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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


Flat tax plan legalizes cheating on Iowa taxes

Posted March 11th, 2013 to Blog
Peter Fisher

Peter Fisher

The Iowa House of Representatives will soon take up a bill that would legalize cheating on your Iowa income taxes. While that isn’t the intent, it will certainly be the effect, at least for anyone who has an accountant or who can figure out how to do it on their own.

Officially, the bill is HF3, which would create an alternative flat tax of 4.5 percent. The taxpayer could choose between the current system and the flat rate. If you choose the flat rate, you get a standard deduction but cannot deduct federal income taxes, itemize deductions, or take any credits. But if you currently pay a higher rate than 4.5 percent, and don’t have a lot of deductions or federal income taxes, you might come out ahead picking the alternative flat rate.

To see how this opens the door to massive tax avoidance, you need to understand one important feature of Iowa’s income tax: federal deductibility.

Let’s say you earn $75,000 in Iowa adjusted gross income (AGI) for 2013 and you had $5,000 in federal income taxes deducted from your paycheck during the year. You can deduct the $5,000 from your AGI, leaving you with that much less income to pay tax on. But if you also got a refund check from the federal government in 2013 (because you had too much withheld during 2012, and deducted too much federal tax on your 2012 Iowa return), you have to add that back to your taxable income. This ensures that, over the years, you always end up deducting exactly what you actually paid in federal taxes.

HF3 changes the rules — and here’s how any taxpayer could game the system under HF3. Let’s call it, “Follow the 20,000.”

•  First stop, your W-4. During 2013 you file a W-4 to have five times as much federal income taxes withheld from your paycheck as you really need to. (Or, if you are self-employed, pay quarterly estimated taxes five times what is required.) So when you go to file your 2013 Iowa tax in April 2014, you can deduct $25,000 from your income instead of $5,000. This lowers your Iowa tax bill considerably. If you were in the top 8.98 percent bracket, the extra $20,000 deduction would save you $1,796 on your state income tax. So you choose to file under the current system instead of using the flat rate.

•  Why that’s a bad idea now. Under the current system, your strategy would bite you in the back the next year, because now the $20,000 excess withheld in 2013 comes back as a refund check in 2014. The $20,000 refund check from the feds in 2014 would have to be added back to your 2014 income. You have to pay state tax on it.

•  Flat tax changes the game. If you can take the alternative flat tax for 2014, you will see a huge break. While you would not be able to deduct federal taxes withheld during 2014 under that scheme, you don’t have to add back the $20,000 refund check either.

So for 2014, you pick the flat tax alternative, and pay 4.5 percent on “all” your income — but in the state’s eyes, it’s like that $20,000 never existed.

•  An endless payoff. By doing this, you magically avoid ever paying Iowa income taxes on that $20,000. You didn’t pay tax on it the year it was withheld, because that year you filed the old way and took federal deductibility. And you didn’t pay tax on it the next year, either, because that year you chose the flat tax alternative and didn’t have to add in the $20,000 refund check.

You could argue that if the Legislature makes it legal, it can’t be called cheating. But it sure smells like it. That’s a “tax avoidance” strategy useful only to those in the higher tax brackets.

And that strategy can be avoided if HF3 gets no further in the Iowa House.

Posted by Peter Fisher, Research Director


Fisher: Commercial property taxes — reform first

Posted March 1st, 2013 to IFP in the News, Op-eds

Peter FisherBy Peter S. Fisher, Iowa Policy Project

The annual debate about commercial property taxes in Iowa is under way, and once again the discussion ignores the larger picture — that overall business taxes in Iowa are below average among states — and fails to consider reforms that should be addressed first.

It has become routine practice throughout Iowa, for example, to grant large property tax rebates to new commercial properties through Tax Increment Financing (TIF). Millions of dollars per year flow back to commercial projects, sometimes eliminating nearly all property taxes for 15 or 20 years — which can be to the disadvantage of an existing commercial project not in the TIF.

At the same time, some of Iowa’s largest and most profitable companies are paying no state corporate income tax due to the generosity of Iowa’s business tax credit programs. And many large multistate companies continue to exploit loopholes in Iowa’s corporate tax system to shift profits out of state and avoid paying their share of Iowa’s corporate tax, while instate business competitors cannot.

