocks on the path to self-sufficiency for low-wage working parents in Iowa is the cost of child care. The statewide average cost of care in a licensed center for a 2- to 5-year-old was $148 per week in 2013. Yet weekly pay before taxes for someone making $9.00 per hour (well above the minimum wage) is just $360; 41 percent of that pay would go to child care. With a minimum wage job, or with more than one child (or an infant), the percentage is even higher.

Fortunately for those with very low wages Iowa does have a program that pays for all or part of child care for working parents. The bad news is that Iowa has one of the lowest income eligibility ceilings in the country: 145 percent of the federal poverty guideline. In 2013, only seven states had a ceiling lower than Iowa’s; in 30 states (and in parts of three others) the threshold was 165 percent of poverty or higher, including 16 states with a threshold at or above 200 percent.[1] When parents trying to provide for their families get a better job, a pay raise or more hours that pushes family income above 145 percent of poverty, they find themselves worse off instead of better off. Their total family resources fall off a cliff as the child care assistance disappears and they are suddenly left footing the entire bill with only a minor increase in income.

A previous report by the Iowa Policy Project demonstrated how the current operation of Iowa’s Child Care Assistance program creates barriers for low-income parents trying to further their education.[2] Several policy reforms were identified that would make it easier for low-wage workers with children needing child care to raise their earning ability and move closer to self-sufficiency. The authors also showed, in a 2009 report, Strengthening Child Care Assistance in Iowa: The State’s Return on Investment, that expanding eligibility limits in the CCA program would raise earnings and future tax payments of recipients, returning a significant portion of the cost to the state through higher lifetime tax payments.[3] This brief focuses on eligibility ceilings, co-pays, and the cliff effects in Iowa’s CCA program and how they might be reformed.

Basic Needs Budgets for Iowa Families

140310-COL-CCA-T1To illustrate this fundamental problem with the Child Care Assistance Program (CCA), we consider the basic-needs budgets for two families: a single mother with one child age 2 or 3, and a married couple (both working) with two children, one preschool age and one age 6 to 10 (needing care in the summer and before and after school). Table 1 shows the average expenses such a family would face in Iowa, based on the cost of basic needs such as food, rent, utilities, transportation, child care, health care, and clothing in 2013-14.[4] The single parent would need to earn almost $21 an hour to make ends meet without the help of any work support programs or tax credits. For the two-parent, two-earner family, each parent would need to make almost $17 an hour.[5]

The Cliff Effects

The charts below illustrate the various cliff effects that impact a family’s net resources — after-tax wages plus public supports — as earnings increase. The charts assume that the family participates in every possible assistance program: TANF (Temporary Assistance to Needy Families), SNAP (Supplemental Nutrition Assistance Program, formerly Food Stamps), LIHEAP (Low Income Home Energy Assistance Program), Child Care Assistance (CCA) and the federal and state EITC (Earned Income Tax Credit), as well as other credits available.[6] (In fact, this is highly unlikely; for most of these programs only one-third to two-thirds of those eligible actually participate, the exception being the EITC.[7])

Figure 1. The Cliff Effect: How Net Resources Change as Earnings Increase, Statewide Average
Current Law

Single Parent with One Child                                   Married Couple (Both Work) with Two Children

cliffssingle cliffsmarried

 

  
 
Source: The Cost of Living in Iowa, 2014 Edition.

As earnings increase above the minimum wage, the families lose SNAP benefits (at 130 percent of poverty, which is an hourly wage of $9.71 for the single parent), and then switch from Iowa’s Medicaid expansion to premium subsidies under the Affordable Care Act (at 138 percent of poverty).[8] These benefit losses create small cliff effects — $500 to $800. But when the family loses child care assistance, the cliff is huge, because child care costs are huge: The single parent sees net resources fall by $4,890 as CCA disappears; for the married couple the cliff amounts to $8,905.

The single parent with one child will pay about 26 percent of the cost of child care if she earns 144 percent of poverty ($10.75 an hour full time), because the program requires a co-payment once income reaches the poverty level. But when her income rises to 145 percent of poverty, benefits disappear all at once, leaving her with the full cost instead of the previous 26 percent of child care costs.[9] The two-parent family will be responsible for about 17 percent of the cost of child care for their two children (one in all-day care, the other in a before- and-after-school program) if their income is just below the eligibility ceiling. When a small increase in wages or hours worked pushes them to 145 percent of poverty, they will suddenly be responsible for all $11,000 in annual child care costs out of their $34,200 annual income.[10]

The cliff effect and the low ceiling on eligibility for Iowa’s Child Care Assistance Program create a serious disincentive for working families to increase their working hours, accept pay increases or advance to a better paying job. They also create a significant hardship for those who do earn more than the limit despite those disincentives. An increase in the income limit, along with a phase-in of the co-pays, could reduce the cliff effect substantially and push it off to a higher wage level where the family is closer to self-sufficiency and better able to pay for increased child care costs. 

