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Posts tagged tax breaks

Protect Iowa taxpayers from bad spin

Posted August 30th, 2017 to Blog

“Protecting Iowa’s taxpayers,” reads the headline on the newspaper column, but the column contradicts that.

On the pages of major state newspapers this week, Iowans for Tax Relief (ITR) is offering its predictable and tired promotion of tax and spending limitations that are neither necessary nor fair.

Instead of protecting taxpayers who live in Iowa and do business here, these gimmicky limitations promote an ideological agenda that fails to offer prosperity — ask Kansas — and is a poor solution to imagined problems invented by its authors.

The limits advocated by ITR never are necessary or fair, but this is especially so where we see K-12 school spending held below needs, where higher-education spending is cut and tuitions raised, and where worldwide corporate giants are taking bites out of Iowa millions of dollars at a time — over $200 million in the case of Apple last week.

By all means, let’s protect taxpayers from thumb-on-the-scale rules that give a minority viewpoint a decided and sometimes insurmountable advantage over the majority. The big money put behind these ideas make elections less meaningful, and erode Iowans’ ability to govern themselves.

The real path to prosperity for Iowa is a high-road path that rests upon sensible investments in education and public infrastructure that accommodates commerce and sets a level playing field for business and individuals. It means promoting better pay to keep and attract workers who want to raise their families here, and sustaining critical services.

Time and time again, we and others have shown irrefutably that Iowa is a low-tax and low-wage state. We already are “competitive” to the small degree that taxes play a role in business location decisions; even conservative analysts such as Anderson Economic Group and Ernst & Young put Iowa in the middle of the pack on business taxes.

Suffice it to say, you are being peddled a load of garbage by the far right and the privileged, who take what they can from our public structures and policies, and attempt to deny others not only public services, but also a say in the funding of programs that promote opportunity and prosperity for all.

The same suppression mindset prevailed in the Iowa Legislature in 2017 as a majority bullied public workers and decimated workers’ rights. Now they are taking on tax policy in 2018, plus the possibility of new assaults on retirement security and renewed neglect of our natural assets of air and water.

Shake your head at the headlines, throw a shoe through the TV if you must, but only by engaging these issues at every step of the political process will we turn Iowa back from our low-road course.

This is the battle of the 21st century. We are living it. May we survive it.

Mike Owen, executive director of the nonpartisan Iowa Policy Project

mikeowen@iowapolicyproject.org


Closing the books — why real math matters

Posted June 20th, 2017 to Blog

Or: How Governor Branstad claimed to reach his jobs goal but did not come close

As it all turned out, the job-growth goal set by former Governor Terry Branstad was at best ambitious, and never realistic.

With four previous terms behind him, and 12 years out of office, Branstad came back in 2010 with a goal of 200,000 new jobs in five years.



Nothing wrong with setting lofty goals. The biggest problem with this one was the way the longtime Governor decided to measure progress toward it. If the goal was never realistic, the counting method was never math.

Iowa’s economy produced 106,900 new jobs — the net job increase — through the Governor’s second round in office.

As late as April, the last jobs report released in Governor Branstad’s tenure, the official report from Iowa Workforce Development bore an extra line, ordered by someone, for “Gross Over-the-month Employment Gains,” from January 2011. And that line would, magically, put the state over the 200,000 mark — a year late, but more on that later.

There was no explanation with the report on how this special line was computed, but analysis showed the administration cherry-picked job gains to come up with the “gross” figure. Job categories that showed a loss in a given month were simply ignored.

It was as if a business reported its sales but not its expenses, or a football team counted its own touchdowns but not those it gave up. The number, then, was literally meaningless as an indicator of anything happening in the economy.
 

Last week, IWD released its first report on monthly job numbers since Governor Kim Reynolds took office, and the “gross” gains line was gone from the official spreadsheet.

So, for the sake at least of history, a little context:
— Through the five years of the Governor’s goal, Iowa produced 92,100 new jobs.