Rockwell-Collins has not paid any state corporate income tax for at least the last three years, and in fact, received state subsidy payments of as much as $13.8 million last year through the Research Activities Credit, yet it would benefit substantially from the property tax rollbacks and credits being discussed in the Legislature.

At the same time, local services could suffer from the loss of revenue, at least under some proposals. Similarly, Wal-Mart and its stores throughout Iowa, which exist because they are profitable, would receive a reduction on the $12 million in property taxes they currently pay to support state and local services.

Other national companies that use tax loopholes to escape Iowa income taxes would benefit as well. Nearly identical companies doing business in Iowa may have dramatically different property taxes based upon whether they are part of a TIF district, with TIFs often eroding local property taxes and playing one Iowa community off against another.

That violates a primary tax principle of fairness — that taxes should be based on ability to pay, and that those of similar standing and with similar ability to pay should have similar tax responsibilities.

Is Iowa really not competitive for new commercial investment, as some claim, given the ability of cities to reduce their property taxes to almost nothing? Should corporations not paying their share of the corporate income tax benefit from further state largesse in the form of property tax cuts?

TIF reform, caps on the refundability of tax credits, and measures to close the loopholes in Iowa’s corporate tax system (which could be corrected by combined reporting, as is done in the majority of states with corporate income taxes) should be undertaken before any further reduction in business taxes at a cost of cuts to local services.

Recent legislative proposals: In fiscal year 2009, property taxes levied amounted to $4,023 billion, with 31.2 percent, or $1.254 million, coming from commercial and industrial property. During the 2012 session, the Iowa House and Senate passed different versions of commercial and industrial property tax rollbacks — either of which could significantly affect the ability of both state and local governments to address health, education, and safety needs of Iowans (which make up 80 percent of the Iowa budget).

The House version, when fully phased in by FY2022, would have resulted in $486 million less in property tax collections and $237 million less in funding available to local governments, provided the state honored new commitments for $249 million in property tax replacement from state sources. The Senate version, when fully phased in by FY2022, would have resulted in $419 million less in property tax collections and $91 million less in funding available to local governments, provided the state honored new commitments of $328 million in property tax replacement funds from state sources. Since they did not reach agreement, neither version was enacted into law, but these issues are again before the General Assembly.

Iowa’s business taxes already are low. When one considers the whole range of state and local taxes that fall on businesses, Iowa is a low-tax state. In a report on overall taxes, including property taxes, paid by businesses, the nationally recognized accounting firm of Ernst and Young recently showed that only 15 states taxed businesses at a lower rate than Iowa as a percent of private-sector GDP.

Commercial property tax break will spur little or no growth. A state or local government’s tax rate — be it corporate income or commercial property or the combination of all taxes on business — is a tiny portion of a business’ overall costs. Taken together, state and local taxes on business are, on average, only about 1.8 percent of total business costs. The commercial property tax by itself would be an even tinier fraction of a business’ overall costs. The notion that cutting commercial property taxes further by reducing assessments will bring in new economic activity and new revenue is a pipe dream.

If Iowa is to make changes in its property tax treatment of commercial and industrial property, the first thing it should do is look to finance the cost of these changes through closing existing tax loopholes and subsidies. There are many provisions within Iowa’s tax code that are designed to stimulate economic activity but also substantially erode overall tax collections, often to the benefit of very narrow business interests. Because these credits are part of the tax code, they are not subject to annual appropriation or review. Before lawmakers consider changes to commercial and industrial property taxes or to corporate or individual income taxes, they need to review and consider reforms to and eliminations of special business tax exemptions and credits.

 

Peter Fisher is research director of the Iowa Policy Project, part of the Iowa Fiscal Partnership, a joint public policy research and analysis initiative of IPP in Iowa City and another nonpartisan, nonprofit organization, the Child & Family Policy Center in Des Moines.

This guest opinion ran in the March 1, 2013, Iowa City Press Citizen.