Reducing Cliff Effects and Raising the Eligibility Ceiling

Raising the income eligibility ceiling closer to the average across U.S. states could help many Iowa families who work full time but earn considerably less than what is needed to achieve a basic standard of living. Below we show the effects for our two representative families if the ceiling were raised to 175 percent of poverty, while using the existing co-pay schedule. Under Iowa’s current CCA program, once a family’s income reaches 100 percent of the poverty guideline, a co-pay schedule takes effect, with a “unit fee” that rises with income. The existing schedule continues up to income equal to 200 percent of poverty for parents of children with special needs. We assume that this schedule, with cost sharing that increases (quite gradually) as income rises from 145 to 200 percent of poverty, is used for everyone under the 175 percent eligibility ceiling.[11]

Figure 2. The Cliff Effect: How Net Resources Change as Earnings Increase, State Average
175 Percent Option

Eligibility Ceiling Raised to 175 Percent of Poverty, with Existing Co-pay Schedule

Single Parent with One Child                                   Married Couple (Both Work) with Two Children

cliffssinglemarriedcliffs

 

 

 

 

 

 

The effect of the increase in eligibility to 175 percent of poverty is to increase the wage at which CCA disappears and reduce the size of the cliff somewhat. The single parent can earn up to $13.00 an hour instead of $10.82, a 21 percent increase, and still retain child care assistance. At $13.08, CCA is lost and family resources decline by $4,002 (Figure 2). The cliff is $882 shorter, but still sizable. For the two-parent family, the parents can now each earn $9.90 per hour, a 20 percent increase, without losing eligibility. Just a nickel higher, at $9.95, their net resources suddenly drop by $8,039. Still a sizable cliff, it is $866 lower than under current law, but the family is now in a better position to overcome this loss of assistance because they are earning more.

Making the Cliff Effect Disappear

Increasing the eligibility ceiling while using the existing co-pay system slightly decreases and postpones the cliff effect, but it is far from eliminated. The reasons are twofold: The increase in co-pays as income increases are quite modest and the unit fee applies only to hours of child care for the child in care for the most time. Families with more than one child in care will still face sizable cliffs as they would pay a smaller share of the total cost of care than a family with only one child.

Our final policy simulation, then, alters the unit fee structure for all families with income above 145 percent of poverty (but does not change the co-pay system for those currently eligible). There is only one unit fee based on income alone, not also on the number of children in care, but that fee is applied to the total units of child care for all children in subsidized care, instead of just the units of child care for the child who spent the most time in care. The income eligibility ceiling is raised to 200 percent of poverty to allow a longer and more gradual phaseout of benefits. (For a more detailed description of alternative ways to modify the co-pay schedule, see the appendix.)

The results are shown in Figure 3. The single parent with one child now faces a series of quite small cliffs and continues to receive some assistance up to an hourly wage of $14.95. When the eligibility ceiling is reached, the loss of net resources amounts to only $409. For the married couple with two children in care a cliff still occurs, but at an hourly wage of $11.35. The cliff amounts to just $1,581 compared to the $8,039 cliff in Figure 2.

Figure 3. The Cliff Effect: How Net Resources Change as Earnings Increase, State Average
200 Percent Option

Eligibility Ceiling Raised to 200 Percent of Poverty, Modified Co-pay Schedule

Single Parent with One Child                                   Married Couple (Both Work) with Two Children

figthreesingle140311-CCA-COL-F3b-3pt5

 

 

 

 

 

Conclusions

These simulations illustrate policy choices. If the eligibility ceiling is raised and co-pays increase as income rises above the current ceiling, child care assistance can help families who are still well below the income level needed to support basic needs. Those families between 145 percent and the new ceiling will be better off, and the disincentive effect of the cliff will be reduced. The ideal trade-off between higher benefits for those who would qualify under the new eligibility ceiling, and the size of the cliff when they hit that ceiling, is a matter of judgment. The higher the unit fee increase, the lower the benefits and the smaller the cliff. The lower the increase in co-pays, the greater the benefits for those eligible, but the higher the cliff when they lose that eligibility.

