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Posts tagged Tax Foundation

Business tax rankings: Misinformation continues

Posted October 23rd, 2019 to Blog
The Tax Foundation is at it again. The corporate-funded think tank released their latest bogus measure of state tax competitiveness, the 2019 State Business Tax Climate Index (SBTCI), on October 22.  The major features of the SBTCI remain unchanged from earlier editions. The fundamental criticisms of their methodology remain as salient as ever. The State Business Tax Climate Index purports to measure a state’s “tax competitiveness” but the index bears very little relationship to what businesses actually pay in taxes in one state vs. another. Of the 10 supposedly “worst” states in terms of business taxation according to the latest Tax Foundation ranking, six (including Iowa) actually ranked among the 21 states with the lowest business taxes, including two among the lowest 10, according to of the Council on State Taxation. The Tax Foundation ranking (they put Iowa as the ninth-worst state) differs dramatically from more defensible analyses that simply measure the average effective corporate income tax rate. The Council on State Taxation produces periodic estimates of all business taxes as a share of private sector Gross State Product and has consistently found Iowa to be among a sizable group of states right in the middle. In fact, their latest report shows that only 17 states have a lower effective business tax rate than Iowa, while 30 states have a higher rate. The SBTCI is a combination of 124 components of state tax systems, giving substantial emphasis to some components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes (single-factor apportionment and deduction of federal corporate income taxes). The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. These two features help explain why the Tax Foundation ranks us poorly while others show us with average, or lower than average, taxes on business. There are a few changes in the 2020 version of the index. The Tax Foundation now penalizes states for attempting to rein in corporate tax avoidance in two ways. First, they penalize a state’s score if they conform to the Global Intangible Low Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, which are intended to reduce the incentive to shift corporate assets abroad. State conformity would in fact help states avoid some of the corporate tax avoidance that has been eroding state revenues, due to the ability of corporations to shift profits overseas. But restoring revenues in this way is a bad thing, according to the TF. The second new feature is a penalty for states that conform to the net interest limitation in TCJA. This provision limits the ability of corporations to deduct interest expense, but apparently the TF thinks the deduction should be unlimited. Iowa has chosen to conform to both of those provisions, for which the state’s taxpayers should be thankful. That the Tax Foundation has penalized Iowa in the rankings for trying to close corporate loopholes is just another reason to ignore their rankings. 2010-PFw5464 Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

‘Nothing to see here, folks,’ 2017 edition

Posted September 28th, 2016 to Blog

slide_taxfoundation-cropBasic flaws remain in Tax Foundation business index

The Tax Foundation released the 14th edition of its State Business Tax Climate Index (SBTCI) today (Sept. 28). The basic flaws that have rendered it of little use as a guide to state economic policy remain. While a few methodological tweaks have been made, it is still a hodge-podge of over 100 different features of state tax law, mashed together into an index number. The components are weighted illogically, and the result is a ranking that bears little or no relation to the taxes businesses actually pay in one state versus another.

The Tax Foundation acknowledges that they are not measuring actual tax levels on business, but rather the states’ tax structure. But they provide no evidence that tax structure influences business decisions. If you were a business, what would you care more about: the bottom line amount you will pay, or whether there were three tax brackets or five tax brackets involved in the calculation that got you there? The Tax Foundation would have you count brackets, and ignore the dollars.

The SBTCI has separate components for the corporate income tax, the individual income tax, property taxes, etc. So let’s consider the corporate tax component. Even as a measure of “structure” somehow, it falls short because it leaves out two major determinants of corporate income tax liabilities — federal deductibility and the apportionment rule — while including numerous minor features. As a result, the corporate tax index is a meaningless number.

Furthermore, the corporate income tax is much less important than the property tax, for most businesses. According to the Council on State Taxation, the property tax accounted for 43 percent of all business taxes, the corporate income tax just 11 percent, in 2014. Yet in coming up with the overall state rankings, the latest Tax Foundation index weights the property tax 14.9 percent, the corporate income tax 19.7 percent. That makes states with high property taxes and low corporate income taxes look much better on the index than they really are, and penalizes the states with a robust corporate income tax, a high state share of education funding, and low property taxes.

To make matters worse, the index weights change every year. This makes it impossible to know if a change in a state’s rank from one year to the next is due to a change in tax law, or just a change in the weights.

More importantly, the whole focus on business tax competitiveness is misplaced. State and local taxes are a very small share of overall business costs. What really drives state growth is the rate of new business formation. And what matters most for entrepreneurial vibrancy is the education level of the state’s residents.

2010-PFw5464Editor’s Note: Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP), wrote this blog for GradingStates.org, IPP’s separate website devoted to promoting a better understanding of various state business climate rankings. For a look at components of state policies that can promote prosperity, see this page on the GradingStates.org site.


Don’t compound Iowa tax inequity

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The first report by a self-proclaimed conservative think tank in Iowa is getting some attention today, and reviving dubious ideas about taxes.

First, we applaud the recognition from Engage Iowa that our state’s various tax rates are not as high as they appear at first blush, because of federal deductibility — which permits tax filers to reduce their state taxable income for federal taxes paid. Ending federal deductibility, which Engage Iowa proposes, is something Iowa should consider. That would allow lowering the top rate to around 7 percent and eliminate the perception problem the group is so concerned about.

Unfortunately, however, this is not a well-thought-out plan to improve fairness and simplicity in Iowa taxes, or to assure adequate revenues for schools and other critical services, which are the best way to promote economic growth.

It compounds the overall regressive nature of Iowa taxes — and does nothing to help low- to moderate-income working families. In fact, for many families it would destroy the most important recent advance — the Earned Income Tax Credit. Some 147,000 recipients making over $10,000 — 70 percent of all EITC recipients — would lose the EITC.

While raising low-income Iowans’ taxes, the plan would buy down income-tax rates for higher-income Iowans with a sales tax increase. This would compound existing inequities in Iowa’s state and local tax system, which taxes the bottom 80 percent of taxpayers at about 10 percent, and the highest earners only 6 percent. The big winners would be those with the highest incomes.

The report’s claims about taxes and migration fly in the face of much published academic research showing that in fact taxes have very little influence on interstate migration. The claims that the flat tax would result in substantial economic gains to the state are highly suspect.

Finally, the group’s argument rests on discredited assumptions about Iowa’s so-called “business climate” and ignores the fact that Iowa already is very — perhaps overly — friendly to business. The plan places a great deal of weight on the Tax Foundation rankings, which have been thoroughly debunked. The author could have consulted more credible rankings of business climate, such as the Anderson Economic Group (which places Iowa 20th best, with below-average business taxes) or Ernst and Young, which has Iowa 28th, with an effective rate equal to the national average.

In short, the plan focuses mostly on a perception about Iowa taxes, a perception that is inaccurate but is cultivated by anti-tax forces, rather than ways to improve the stability and sustainability of funding for the critical public services on which all Iowans depend.

2010-PFw5464Posted by Peter Fisher, Research Director of the Iowa Policy Project

 


Beware the “business climateers”

Posted August 18th, 2014 to Blog

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

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

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

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

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

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

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

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

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

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

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

But this argument just isn’t true…

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

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

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

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