Fisher: Heightened concern about business tax incentives

Posted February 24th, 2013 to Economic Development, IFP in the News, Op-eds

Peter FisherBy Peter Fisher, Iowa Policy Project

Headlines in last weekend’s editions of The Gazette say so much:
•  “State leaders didn’t do their homework” (Feb. 16 column by Jennifer Hemmingsen).
•  “State’s business lures don’t measure the net catch” (Feb. 17 Gazette Editorial Board editorial).
•  “Incentive cash down the drain?” (Feb. 17 front-page news story).

This trifecta is all the more disturbing when you realize the three stories focused on different issues with Iowa’s economic development programs.

The first was a glaring lack of “due diligence” by state officials in offering the biggest subsidy package in state history to the Egyptian company Orascom that, it turns out, has an affiliated firm under the cloud of fraud accusations by the U.S. government.

The others refer to the need to better establish what taxpayers are getting in return for their generosity to corporations, and to an investigation showing weaknesses in the state’s ability to recover subsidies from companies that don’t hold up their end of a development deal.

When you add in a fourth issue — the disclosure about more than $40 million in annual state giveaways to giant companies under the guise of stimulating research — you can see we have problems with accountability in Iowa.

The Research Activities Credit is an example of a business spending program crying out for reform. Designed in the 1980s to spark small startup operations, its primary beneficiaries are very large and profitable companies.

For each of the last three years, the Department of Revenue reports that Rockwell Collins, Deere & Co., Dupont, John Deere Construction and Monsanto have been the top recipients of the “credit.” In those three years, the state has sent more than $120 million to corporations in direct taxpayer subsidies, above the elimination of any corporate taxes the beneficiary corporations would have owed, at the expense of other taxpayers.

To this list could be added the film tax credit scandal in 2010 and the Iowa Fund of Funds debacle last fall.

Unfortunately, Iowans are left without much critical information needed to understand these tax provisions, who benefits from them and what Iowans receive as a result. If lawmakers are going to continue these tax provisions or enact new ones, they need to put in place much more transparency and accountability than we have currently.

We expect and receive that information from any public agency that spends state money. If we had that information on tax expenditures, we could make reasonable evaluations of whether the public was getting a return, whether dollars were spent with a public purpose, whether it was creating new economic activity.

Instead of calls for reform from the Branstad administration and the General Assembly, we see new proposals floated for fewer restrictions on corporate tax credits. Gov. Terry Branstad has proposed raising the cap that limits a select group of business tax credits from $120 million to $185 million a year.

Rather than finding more ways to give money away, the first order of business in the General Assembly should be to ensure that existing tax credits achieve the public goals for which they are intended. Lawmakers need to be stewards of the state treasury, and this includes tax expenditures every bit as much as appropriations of funds.

 

Peter S. Fisher is research director of the Iowa Policy Project and co-director of the Iowa Fiscal Partnership. Reports on the Research Activities Credit and other corporate tax subsidy programs are available at www.iowafiscal.org. Comments: iowapolicy@gmail.com

 This guest opinion appeared in The Gazette, Cedar Rapids, on February 24, 2013.

ALEC’s ‘Tax Myths Debunked’ Misses the Mark

Posted February 11th, 2013 to Budget, Corporate Taxes, Taxes

3-page PDF of this report

By Peter Fisher

The American Legislative Exchange Council has for several years attempted to provide factual underpinnings for its right-wing policy agenda through an annual publication called Rich States, Poor States. This report and similar ALEC documents have come under increasing attack in recent years for their shoddy research methods and misleading conclusions. ALEC has now struck back at its critics in a report by Eric Fruits and Randall Pozdena called Tax Myths Debunked.[i] A portion of that document is devoted to research released last November by Good Jobs First and the Iowa Policy Project in the report Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity.[ii] Some of the key findings in that report were released in the summer of 2012 in a short piece called The Doctor is Out to Lunch.[iii] It is the latter piece that is referenced in Tax Myths Debunked rather than the full research report; we refer herein, however, to the full document and use its shorthand title, Selling Snake Oil. The full report was known to ALEC well before Tax Myths was released.[iv]