The gradual phaseout of benefits combined with a higher eligibility ceiling would not just eliminate, or nearly eliminate, the cliff effect. It would also allow families to continue to receive some benefits from CCA as their income approaches what is needed to support a family at a reasonable but basic level. Furthermore, it would do so at a much lower cost to the state than simply raising eligibility while leaving in place the current co-pay schedule. Raising eligibility to 200 percent of poverty while adopting something like our modified co-pay schedule would be much less expensive than the same eligibility ceiling with no change in the co-pay schedule.[12]


[1] Karen Schulman and Helen Blank.Pivot Point: State Child Care Assistance Policies, 2013. National Women’s Law Center, Washington, D.C. http://www.nwlc.org/resource/pivot-point-state-child-care-assistance-policies-2013 . In Colorado, Texas and Virginia, the threshold varies across the state, and in some areas exceeds 200 percent of poverty. These three states are not counted among the 16.

[2] Lily French and Peter Fisher. Child’s Play: Creating a Path to the Middle Class. Improving Child Care Assistance Can Facilitate Parent Education. The Iowa Policy Project, November, 2013. Executive summary at: http://www.iowafiscal.org/executive-summary-childs-play-creating-a-path-to-the-middle-class/. Full report at: http://www.iowapolicyproject.org/2013docs/131126-IFP-CCA.pdf

[3] Lily French and Peter Fisher. Strengthening Child Care Assistance in Iowa: The State’s Return on Investment. The Iowa Policy Project, March 2009.  See executive summary at  www.iowapolicyproject.org/2009docs/090909-CCROI-xs-rev.pdf

[4] These examples are drawn from The Cost of Living in Iowa, 2014 Edition, Part One: Basic Needs Budgets, published by the Iowa Policy Project in February, 2014, at http://www.iowapolicyproject.org/2014docs/140226-COL.pdf

[5] The table assumes that the parents have no health benefits from a job, and rely on Medicaid and Hawk-I, or on the premium and cost-share subsidies available under the Affordable Care Act, if eligible. While the availability of health insurance through the employer would lower the basic needs budget somewhat, it would not affect the size of the cliff effects, or the wage levels at which they occur, in the illustrations that follow. The Cost of Living in Iowa, 2014 Edition, has basic family budgets for families with employer sponsored insurance.

[6] Rules for all programs are based on eligibility criteria and benefit levels in effect for Fiscal Year 2014 (including the recent cuts to SNAP), or calendar 2014 in the case of health programs. The availability of health insurance through the employer would lower the basic needs budget somewhat, but would not affect the size of the cliff effects, or the wage levels at which they occur, in the illustrations that follow.

[7] See the report Bridging the Gaps in Iowa, June 2007, at http://www.iowapolicyproject.org/2007docs/070626-BTG_Report.pdf‎

[8] Loss of TANF benefits occurs at a much lower level of earnings – about $10,800 annually, or 70 percent of poverty, for the single parent.

[9] The loss of $5,003 in child care assistance as income rises from $22,400 to $22,500 is offset by the $100 increase in earnings but only trivial increases in other benefits, leaving a loss of net resources of $4,890. The federal child and dependent care credit rises just $10, while the state credit is unchanged because the credit was already maxed out at an income level of $22,400. 

[10] The $9,107 loss in child care assistance as income rises to 145 percent of poverty (from $34,000 to $34,200) is offset by the $200 in greater earnings but tax credits increase only trivially, leaving a net loss of disposable income of $8,905. The federal child and dependent care credit rises $20, but the Iowa credit is unchanged, while gross taxes increase slightly.

[11] Once a family’s income reaches 100 percent of Federal Poverty Guidelines, a co-pay schedule takes effect where families begin to pay part of the cost of child care. The family contribution is based on the number of “units” of child care, with one unit equal to a half day. To determine the family’s contribution to the cost of child care, the units are multiplied by a “unit fee.” The unit fee, and hence the family contribution, increases as household income increases. For a married couple with two children and total income at 125 percent of poverty, for example, the unit fee would be $2.20 for one child in care. The unit fee increases by 25 cents for each additional child in care, up to three. If both children in our example were in child care, then, the family would pay a unit fee of $2.45. The number of units for the child receiving the most hours of care is multiplied by the unit fee to determine the total cost to the family.

