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Red ink, inequity and pain

Posted November 14th, 2017 to Blog

redink-capitol

To dive into an ocean of red ink for a tax cut that will do little to boost the economy is one thing. To pretend it benefits middle-class families is, at the least, cynical.

It is impossible to view either the Senate or House tax bills moving in Washington as anything but a boost to the wealthy.

Responsible analysis by respected research organizations makes this apparent. The wealthy don’t just do the best in this legislation — they are the clear focus of it.

New data released by the Institute on Taxation and Economic Policy offer several key illustrations of how the Senate Republican proposal released late last week will affect Iowans:

  • The middle 20 percent of families, people making between $59,300 and $87,080 (average $72,400) receive only 11 percent of the overall tax cut. Meanwhile, the top 20 percent receive more than half — 56 percent.
  • The average tax change for the middle group is a $760 cut. In the top 1 percent, people making $1.46 million a year, on average, the average tax cut is $36,450.
  • Nine percent of Iowa taxpayers would see a tax increase in this tax-cut bill — 13 percent of the middle group would see an increase, on average, $520. Only 2 percent of the top 1 percent would see an increase.
  • The bottom 60 percent of Iowa taxpayers would receive less than one-fourth of the total tax cut (23 percent), $493.2 million, while the top 1 percent would receive more, at $517.5 million.

Those who are promoting this bill should at least have the honesty to call it what it is: a new handout to the wealthy — one that everyone will pay for, to the tune of $1.5 trillion over 10 years, and an almost certain loss of critical services that benefit all.

 

2017-owen5464Mike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

 


Against tax spin: Wealthiest benefit

​IFP News

Against the spin: Wealthy benefit most from House plan
In Iowa and nationwide, federal tax proposal skewed to benefit millionaires

 

IOWA CITY, Iowa (Nov. 6, 2017) — New national and state-level analysis shows the wealthiest taxpayers are the biggest beneficiaries of the House tax reform proposal, exposing exaggerations of middle-income benefits in a package that could threaten critical services to low- and moderate-income families.

The Institute on Taxation and Economic Policy (ITEP — itep.org) released its analysis today. Its national findings follow estimates by Congress’ nonpartisan Joint Committee on Taxation late last week that also show benefits of the plan are heavily skewed to the wealthy.

Among ITEP’s findings for Iowa:

  • In 2018, the middle 20 percent of Iowa taxpayers will see an average tax cut of $790, compared to a $36,100 tax cut for the top 1 percent, a benefit 46 times higher for the very rich, whose annual income averages $1.2 million.
  • The inequity grows by 2027, as the average middle-income cut falls to $340 (less than half of the 2018 figure) while the very rich get a $48,520 tax cut — a third greater than in 2018, and a benefit 143 times greater than the middle-income average. (graph below)
  • The top 20 percent take 61 percent of the tax benefit in 2018, and 69 percent of the tax benefit in 2027.
Tax Cuts Skewed to the Wealthy in House Plan, 2018 and 2017
171106-ITEP-taxreform
Source: Institute on Taxation and Economic Policy
 
“So much for boosting the middle class. The rich in Iowa do far better than middle and lower-income taxpayers in our state under the House tax plan,” said Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP), part of the Iowa Fiscal Partnership with the Child & Family Policy Center (CFPC) in Des Moines.

CFPC interim director Anne Discher agreed.

“While focusing rightly on who actually benefits from this legislation — and who does not — we should not miss the impact on services and the difficult choices that will be forced upon states by federal tax cuts,” Discher said. The tax package will cost an estimated $1.5 trillion over 10 years.

Discher agreed with ITEP that low- and middle- class families likely will pay for these tax cuts for the wealthiest through reduced investments in education, health care, infrastructure, scientific research, environmental protection, and other priorities.

The ITEP analysis examines the difference in tax benefits at various incomes both in 2018 and 2027.

Fisher noted the ITEP analysis shows the legislation does not mean tax cuts for everyone, and in some cases means tax increases. Five percent of all Iowa taxpayers would see a tax hike in 2018, rising to 13 percent in 2027, according to ITEP.

“This plan benefits the wealthy immediately, but disguises even greater benefits and disparities that will become apparent well after the next election,” said Mike Owen, executive director of IPP.

“What might appear to some to be a substantial benefit at the middle next year — an average tax cut of $790 — will vanish by more than half in 2027, as even greater benefits to the very wealthy are phased in over the decade. The benefit at the top 1 percent, on average, is projected to grow from a $36,100 tax cut in 2018 to $48,520 in 2027.”
The ITEP analysis shows, in fact, that the value of the average tax benefit drops over the nine years for every income group in Iowa except the very top 1 percent. But this bias to the very rich would take place long after the 2018 and 2020 elections when policy makers might have to defend them.

“A closer look at the details of this tax plan indicates that lawmakers are most serious about ensuring that they lower tax bills for the highest-earning households,” said Alan Essig, executive director of the Institute on Taxation and Economic Policy.

ITEP and others have noted specific disparities in the treatment of various taxpayers under the proposed bill.

For example, after five years, the bill would eliminate a $300 non-child dependent credit that benefits low- and moderate-income families while reducing and eventually eliminating the estate tax, which benefits only the wealthiest two-tenths of 1 percent of estates in Iowa and the nation.

“The estate tax assures at least some taxation of extremely large amounts of income that otherwise are never taxed,” Owen said. “The estate tax already is effectively very low for even enormous estates — the first $5.5 million of an individual’s estate, or $11 million of a couple’s estate, is exempt from tax. And no family inheriting an estate of less than those amounts faces any estate tax at all, so the scare tactics that are used with small businesses and farm families are very misleading.”