The first criticism leveled in Tax Myths is directed at an analysis in Selling Snake Oil of the factors leading to economic growth and rising incomes among the states between 2007 and 2012. In that analysis we argued that state economic structure — the composition of a state’s economy — is likely to play an important role in the short run in determining how well the economy fares; states more heavily invested in 2007 in sectors poised to grow in the succeeding five years would be expected to do better than states with a concentration of jobs in sectors that would be hit hard by the recession. Thus it was important to control for economic structure in a statistical analysis that attempts to identify whether the policy prescriptions of ALEC performed as advertised, leading to growth and prosperity. ALEC, in Tax Myths, appears to have completely misunderstood what was done in our analysis; their criticism seems to be based on the assumption that our model was predicting changes in the share of employment by sector. Instead we were simply using 2007 economic structure — measured by employment shares — to predict rates of growth in overall state GDP, employment, and personal income. Their criticisms make no sense and are completely off base; 2012 state GDP cannot be a cause of 2007 economic structure, which is the circularity they argue undermines our analysis.

Second, they argue that economists have found a strong relationship between tax policy and economic health, and cite two pieces of research in support. In Selling Snake Oil, we devote several paragraphs to a discussion of the many reviews of dozens of research articles over the past 30 years that have led to the conclusion that business taxes have, at best, a small effect on business location decisions. In our piece, we looked at the consensus among a large number of economists who have examined this question; in Tax Myths, they found two that supported their position and ignored the rest.

The third criticism is directed at several scatter plots and associated correlations that were presented in Selling Snake Oil.  In those charts we were illustrating how states that were ranked high or low by ALEC in the first edition of Rich States, Poor States in 2007 actually performed in the time since then. Did the states that ALEC ranked high on their Economic Outlook Ranking (EOR) actually perform better than others? Since all ALEC provided was the state rankings (not an index number showing their relative strength or weakness), we correlated those rankings with the measures of performance that ALEC emphasizes: growth in GDP, employment, and income. ALEC argues a technical point here: The formula used to calculate the correlation between two continuous variables (the Pearson coefficient) is different from the formula used to calculate the correlation between two rankings (the Spearman coefficient). We had one ranked variable (the EOR), and one continuous variable, and used the Pearson coefficient.

130211-table1To respond to this criticism, we converted all of the performance variables to ranks first, and then calculated the Spearman coefficient. The conclusions were the same (Table 1). Where there was no statistically significant relation using the Pearson formula (as was the case when we looked at the EOR as a predictor of growth in GDP or jobs), there was also no significant relation using the Spearman. Where there was a statistically significant and negative relation (high ranked states have lower per capita and median family incomes) using the Pearson measure, the same result occurred with the Spearman. In only one instance did results change: Our original analysis showed a negative but not statistically significant relation between EOR and the growth in state revenues. The analysis substituting the state rank in revenue growth and using the Spearman coefficient found a negative effect as well, but this time the effect was stronger and statistically significant.

Finally, Tax Myths presents an alternative to the analyses in Selling Snake Oil, correlating the state EOR each year with the June value of the “state coincident indices” published monthly by the Federal Reserve Bank of Philadelphia for each state. The coincident indices are based on four measures of the health of the state economy: non-farm employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements. ALEC found a strong correlation between a state’s EOR and the value of the coincident index.

The state coincident indices are designed for tracking the course of a state’s economy over time — whether it is sliding into recession or on a path to recovery — and are pegged to a value of 100 for every state as of 1992. They are used to compare states, but only in terms of the changes in the index over time. So the value of the index as of 2008 is a measure of that state’s growth rate from 1992 to 2008, since every state started at 100. However, a high value for state X in 2008 does not mean that state X has a healthier economy in some sense than state Y with a lower value in 2008, because state Y could have started out with a much higher level of prosperity in 1992 and still have higher incomes and wages than state X in 2008, despite growing more slowly. Furthermore, the correlations performed by Fruits and Pozdena are taken as evidence that ALEC policies, as represented by EOR, cause economic health, but they have done it backwards, in effect trying to demonstrate that conformance to ALEC policies in 2008 caused states to grow more rapidly from 1992 to 2008! So why didn’t they look at the policies in place as of 2008 and see if they predicted economic growth from 2008 to 2012? The answer is, because the correlations between the EOR in 2008 and changes in the state coincident index subsequent to that are near zero. This is not the result they were looking for.