[12] As family income rises from 145 to just under 200 percent of poverty, for a family with two children in care the state share of costs under the current unit fee schedule declines from 83 percent to 68 percent (average about 75 percent). Under the alternative schedule it declines from 83 percent to about 8 percent. For a family with one pre-schooler in care, the state share falls from 74 percent to 51 percent as income rises from 145 to 200 percent of poverty under the current schedule, but would fall from 74 percent to near zero in our alternative.

 

2009-LF25464 Lily French is Senior Policy Consultant for the Iowa Policy Project. She is Director of Field Education and a Clinical Assistant Professor in the School of Social Work at the University of Iowa.

2010-PFw5464Peter S. Fisher is Research Director of the nonpartisan Iowa Policy Project. He is Professor Emeritus of Urban and Regional Planning at the University of Iowa. 

We gratefully acknowledge the generous support of the Northwest Area Foundation, the United Way of Central Iowa, Mid-Iowa Health Foundation, United Way of the Quad Cities, United Way of East Central Iowa, United Way of Johnson County, United Way of North Central Iowa, and United Way of Story County. While these funders support the research that went into this report, they may not necessarily agree with policy recommendations that are included. Policy recommendations are solely the perspective of the authors and the Iowa Policy Project.

110929-ifp-newlogo10The Iowa Fiscal Partnership is a joint public policy analysis initiative of two Iowa-based nonpartisan, nonprofit organizations, the Iowa Policy Project and the Child & Family Policy Center. IFP is part of the State Fiscal Analysis Initiative, a network of state-level organizations and the Center on Budget and Policy Priorities to promote sound fiscal policy analysis. IFP work is supported by the Stoneman Family Foundation and the Annie E. Casey Foundation.

State Policy and Economic Growth

Public investments require public funding. And therein lies the rub. A continual diet of tax cuts deprives state and local governments of the ability to adequately fund public services.

IFP Backgrounder

State Policy and Economic Growth

Innovation, Education, Infrastructure: The Things that Matter

PDF (2 pages)

We’re all for building a strong state economy with good jobs. But we get a lot of different answers when we pose the question: “What kinds of state policies are going to get us there?” Increasingly over the past 20 years, the easy answer, and the one that prevails most often, has been “tax cuts.” But what really determines how a state economy grows or declines? Can we really expect state policy to change the course of economic growth?

In the short run, a state is largely at the mercy of national and global economic trends: Its economic structure and resource base will largely determine its economic fortunes. Over the past five years, for example, states with a strong base in oil and natural gas did well in spite of the recession. States heavily invested in industries severely impacted by the global recession suffered greatly. State policy was a minor actor compared to global economic trends.

But that doesn’t mean state policy doesn’t matter. In the longer term, substantial evidence shows that two factors are most important in explaining why some states experience greater growth in per capita income than others: the level of education of the workforce and the rate of innovation and new business formation (with the latter in large measure dependent upon the former).[i] Tax policies, and particularly tax incentives that are specifically geared to promoting business growth, play very small roles and can also distort the free market system by benefiting and subsidizing one activity over another. The quality of a state’s infrastructure also matters — businesses need good roads, reliable water and sewer systems, and public safety. To attract workers we need the kinds of things that make Iowa a place where people want to raise families, including good public services, schools, and recreation opportunities.

Public investments require public funding. And therein lies the rub. A continual diet of tax cuts deprives state and local governments of the ability to adequately fund public services. About three-fifths of the state budget goes to education alone, and education, health, infrastructure and public safety account for a majority of the budgets of local governments.

So what about taxes on business? How much do they matter? When deciding where to locate or expand, a firm will consider a wide range of factors that affect its costs, productivity or sales: access to markets and to suppliers; transportation costs; energy costs; access to a pool of labor with appropriate education and skills; wage rates; health care costs; the quality of schools, recreation opportunities, climate and other amenities important in attracting skilled labor; the quality of state and local government services, such as public safety and infrastructure; and state and local taxes.

State and local business taxes, it turns out, are just a small share of costs. In fact, for the average firm, all state and local taxes paid by businesses together amount to just 1.8 percent of total costs.[ii] The simple fact is this: Changes in tax policy provide very little leverage over the economic decisions of firms. Other cost factors predominate.