— Through the end of the Governor’s tenure, Iowa produced 106,900 new jobs.

In fact, we didn’t reach 200,000 under even the Governor’s counting gimmick until January of this year, a year late. Meeting the goal would have required 60 months averaging over 3,300 net new jobs a month. Instead, we have seen far less:



The slow pace of recovery should not have been a surprise to anyone. Iowa and the nation had just come out of a shorter and less severe recession in 2001. The pace of that recovery — up until the Great Recession hit — was quite similar to what we have seen over the past six years before even the latest pace slowed down.

The actual job numbers and what they may illustrate remain more important than Governor Branstad’s spin on them. It would be a mistake to devote undue further attention to the fake numbers.
Likewise, it would be a mistake to attribute any general job trends — positive or negative, even legitimately derived with actual math — principally to state efforts. Much larger forces are at work. Plus, overselling the state role feeds poor policy choices, namely to sell expensive and unaccountable tax breaks, supposedly to create jobs, at the expense of the public services that make a strong business environment possible and make our state one where people want to raise families.
Iowa needs more jobs and better jobs. To understand whether we’re getting them
requires responsible treatment of data, and honest debate with it.
owen-2013-57Posted by Mike Owen, executive director of the Iowa Policy Project

Rosy forecasts bring thorny budgets

Capitol-DSC_0119-7inA memo from the Legislative Services Agency (LSA) indicates a higher-than-anticipated cost of a special-interest sales-tax break primarily for manufacturers.

We could not afford it when Governor Terry Branstad attempted to implement it by rule in 2015, or when a scaled-back version passed in 2016, and we cannot afford it now.

But it appears likely that the new break is at least part of the reason sales-and-use taxes are flattening out, putting fresh pressure on the budget even after FY2017 cuts and continued reliance of state policy makers to push tax breaks that divert millions from critical services such as education.

There is great irony in this report coming as Governor Branstad was turning over the keys to Kim Reynolds, especially given this comment in the LSA piece by senior fiscal legislative analyst Jeff Robinson:

One potential explanation for the recent sales/use tax downturn is an underestimated fiscal impact of the sales/use tax exemption for manufacturing supplies and replacement parts. For proposed legislation in previous years, estimates of the impact of exempting manufacturing supplies and replacement parts from the State sales/use tax had been much higher.

As Robinson suggests, there was ample reason to think the cost would be “much higher” and that should have been taken into account in revenue estimates and crafting the FY17 budget.

Likewise, the four of us were present in the Iowa House chamber in 1983 when new Governor Branstad proposed a sales-tax increase, just a few months after bludgeoning his election opponent, Roxanne Conlin, with a “tax and spend” refrain. The new Governor inherited a budget shortfall right out of the gate, a product of overly rosy revenue projections by the Ray administration.

To be fair to Governor Ray, the farm crisis was unfolding back then, and the landscape was not necessarily as clear.

This time, the continuing revenue problem is due principally to out-of-control tax giveaways, which have accelerated long since Governor Ray left office. Just this one perk for manufacturing was expected to cost $21.3 million from the state budget.* However, the latest LSA analysis suggests, the cost to the state may be two or three times what was expected.

Odd that Governor Branstad, burned so early in his tenure by optimistic revenue estimates, would let this happen to his very own successor as she took office. Maybe he just forgot.

We did not forget.

 

* That cost figure grows to $25.6 million when including the dedicated revenue for local school infrastructure, and $29.2 million when including lost local-option tax revenue.

Posted by IPP Executive Director Mike Owen, IPP Founder David Osterberg, IPP Board President Janet Carl, and IPP Board Member Lyle Krewson. Owen was the Statehouse correspondent for the Quad-City Times and Osterberg, Carl and Krewson were state representatives from Mount Vernon, Grinnell and Urbandale, respectively — in 1983.


Kansans deliver tax-cut cautions for Iowans

Posted February 15th, 2017 to Blog

As part of Moral Mondays at the Iowa State Capitol, Iowa advocates and lawmakers this week heard a cautionary tale from Annie McKay of Kansas Action for Children and Duane Goossen of the Kansas Center for Economic Growth.