In Selling Snake Oil, we argued that a more sophisticated approach to identifying the effects of a state’s EOR would entail a statistical analysis that controlled for economic structure, as described earlier.  In fact, a Philadelphia Federal Reserve Bank economist in an article about the state coincident index explains how state economic structure is an important determinant of the path of the state economy, as measured by changes in that index over time.[v] We decided to see how the coincident index measure of economic performance fared in our regression model. So we used our 2007 economic structure variables, along with either the EOR or several key measures that are components of the EOR, to predict the rate of improvement in a state’s coincident index from 2007 to 2012. The results were much the same as our previous analysis, using growth in GDP, employment, or income as the performance measures. In other words, when state economic structure is controlled for, none of the ALEC policy variables, including the EOR, had a statistically significant effect on the rate of improvement in the state’s economy over this period.

In sum, nothing in Tax Myths actually undercuts any of the analyses or conclusions in Selling Snake Oil. In fact the authors’ misinterpretation of our use of economic structure variables and misuse of the state coincident indices serves only to further confirm the shoddiness of the research sponsored by ALEC.



[i] Eric Fruits and Randall J. Pozdena, “Tax Myths Debunked.” American Legislative Exchange Council, 2013. http://www.alec.org/publications/tax-myths-debunked/

[ii] Peter Fisher with Greg LeRoy and Philip Mattera, “Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity.” Good Jobs First and the Iowa Policy Project, November 2012. http://www.iowapolicyproject.org/2012docs/121128-snakeoiltothestates.pdf

[iii] Peter Fisher, “The Doctor is Out to Lunch: ALEC’s Recommendations Wrong Prescription for State Prosperity.” Iowa Policy Project, July 24, 2012. http://www.iowapolicyproject.org/2012Research/120724-rsps.html

[iv] The author of the ALEC report evaluated by the “Selling Snake Oil” report was quoted in a news story the day of its release, November 28, 2012, by Mike Wiser of the Quad-City Times, Davenport, Iowa. http://qctimes.com/news/local/report-iowa-tax-policy-might-hurt-state-economy/article_6f578494-39d5-11e2-9519-0019bb2963f4.html

[v] Theodore Crone, “What a New Set of Indexes Tells Us About State and National Business Cycles.” Federal Reserve Bank of Philadelphia, Business Review Q1 2006. http://www.philadelphiafed.org/research-and-data/publications/business-review/2006/q1/Q1_06_NewIndexes.pdf

 

Peter Fisher is Research Director of the Iowa Policy Project (IPP), a nonpartisan, nonprofit organization that engages the public in an informed discussion of policy alternatives by providing fact-based analysis of public policy issues.

Fisher holds a Ph.D. in economics from the University of Wisconsin-Madison and is professor emeritus of Urban and Regional Planning at the University of Iowa in Iowa City. He is a national expert on public finance and has served as a consultant to the Iowa Department of Economic Development, the State of Ohio, and the Iowa Business Council. His reports are regularly published in State Tax Notes and refereed journals. His book Grading Places: What Do the Business Climate Rankings Really Tell Us? was published by the Economic Policy Institute in 2005.

 

Remaking ‘Blazing Saddles’

Posted December 13th, 2012 to Blog
Peter Fisher

Peter Fisher

Some of the arguments against raising tax rates on the richest 2 percent of Americans back to the level that prevailed during the boom years of the 1990s bring to mind Mel Brooks’ classic, Blazing Saddles. In the film, new Sheriff Bart is surrounded by an angry mob. He draws his gun, points it at his own head and warns he’ll shoot if someone makes a move. The mob freezes and Bart escapes to safety.

In the current remake of the film, Bart is being played by the wealthy businessmen claiming they will have to lay off workers if we raise the tax rate on their profits by 3.6 percentage points.

We can reasonably assume those workers are currently productive, earning enough for the owner to cover their wages and add something to the bottom line. If not, they would have been laid off long ago. So these owners would have us believe that an increase in the tax on profits would lead them to lay off these productive workers. That, in turn, would mean the business is producing less, earning less profit before taxes.

