Iowa Tax Reform – doable? I will spend much of today at the Iowa Association of Business and Industry Tax Committee meeting. The topic is Iowa tax reform. Regular readers know that I have strong feelings about the topic. Iowa’s income tax is a mess, and it doesn’t have to be.
Or does it?
There are always forces that push a tax system to complexity. I think any tax system will always have insiders trying to cut special deals for themselves. This leads to higher taxes on everyone else, but the insiders are good at protecting their special deals. Iowa’s dozens of incentive tax credits are classic examples.
Iowa has other factors that help stymie efforts to lower tax rates by eliminating deductions and special tax breaks. On the right side of the aisle, Iowans for Tax Relief has always opposed any tax reform that eliminates the deductibility of federal income taxes. This is almost unknown outside of Iowa, and its repeal is probably essential if we are going to significantly reduce Iowa’s very high 8.98% individual rate.
On the left side of the aisle, the politicians have an unhealthy focus on soaking the rich. With control of the state senate, Iowa Democrats have bottled up all efforts that would reduce Iowa’s high rates because they help “the rich” — better known as “employers.”
I think Iowa may overcome these obstacles. Elimination of corporate tax and much lower individual might persuade insiders to give up special deals, or at least make them not worth fighting for. I think Iowa business is tired of its perpetually poor business tax climate. Iowans for Tax Relief may soften its stance on federal deductibilty, or legislators may find the arguments for reform more persuasive. And a broad-based tax simplification could have non-partisan appeal, especially if it has a large low-income exemption.
But I think it has to be ambitious. A small plan isn’t going to persuade anybody to give up their special deals, or to modify long-held views. That’s why the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is a good place to start.
Scott Drenkard, State Sales Tax Holidays in 2015 (Tax Policy Blog):
“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.”
Victor Fleisher, Stop Universities From Hoarding Money:
Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment.
In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton.
For some reason, you hear less about inequality in college endowments than you do about income inequality.
Two Headlines from Tax Notes this morning (unfortunately links only work for subscribers):
To me, the second headline pretty much confirms the error of the “tax community” cited in the first one. To read the Lerner emails and conclude that she was “non-partisan” indicates a reading comprehension problem. NTEU, the IRS employee union, gives 96% of of its donations to, er, non-Republicans. Sounds nonpartisan to me…
Entity selection is more important than you think. Your choice of entity can affect the number and identity of shareholders and partners, equity structure, control and management, as well what kind of funding you might be eligible to receive.
If you can’t make up your mind, start with the most flexible one — an LLC not taxed as a corporation– so you can change your mind without too much pain and suffering
Peter Reilly, Does Ninth Circuit Mortgage Interest Decision Create Special Rights? Well, it creates an incentive for people with multi-million-dollar houses to get divorces.
Carl Smith, Tax Court Again Refuses to Apply One Part of Equitable Innocent Spouse Relief Rev. Proc. 2013-34 (Procedurally Taxing)
Paul Neiffer, Wohttp://www.farmcpatoday.com/2015/08/19/wow/w! Paul is seeing lots of 200-bushel corn in Southwest Iowa on his Midwest Crop Tour.
TaxProf, The IRS Scandal, Day 833