Annie McKay, president and CEO of Kansas Action for Children, speaks at the Moral Mondays Iowa event this week at the Iowa State Capitol.
Annie McKay, president and CEO of Kansas Action for Children, speaks at the Moral Mondays Iowa event this week at the Iowa State Capitol.

At a time when Iowa lawmakers are considering significant tax cuts, McKay and Goossen, who analyze and promote child policies and conduct analysis of the Kansas state budget, traveled to Des Moines to outline the effects of what has become known as the “Kansas experiment,” a set of draconian tax cuts passed in 2012.

At that time, Goossen recounted, Gov. Sam Brownback promised the cuts would bring an economic boom to the state, with rising employment and personal income. People would move to Kansas. It would be, the governor said, “like a shot of adrenaline into the heart of Kansas economy.”

But, five years on, the promised economic boom has not arrived.

“Business tax cuts were supposed to be magic, they were supposed to spur job growth — and they didn’t,” said Goossen, a former Republican state legislator and state budget director under three governors.

In fact, since 2012 job growth in Kansas has lagged behind its Midwestern neighbors, including Iowa. The state has, however, seen years of revenue shortfalls and damaging budget cuts, eroding critical public services like K-12 and higher education, human services, public safety and highway construction.

In this period, the state has depleted its budget reserves, robbed its highway fund to shore up its general fund, borrowed money and deferred payments in order to balance the budget. Kansas has experienced three credit downgrades. Lawmakers have raised the sales tax twice and repealed tax credits that helped low-income families make ends meet.  (In fact, the bottom 40 percent of Kansans actually pays more in taxes today than before the 2012 tax cuts went into effect.)

These actions have real impacts. Last year, Kansas saw the third biggest drop in child well-being among states as documented by Kids Count. Its 3rd grade reading proficiency ranking fell from 13th to 30th.

“What we did in Kansas – there is no proof behind it,” McKay said.

Iowans today are better positioned to stand up to damaging tax cuts than their Kansas counterparts were five years ago, McKay said. “We did not that have same people power in 2012.” She advised Iowa advocates to make crystal clear how all the issues currently generating widespread interest — education, health and water quality among them — are linked to the state’s ability to raise adequate revenue.

“You are ahead of where we were,” she said. “You have the opportunity to not be like Kansas.”

 

annedischer5464Posted by Anne Discher, interim executive director of the Child & Family Policy Center (CFPC).
adischer@cfpciowa.org

McKay and Goossen’s talk Feb. 13 at the Iowa State Capitol was coordinated by the Iowa Fiscal Partnership (a joint effort of CFPC and the Iowa Policy Project) and supported by the Center on Budget and Policy Priorities. CFPC, through its Every Child Counts initiative, is one of more than two dozen sponsors of Moral Mondays, a weekly gathering during session to highlight issues that advance Iowa values like equality, fairness and justice.


IFP End of Session Statement

Four months we won’t get back

IOWA CITY, Iowa — The Iowa Fiscal Partnership today issued this statement on the conclusion of the 2016 session of the Iowa General Assembly:

When the 2016 session began, Iowa faced a host of critical challenges: polluted water, slow job growth, a tax system skewed to benefit those at the top and those with strong lobbyists, and a wavering commitment to investments in education and services for low- and moderate-income working families — those most vulnerable in our state. There were fresh uncertainties about health care due to plans to privatize Medicaid.

This session has done little to ease any of those concerns, and nothing to meet those challenges for the long term. Public policy stands tall when it supports long-held, long-promoted values of our state. Education and a clean environment are among those. Neither had victories of note.

