How the “Anchor Manufacturer” break passed by the Iowa house would work.

April 26th, 2012 by Joe Kristan

Image credit: Flickr image courtesy Stew Dean under Creative Commons license.

Iowa’s corporate income tax has the highest rates in the nation, and the U.S. corporate rates are the highest in the developed world — making Iowa’s rate the highest of the high.  Iowa individual rates are high, making life hard on pass-through businesses whose income is taxed on 1040s.  Both systems are riddled with special favors carved out by groups with skilled lobbyists and influence, leaving the rest of us to carry a higher burden.   Politicians don’t mind, because this means special interests will always need to curry their favor to avoid punitive taxes.

The Iowa House passed another special-interest carve-out last week, the “supply chain incentive” bill.   The bill addresses an unanticipated consequence of single-factor apportionment.  This method of taxing business income, pioneered by Iowa, taxes corporate income entirely based on the destination of the corporation’s sales.  The traditional formula also includes property and payroll in the allocation. 

Single-factor works great for big corporations that sell out of Iowa, because Iowa is a tiny part of their market.  It works badly for captive suppliers of Iowa corporations, because their sales are all Iowa-destination.   So the legislature just repealed Iowa’s futile corporation tax and adopted a broad-based reform to lower rates, right?  Of course not.

The Iowa House bill, HF 2471, covers only “certified suppliers.”  So if you happen to be clobbered by Iowa’s high taxes for other reasons, that’s too bad.  If you are a “certified supplier” to a big company, though, the bill gives a unique and strange break.  No, it doesn’t let the suppliers piggyback on the apportionment factors of their customers, a provision that would sort of make sense.  It instead limits their annual increase in Iowa taxable income to 5%. 

That causes all sorts of weird possibilities.  If, for example, your taxable income is $1, that means you become pretty much tax exempt for a long time, until the 5% annual increase gets your Iowa taxable income to double digits.  If you have a loss, I’m not sure what happens.  But if you already have a lot of Iowa taxable income, the bill doesn’t do much for you, and it does nothing in a bad year.  But then maybe your base goes down, so Iowa tax law would encourage you to have an awful year.

To become a “certified supplier,” the bill lays out these conditions:

   a.  The business manufactures tangible personal property at a facility in Iowa.

   b.  The business derives more than ten percent of its gross sales of tangible personal property manufactured at a facility in Iowa from sales to anchor manufacturers. For purposes of the requirement in this paragraph, a business may aggregate gross sales to more than one anchor manufacturer.

   c.  All sales by the business to anchor manufacturers are arm’s length transactions.

   d.  The business provides a statement from an anchor manufacturer, signed by an officer or authorized representative of the anchor manufacturer, attesting that the anchor manufacturer meets the definition of anchor manufacturer under section 15.226, and provides supporting documentation in a form prescribed by the authority.

   e.  The business meets one of the following criteria:

   (1)  At least ten percent of the total payroll of the business is located in the state.

   (2)  The business employs at least fifty employees at a facility in the state.

   f.  The business agrees to annually provide to the authority information and data on jobs created and capital investments made in the state by the business. The information and data shall be in a form prescribed by the authority.

   g.  The business is not an anchor manufacturer.

 

A visual representation of the Iowa income tax.

An “Anchor Manufacturer” is one that makes products in Iowa, at least half of which are sold out-of-state.

So that means manufacturers qualify, but everyone else – transportation companies, support service companies, professionals,  and so on — is out of luck.  So are companies that sell mostly to other customers besides anchor manufacturers.  It’s a very narrow slice of the Iowa economy that benefits, and even that in a whimsically unpredictable way.  It’s an unwieldy and unworkable program.  It’s duct tape and coat hangers to hold together an obsolete and collapsing income tax system. 

It would be much better to start over with something like the Quick nd Dirty Iowa Tax Reform Plan, but there seems to be no interest in the legislature, the Governor’s office, or especially in the Iowa Economic Development Authority in doing anything remotely like that.

Prior coverage:Who knew they manufactured anchors in Iowa?”

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