Posts Tagged ‘Quick and dirty iowa tax reform’

Grand bargains and other mistakes

Wednesday, July 31st, 2013 by Joe Kristan
Economic supergenius

Economic supergenius

The President has offered a new “grand bargain” on taxes.  While cutting corporate rates, it would be structured to generate a bunch of new revenue to finance yet another “jobs” program.  While details weren’t offered, expect pretty much the same package of deduction cutbacks and international tax increases that he has offered every year.  LIFO inventories are surely part of the package.  Some bargain.

One item that would be in the package would be a 28% corporation top rate, with a 25% top rate for manufacturers.  The President’s offer isn’t serious, so there’s no point spending a lot of time analyzing it, but it includes disorganized thinking that is found in both parties in the tax debate.

The President’s special rate for manufacturers assumes that one sort of economic activity is special and more worthy of favor than others.  (The current foolish Section 199 does the same thing).  There are two big problems with this:

1. Why is manufacturing something inherently better than other things? Is it better to make a Whoopie Cushion in America than, say, save a life with a kidney transplant?  Is making an IPhone more worthy than relieving chronic pain with a hip operation?  More worthy than making someone’s life a little more beautiful by playing music?

2.  Where does manufacturing stop?  Yes, somebody on the assembly line is manufacturing.  But he wouldn’t be able to do it very long without trucks delivering raw materials and driving off with finished products.  It wouldn’t work without trains delivering coal to the powerplant that feeds the machinery.  It wouldn’t run without lawyers keeping the company from being sued to death, or without accountants balancing the books and preparing tax returns.  Yet only the guy on the assembly line is considered “manufacturing.”  It’s a futile and false distinction.

This is just part of a bigger problem: trying to do too much with the tax law.  As anybody who has taken their first corporation tax accounting course will tell you, it’s hard enough to determine taxable income.  When you ask the tax law to finance research, provide health insurance, run the pension system, oversee national housing policy, and be a welfare program, you are asking too much.

Bruce Braley does the same thing in his Des Moines Register op-ed, Tax reform should provide incentives for innovation.  No, the tax law needs to collect revenue.  The biggest incentive for innovation would be to simplify the tax law and let innovators use the money not spent on tax advisors to pay for their own innovation.  The ability to make money after tax is all the incentive people need.

The fallacy that the government should be micromanaging the economy through “incentives” — really, tax breaks for the well-connected and well-lobbied — is bipartisan, as Iowa GOP State Senator Randy Feenstra illustrates in “Attacks on incentives harm state “:

They failed to check the facts before delving into the discussion. The tax credits being offered to the Iowa Fertilizer Company are not new. The tax credits were always part of the good faith understanding between the company and the state and were necessary to ensure that the new jobs and investment occurred in Iowa.

I am not sure what Senate Democrats are taking issue with most, if it is the 165 jobs being created or the $1.8 billion investment being made in a county struggling to lower unemployment rates. However, I take great issue with the attack on this company investing in our state, amid a history of Democratic support of tax credit programs.

Sen. Feenstra falls victim to the fallacy that the tax credits being spent on the fertilizer company are some kind of cost-free pixie dust that magically creates jobs.  Yet they are really tax dollars taken from everybody else in the state and sent to a company with connections.  If they hadn’t been taken from the rest of us, these dollars would have been used by taxpayers to buy and to invest in ways that would have been just as real, but which would have not given politicians any excuses for press releases.  It’s just another version of the broken window fallacy.

The only tax reform worthy of the name is one where politicians get out of the business of playing favorites for certain businesses and activities — something like the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  Anything else is just blowing smoke.

 

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Tax Roundup, 12/10/2012: Fund of Follies tax credits!

Monday, December 10th, 2012 by Joe Kristan

Tails.  We lose.   In 2002 Governor Vilsack signed into law a bill creating an Iowa “Fund of Funds” tax credit.  It’s back in the news:

Register Exclusive: Fund’s bailout costs Iowans $26 million

The Iowa Fund of Funds for startups never took off and a deal was needed to avoid a ‘train wreck.’

From the Des Moines Register:

A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.

State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.

In August? And we’re just hearing about this now?  Maybe it’s because it’s an embarrassment to the entire Iowa political class that they just want to have go away.  While signed by a Democratic governor, it passed the Iowa House 90-3 and the Senate 39-5  — lots of votes from both parties there.  When the state is giving millions in new tax credits for fertilizer companies, it would poop the party.