Work supports and wages
• Iowa remains one of only 21 states that has refused to raise the minimum wage above the spartan $7.25 per hour. Iowa’s minimum wage has remained at $7.25 longer than any state minimum wage — over eight years — and likely is guaranteed to reach the nine-year mark before the Legislature returns to the Capitol.
More: “Iowa: Once a Leader, Now a Laggard on Minimum Wage,” updated March 2016
http://www.iowapolicyproject.org/2016docs/160304-minwage-FS12.pdf
• Once again, lawmakers left in place Iowa’s severe eligibility limits for child care assistance, which can make it more costly for families to take a higher paying job.
More: “Reducing Cliff Effects in Iowa Child Care Assistance,” March 2014
http://www.iowapolicyproject.org/2014docs/140313-CCA-cliffs.pdf
• No action was taken to combat the problem of wage theft.
More: “Stolen Chances: Low-Wage Work and Wage Theft in Iowa,” September 2015
http://www.iowapolicyproject.org/2015Research/150902-wagetheft-xs.html

Education School funding remains too little and too late. Lawmakers in the House and Senate set State Supplemental Aid (SSA), which governs growth in per-pupil spending in Iowa schools, at 2.25 percent for Fiscal Year 2017 — a compromise below even the Governor’s meager proposal of 2.45 percent. With this, average per-pupil spending growth in Iowa will have been below 2 percent for seven years. School districts have already begun reducing teaching staff to cope with this low funding level, while property tax increases will be necessary in several districts that have declining enrollment. Money existed in the treasury to do much better.

In addition, the Legislature — which acted on FY2017 SSA about 13 months past the legal deadline — chose once again to violate the law by failing to set funding for the following budget year. SSA for Fiscal Year 2018 was to have been set by mid-February.
More: “Sensible context on school aid growth” blog post, March 29, 2016
https://iowapolicypoints.org/2016/03/29/sensible-context-on-school-aid-growth/

Water quality and school infrastructure
Another legislative session has come and gone without agreement on a sustainable strategy to improve Iowa’s water quality, which is threatened by agricultural pollution — either with regulation, funding or a combination of both. Iowa voters gave lawmakers a roadmap to a funding solution in 2010 with a constitutional amendment designating the next 3/8-cent sales tax increase to go toward land and water protection and enhancement. Neither the Governor nor a majority of legislators has taken that step, nor have they taken it to a vote even though the amendment passed the Legislature in two consecutive general assemblies before it went to the voters. Other proposals offered during the session would have diverted funds from existing and designated uses toward water quality, but not in sufficient amounts or without damaging other services.
More: “To fund water solutions, why not the obvious? Tax pollutants,” blog post, March 7, 2016
https://iowapolicypoints.org/2016/03/07/to-fund-water-solutions-why-not-the-obvious-tax-pollutants/

Continued state spending for business
The Governor’s unilateral action to expand a sales tax exemption for manufacturers was left in place; though scaled back, it will still take $21 million from next year’s budget at a time when schools and universities are scrapping for every dollar. Moreover, the exemption was combined with a more costly decision to “couple” with federal tax code changes for the current budget year.  The coupling cost in the current year, $98 million, was not budgeted by the Governor and Legislature, has no value to incentivize investment, and comes at a time other identified state priorities have seen funding held down or reduced on grounds that revenue is not available. The Legislature left open the question of whether coupling will continue next year, and thus uncertainties on new unbudgeted costs. Iowa policy makers are too quick to provide tax breaks without finding ways to fund our traditional priorities.
More: “High Cost of Conformity,” IFP Policy Brief, March 2, 2016
http://www.iowafiscal.org/high-cost-of-conformity/

Business tax credits have become an increasing share of state spending and are rising in cost at a faster pace than priorities in education and human services. Iowa taxpayers will see more of their dollars going to business subsidies next year, with little or no accountability for the public return on investment.