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

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Some bad ideas never die

Posted April 24th, 2013 to Blog
Peter Fisher

Peter Fisher

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

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

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

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

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

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

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

Posted by Peter Fisher, Research Director


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.

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


How to make Iowa’s tax system more unfair

Posted February 5th, 2013 to Blog
David Osterberg

David Osterberg

How odd that a new proposal to make Iowa’s tax system more regressive and unfair comes out just when new evidence shows it already is unfair. HF3 would make the Iowa income tax rate flat where it needs to reflect ability to pay. Since higher income people pay more in income tax, and because they are expected to pay a greater percentage as their income rises, moving to a flat or flatter income tax is a reward to them. It does not help low- and moderate-income people.

As shown in the recent “Who Pays?” report by the Institute on Taxation and Economic Policy (ITEP), the poorest pay the highest portion of their income in taxes. (See graph.) The sales tax is much steeper as a share of income from low-income Iowans than it is from high-income Iowans, and the property tax is marginally more expensive to low-income people as a share of income than it is to those with high incomes. The income tax is the only progressive element of Iowa’s state and local tax system.

graph of Who Pays Iowa taxesTo flatten the only progressive feature of Iowa’s tax system would make the overall tax system more regressive. That would be the inevitable effect of HF3.

The problem with Iowa’s tax system is not that it’s too progressive. In fact, it is regressive — taking a larger share of the income of people at low incomes and middle incomes than of people at the top. HF3 would compound this.

Posted by David Osterberg, Executive Director


EITC boost would help families who need it — and economy

Posted January 17th, 2013 to Blog
Heather Gibney, Research Associate

Heather Gibney

If you imagine a packed Kinnick Stadium on game day you have an idea of how many Iowans were kept out of poverty from 2009 to 2011 thanks to two refundable tax credits.

A new state-by-state analysis from the Brookings Institution finds that the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 71,123 Iowans out of poverty, over half of them children.

The Governor’s Condition of the State speech Tuesday missed an opportunity to discuss the value of Iowa’s own Earned Income Tax Credit (EITC) to Iowa families and prospects for an expansion — something he has twice vetoed on grounds that he wanted more comprehensive tax reforms.

The Brookings analysis uses a new way of looking at poverty: the Supplemental Poverty Measure, an updated approach to the calculation of whether an Americans household is in poverty. So it’s a valuable look that we haven’t seen for state-level figures.

The EITC is designed to encourage work when low-income jobs don’t provide enough for a family to make ends meet. So, as a family earns more income, they become eligible for a larger credit; as their income approaches self-sufficiency the EITC gradually phases out.[1]

At the state level, Iowa families who are eligible for the federal EITC also qualify for the state EITC, which is set at 7 percent of the federal credit. Proposals in the past would take that higher, to 10 percent or even 20 percent. It can be an important break for lower-income working families because Iowa already taxes the income of many who don’t earn enough to pay federal income tax. Currently, a married couple with two incomes and two children who qualifies for the federal EITC doesn’t have to start paying federal income taxes until their incomes reach $45,400. That same family would have to pay Iowa income taxes when their incomes reached $22,600.[2]

The EITC is the the nation’s largest and most successful anti-poverty program, largely because it encourages and rewards working families. With Iowa’s 85th General Assembly under way, discussions about raising Iowa’s EITC above 7 percent may once again emerge after lawmakers failed to reach an agreement last year.

An EITC increase would raise the threshold at which Iowa families start to owe income taxes — putting more money into the pockets of those who need it the most and encouraging them to spend that money in their local communities.

Posted by Heather Gibney, Research Associate


EITC boost would help families who need it — and economy

Posted January 17th, 2013 to Blog
Heather Gibney, Research Associate

Heather Gibney

If you imagine a packed Kinnick Stadium on game day you have an idea of how many Iowans were kept out of poverty from 2009 to 2011 thanks to two refundable tax credits.

A new state-by-state analysis from the Brookings Institution finds that the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 71,123 Iowans out of poverty, over half of them children.

The Governor’s Condition of the State speech Tuesday missed an opportunity to discuss the value of Iowa’s own Earned Income Tax Credit (EITC) to Iowa families and prospects for an expansion — something he has twice vetoed on grounds that he wanted more comprehensive tax reforms.

The Brookings analysis uses a new way of looking at poverty: the Supplemental Poverty Measure, an updated approach to the calculation of whether an Americans household is in poverty. So it’s a valuable look that we haven’t seen for state-level figures.

The EITC is designed to encourage work when low-income jobs don’t provide enough for a family to make ends meet. So, as a family earns more income, they become eligible for a larger credit; as their income approaches self-sufficiency the EITC gradually phases out.[1]

At the state level, Iowa families who are eligible for the federal EITC also qualify for the state EITC, which is set at 7 percent of the federal credit. Proposals in the past would take that higher, to 10 percent or even 20 percent. It can be an important break for lower-income working families because Iowa already taxes the income of many who don’t earn enough to pay federal income tax. Currently, a married couple with two incomes and two children who qualifies for the federal EITC doesn’t have to start paying federal income taxes until their incomes reach $45,400. That same family would have to pay Iowa income taxes when their incomes reached $22,600.[2]

The EITC is the the nation’s largest and most successful anti-poverty program, largely because it encourages and rewards working families. With Iowa’s 85th General Assembly under way, discussions about raising Iowa’s EITC above 7 percent may once again emerge after lawmakers failed to reach an agreement last year.

An EITC increase would raise the threshold at which Iowa families start to owe income taxes — putting more money into the pockets of those who need it the most and encouraging them to spend that money in their local communities.

Posted by Heather Gibney, Research Associate


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