So the owners are actually saying, “If you raise my taxes, I will show you a thing or two — I’ll deliberately sabotage my business so you have less profit to tax.”

A business owner whose objective is to maximize after-tax profits will always be better off producing more, with more workers, and earning more before-tax profit, no matter what percent of those profits end up going to pay income taxes. On the other hand, making a political point may be so important to these owners that they are willing to shoot themselves in the foot, if not the head, to do it. If they are rich enough to afford that symbolic gesture, I guess we can’t stop them.

Fortunately, in the remake of Blazing Saddles, it appears that the angry mob is ready to call their bluff. They recognize that the “job-killing tax increase” is no such thing. It is simply an effort to reclaim for the average American a share of the increased wealth generated by workers in this economy in recent years that has been captured almost entirely by the richest among us.

Posted by Peter Fisher, Research Director


Remaking ‘Blazing Saddles’

Posted December 13th, 2012 to Blog
Peter Fisher

Peter Fisher

Some of the arguments against raising tax rates on the richest 2 percent of Americans back to the level that prevailed during the boom years of the 1990s bring to mind Mel Brooks’ classic, Blazing Saddles. In the film, new Sheriff Bart is surrounded by an angry mob. He draws his gun, points it at his own head and warns he’ll shoot if someone makes a move. The mob freezes and Bart escapes to safety.

In the current remake of the film, Bart is being played by the wealthy businessmen claiming they will have to lay off workers if we raise the tax rate on their profits by 3.6 percentage points.

We can reasonably assume those workers are currently productive, earning enough for the owner to cover their wages and add something to the bottom line. If not, they would have been laid off long ago. So these owners would have us believe that an increase in the tax on profits would lead them to lay off these productive workers. That, in turn, would mean the business is producing less, earning less profit before taxes.

So the owners are actually saying, “If you raise my taxes, I will show you a thing or two — I’ll deliberately sabotage my business so you have less profit to tax.”

A business owner whose objective is to maximize after-tax profits will always be better off producing more, with more workers, and earning more before-tax profit, no matter what percent of those profits end up going to pay income taxes. On the other hand, making a political point may be so important to these owners that they are willing to shoot themselves in the foot, if not the head, to do it. If they are rich enough to afford that symbolic gesture, I guess we can’t stop them.

Fortunately, in the remake of Blazing Saddles, it appears that the angry mob is ready to call their bluff. They recognize that the “job-killing tax increase” is no such thing. It is simply an effort to reclaim for the average American a share of the increased wealth generated by workers in this economy in recent years that has been captured almost entirely by the richest among us.

Posted by Peter Fisher, Research Director


States should beware ALEC-brand snake oil

Posted November 29th, 2012 to Blog

Peter Fisher

Legislative sessions will be starting across the country after the first of the year, and with them, some very bad ideas for public policy.

The purveyor of many poor prescriptions is a very influential right-wing organization, the American Legislative Exchange Council, known as ALEC. The organization promotes policies to cut taxes and regulations in the disguise of promoting economic growth, but what they really do is reduce services, opportunity and accountability.

In short, the ALEC medicine show is a prescription for poor results, and states should beware.

Our new report, “Selling Snake Oil to the States,” examines ALEC’s proposals and the misinformed, primitive methodology behind the study that supports them. The new report, a joint project of the Iowa Policy Project in Iowa City and Good Jobs First in Washington, D.C., illustrates how ALEC’s prescriptions really offer stagnation and wage suppression.

In fact, we find that since ALEC first published its annual “Rich States, Poor States” study with its Economic Outlook Ranking in 2007, states that were rated better have actually done worse economically.

Find “Selling Snake Oil to the States” at http://www.goodjobsfirst.org/snakeoiltothestates.

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.

ALEC’s rankings are based on arguments and evidence that range from deeply flawed to nonexistent, consistently ignoring decades of peer-reviewed academic research.

What we know from research is that the composition of a state’s economy — whether it has disproportionate shares of high-growth or low-growth industries — is a far better predictor of a state’s relative success over the past five years. Public policy makers need to stick to the basics and recognize that public services that benefit all employers.

Posted by Peter Fisher, Research Director