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

State aid up 13 percent — for business breaks

Posted January 28th, 2016 to Blog

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

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

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

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

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

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

Basic RGB

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

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

160108-IFP-Budget-Fig2FB

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

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

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

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

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

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

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

Basic RGB

By Peter Fisher

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

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

Business tax credits create part of the problem

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

160107-budget-T1

160107-IFP-budgetF1

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

New tax breaks have worsened the problem

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

160108-IFP-Budget-Fig2

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

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

Iowa business taxes are already quite competitive

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

State and local taxes have little effect on business location decisions

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

Tax breaks erode support for public investments in our future

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

Fixing Iowa’s problem with unsustainable revenues

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

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




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

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

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

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

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

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

 

 

 

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

 

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.

The $54 question

Posted November 25th, 2013 to Blog

Breaking news out of Des Moines is that many Iowa taxpayers will be eligible for an extra $54 tax credit.

This is the result of one of the most short-sighted pieces of legislation passed by the Iowa General Assembly in recent years. Lawmakers created what they called the “Taxpayers Trust Fund,” which we should call the “Giveaway Slush Fund.” It’s a pot of money to dole out to taxpayers and boast about at election time. Chances are, the “givers” won’t give you the whole picture.

Their game is an illusion, a political parlor trick: Hold down funding for key priorities, such as K-12 education, or universities, and then when revenues create a surplus, call it an “overpayment” by taxpayers.

Does anyone really believe their spin? The $120 million to be given away represents easily $120 million in services that could have been provided. For K-12 alone, a little over half of it could have been used this year to fully pay the state’s share of allowable growth at the 4 percent level lawmakers authorized. Instead, state funding only supports half of the state share.

By shortchanging school districts with funding for only 2 percent allowable growth this year despite strong revenues, lawmakers compounded a trend of squirreling away big dollars while claiming poverty. This way, they have given themselves $120 million to spend on dessert — the Giveaway Slush Fund — by choosing not to pay the state’s share of the bill for the meat and potatoes: school aid.

One Iowa columnist who has seen through this is The Des Moines Register’s Rekha Basu, who noted Sunday: “Doling out money piecemeal is a gimmick that may bring smiles to some faces but it can’t take the place of sound and consequential actions.” She’s right.

Is it really worth it to you to receive the $54, instead of putting adequate and appropriate funding back into our education system? Or cleaner water? Or safer streets? Or, well, you get the idea.

Give me a break. On second thought, don’t.

Mike OwenPosted by Mike Owen, Executive Director

The $54 question

Posted November 25th, 2013 to Blog

Breaking news out of Des Moines is that many Iowa taxpayers will be eligible for an extra $54 tax credit.

This is the result of one of the most short-sighted pieces of legislation passed by the Iowa General Assembly in recent years. Lawmakers created what they called the “Taxpayers Trust Fund,” which we should call the “Giveaway Slush Fund.” It’s a pot of money to dole out to taxpayers and boast about at election time. Chances are, the “givers” won’t give you the whole picture.

Their game is an illusion, a political parlor trick: Hold down funding for key priorities, such as K-12 education, or universities, and then when revenues create a surplus, call it an “overpayment” by taxpayers.

Does anyone really believe their spin? The $120 million to be given away represents easily $120 million in services that could have been provided. For K-12 alone, a little over half of it could have been used this year to fully pay the state’s share of allowable growth at the 4 percent level lawmakers authorized. Instead, state funding only supports half of the state share.

By shortchanging school districts with funding for only 2 percent allowable growth this year despite strong revenues, lawmakers compounded a trend of squirreling away big dollars while claiming poverty. This way, they have given themselves $120 million to spend on dessert — the Giveaway Slush Fund — by choosing not to pay the state’s share of the bill for the meat and potatoes: school aid.

One Iowa columnist who has seen through this is The Des Moines Register’s Rekha Basu, who noted Sunday: “Doling out money piecemeal is a gimmick that may bring smiles to some faces but it can’t take the place of sound and consequential actions.” She’s right.

Is it really worth it to you to receive the $54, instead of putting adequate and appropriate funding back into our education system? Or cleaner water? Or safer streets? Or, well, you get the idea.

Give me a break. On second thought, don’t.

Mike OwenPosted by Mike Owen, Executive Director