Let’s set the wayback machine to one of the earliest Tax Update posts — number 48 of over 8,000 — to see what we had to say about the Funds of Funds when it was enacted:

HEADS YOU WIN, TAILS WE LOSE?

…is the concept behind the venture capital legislation. A state-owned for-profit corporation will set up a “fund of funds” partnership to invest in venture capital pools. The venture capital pools are to be chosen based on their commitment of funds to Iowa.

Investors in the “fund of funds,” which we will call the FOF, will receive certificates maturing no sooner than 2005 entitling them to a tax credit. This credit will reduce their Iowa tax dollar for dollar to the extent the return on the FOF is less than a fixed return computed on the certificate. In other words, the investors in the FOF get the upside, but the state absorbs the downside – and even some of the upside, to the extent that there is a positive return lower than the amount set by the certificate.

At the time we received a note from Steven Ringlee, described in today’s Register story as “an architect of the program,” telling us that this was still a terrific deal for Iowa taxpayers because the bill also had a cap on investor return as well as a taxpayer-funded guarantee against losses:

In fact, you fail to notice that, due to the tax credit which provides full repayment security to Iowa taxpayers purchasing the preferred stock of the Fund of Funds, their required rate of return will be similar to that on medium-term governmental debt instruments.  In Oklahoma, where this plan was first implemented, the return on their Fund of Fund instruments (circa 1995) was approximately 8 percent.  In today’s environment, it will approximate 5 to 5.5 percent.  However, the average long-term rate of return on investments in venture capital limited partnerships has been in excess of fifteen percent over an extended period.  Oklahoma experienced a 19 percent positive return during the five year period from inception through 2001.

So how did those 15 percent returns work out?  From the Des Moines Register story:

“It’s been a disaster. As a model for creating jobs, it doesn’t work. … It’s turning into another bad deal for taxpayers,” said Sen. Joe Bolkcom, D-Iowa City.

Jeff Thompson, a deputy attorney general who helped negotiate the agreement, says Iowa taxpayers have always been on the hook for the program, originally authorized at $100 million and later limited to $60 million. This agreement reduces the potential costs and, perhaps more important, prevented lenders from cashing in up to $40 million in tax credits this summer to cover their loans, he said.

That sounds like a return of something less than 15%.  The Register story doesn’t quantify the losses.  Mr. Ringlee didn’t exactly rule out the possibility of losses in 2002, but he made them seem unlikely (my emphasis):

 

As a result, appropriate compensation-for-risk-assumed is in fact given to the State, the grantor of the contingent tax credits.  For what is likely to be zero cash outlay, the State of Iowa, (at the end of the FoF lifetime) receives all accumulated net profits above a nominal return in the range of 5.5%.  Of course, the probability of this occurring is directly related to the skill sets of the VC managers selected to invest the funds.  Because VC historical returns are in fact measurable and venture managers’ skills may be examined in detail, and because good managers tend to have consistent track records, the Fund should be able to select those managers able to deliver above-average results.  Hence, the Fund can improve its ability to deliver stellar returns to the State (the residual legatee) by carefully selecting and supervising its venture capital limited partnership managers.  It will do so through the judicious selection of a skilled, experienced “gatekeeper” fund allocation manager, a common practice in the venture industry.

Oops.

Folks, when the government guarantees something, the proper assumption is that the guarantee will be called upon (Solyndra, anyone?).  If private investors aren’t willing to make a deal, they probably have good reasons.  If it’s a good company, private money will probably be there, if perhaps on stiffer terms.  And just because the guarantees are run through tax returns doesn’t make them somehow not spending.

Senator Joe Bolkcom  (D-Iowa City)– who was one of the few who voted against the program in 2002 – makes a good point:

Bolkcom said the state needs to rethink how it approaches economic development.

“The idea that we can create these third-party arrangements, where we turn over taxpayers’ money and not expect problems to develop, is folly. We have very little control after the law was created,” he said.

The best the state can do for economic development is to leave it alone.  The Quick and Dirty Iowa Tax Reform would get rid of all of the dozens of “economic development” tax credits, and do more for the Iowa economy than all of them.

 

TaxProf,  NY Times: Tax Arithmetic Shows Top Rate Is Just a Starter

Oh, Goody:  “Taxpayers and the IRS could be looking at three filing seasons in 2013 if Congress and President Obama fail to prevent the government from going over the fiscal cliff at year’s end, according to National Taxpayer Advocate Nina Olson.”  (Tax Analysts, $link)

Greg Mankiw,  Fiscal Cliff Fact of the Day:

As reported in the NY Times:

Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.