It should be no surprise then that scholarly research on the effect of taxes on location decisions of firms provides no consensus. Many find no effect, and those that do often come to contradictory conclusions about which taxes matter and which ones don’t. Among the studies finding some effect, the influence of taxes is generally very small.[iii]

The upshot is that tax cuts and incentives are expensive. They actually change business decisions for only a small share of the firms taking advantage of them; tax cuts and incentives mostly go to subsidize firms for doing what they would have done anyway. In some instances, tax incentives actually create unfair advantages to the recipient firms that compete with existing enterprises within the state  In general, tax cuts and incentives  are simply too expensive to ever pay for themselves. Furthermore, even the limited effectiveness found by some researchers is called into question when you consider that states must balance their budgets. The cuts in services required to finance tax breaks will reduce or even eliminate any gain from the small amount of new economic activity generated. Businesses won’t invest in Iowa if they can’t be sure that the school system will produce the workforce they need in the future, and if they can’t count on a quality infrastructure being maintained.

We should remember how Iowa became the place it is, the place so many love and where they want to raise a family. Generations before us made the right decisions to build schools and roads, to support a public university system that is an engine of research and innovation, and to create safe communities that support families. We cannot afford to weaken these commitments; no one wants to see the state slide toward mediocrity.

A smart approach to state economic policy must begin by recognizing the futility of pursuing a single-minded tax-cutting approach, and by recognizing the importance of a healthy public sector in supporting economic growth. State policy should focus on the fundamental responsibilities of state and local government to provide a quality education from early childhood through graduate school, to build and maintain the roads and other services that our citizens and businesses alike depend upon. We need to stop pretending that we can tax-cut our way to prosperity. To finance ever-expanding tax breaks to businesses by cutting support for education, forcing ever higher tuition and increasing class sizes, is a formula for long-term economic decline.


[i]   See Bauer, Paul W., Mark E. Schweitzer and Scott Shane, “State Growth Empirics: The Long-Run Determinants of State Income Growth,” Federal Reserve Bank of Cleveland Working Paper, May 2006; and Noah Berger and Peter Fisher, A Well-Educated Workforce is Key to State Prosperity, Economic Analysis and Research Network Report, August 22, 2013, at http://www.epi.org/publication/states-education-productivity-growth-foundations/.

[ii]   This is based on data averaged over three years 2005-2007 from two sources: U.S. Internal Revenue Service, Statistics of Income, Integrated Business Data for all U.S. Corporations, partnerships, and non-farm proprietorships, showing total deductions for business costs on tax returns, at http://www.irs.gov/taxstats/bustaxstats/article/0,,id=152029,00.html ; and a 2009 report by the Council on State Taxation, which estimates total state and local taxes paid by businesses, available at http://www.cost.org/Page.aspx?id=69654.

[iii]   See Peter Fisher, Corporate Taxes and State Economic Growth, the Iowa Policy Project, December 2010, revised April 2013, at: www.iowapolicyproject.org/2011docs/110209-IFP-corptaxes.pdf;‎ and Michael Mazerov, Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth: A Reply to the Tax Foundation. Center on Budget and Policy Priorities, April 2013, at www.cbpp.org/files/6-17-13sfp.pdf.

With ALEC, it’s not just ‘Who?’ but ‘What?’ and ‘Why?’

Posted January 10th, 2014 to Blog

Some Iowa legislative leaders are taking issue with claims that all Iowa legislators are members of the American Legislative Exchange Council (ALEC).

See these links:

All of this calls to mind the words of the great comedian Groucho Marx, who is widely quoted:

“I don’t want to belong to any club that will accept people like me as a member.”

Groucho presumably was never a member of ALEC — like many Iowa lawmakers now protesting claims of their inclusion. But regardless of who belongs to ALEC, the bigger issue is whether ALEC belongs at the public policy table.

Iowa Policy Project analysis has refuted the value of legislative initiatives promoted by ALEC, which is essentially a bill mill backed by corporate interests. IPP’s Peter Fisher and the national group Good Jobs First, in their 2012 report “Selling Snake Oil to the States,” showed that states following ALEC proposals were likely to show worse economic results than other states.

As Fisher noted at the time:

“We tested ALEC’s claims against actual economic results. We conclude that eliminating progressive taxes, suppressing wages, and cutting public services are actually a recipe for economic inequality, declining incomes, and undermining public infrastructure and education that really matter for long-term economic growth.”

This recalls another quotation:

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.”

No, that is not the ALEC mission statement. Again, they are words widely attributed to Groucho Marx.

But if the shoe fits ….

Mike OwenPosted by Mike Owen, Executive Director