Like I say, the rich guy isn’t buying.

Gene Steurle,  Current Revenue Solutions Will Barely Reduce the Deficit.  (TaxVox)

Patrick Temple-West,  Fiscal talks spur charitable giving, and more

TaxGrrrl,  Obama, Boehner Reach Compromise?  No.

Scott Drenkard,  New Federal-State Rate Calculation in Full Fiscal Cliff/Obamacare Scenario (Tax Policy Blog)

Christopher Bergin,  ‘Small Ball’ — Obsessing about the Rich:  “Sticking it to rich people may play well to a populist theme, but it’s “small ball” and does little to address our fiscal problems or our broken tax system.”  (Tax.com)

Martin Sullivan,  Is the Charitable Deduction a Sacred Cow? (Tax.com)

So how are the tax increases working out for you? California Revenues Below Expectations (Russ Fox)

 

TaxProf,  Supreme Court Grants Cert to Decide Whether Estate Tax Marital Deduction Applies to Same-Sex Couple.  I predict the court will reverse DOMA.  If your taxes have been boosted by the denial of marriage benefits to same-sex couples, you should consider filing a protective refund claim; 2009 is the oldest year still open.

Kay Bell,  Supreme Court to review estate tax challenge to Defense of Marriage Act

 

KCCI.com:  GOP to introduce death penalty bill.  Apply it first to legislators who vote for new tax credits and I’ll be interested.

 

Great tool for understanding new net investment income tax regs: Cheat Sheets To The Obamacare Investment Income Tax (Anthony Nitti)

Peter Reilly,  Can Real Estate Professionals Beat The 3.8% Obamacare Tax ?

 

Jack Townsend,  DOJ Tax and IRS Entreaties to Join OVDP 2012:

These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012.  I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset.  DOJ Tax and the  IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously.  Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you.  And the consequences could be far worse than if you come clean now and get right for the past and going forward.

 If you really are a tax cheat, by all means consider using the OVDP program.  Still, it would probably be much more attractive if the IRS didn’t treat foot-fault violators as international tax criminals.

 

Robert D. Flach gets it right in WHY WE NEED TAX REFORM:

The purpose of the Tax Code is to raise the income necessary to run the government.  It should not be used to solve all the financial and social problems of the country.  It should not be used as a method of distributing social welfare program benefits.  It should not be used as a means of “redistributing” income among the “classes”.  The Tax Code is not Robin Hood.

It’s hard enough to determine taxable income, compute a correct tax, and remit it.  You can’t also ask Iowa tax authorities to administer filmmaking or venture capital.   And to expect the undertrained and undermotivated members of the shrinking IRS work force to administer industrial growth, social justice and, oh yeah, the health care system is folly.  And official policy.

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Iowa General Assembly adjourns without further damage (update – they got some damage in)

Thursday, May 10th, 2012 by Joe Kristan

It could have been much worse.

The 150 elected supergeniuses at the Iowa legislature weren’t shy about deciding what forms of energy production deserve your tax money, and they also invested tax dollars in a private baseball park in Dyersville.  Still, they at least avoided making taxpayers pay for other peoples “innovative” investments or ESOP consultants.

The legislature failed to pass the Governor’s highest priority, a reform of Iowa’s commercial property taxes, though they did vote to curb some of the worst abuses of TIF districts.

Bills that passed include:

  • TIF Reform. HF 2460, the TIF reform, keeps taxpayers from diverting TIF receipts and requires audits of projects.  It’s a small step against local crony capitalism.
  • Field of Dreams.  The legislature passed and the Governor signed a bill (SF 2329) to let an athletic complex built on the location of the Kevin Costner movie to keep sales taxes it collects.  The movie says “if you build it, they will come.”  The legislation says “If you lobby hard enough, they’ll vote for almost anything.”  Any bill passed for the benefit of a specific taxpayer is by definition bad policy.
  • Tax Credits for green energy.SF 2342 provides “tax credits for the construction and installation of solar energy systems and geothermal heat pumps, modifying sales and use tax provisions related to property purchased for resale, and creating a sales tax exemption for certain items purchased for use in providing vehicle wash and wax services.”  Because the Iowa legislature knows better than you how you should heat your house.

Bills that died, mercifully:

It’s unfortunate that the legislature couldn’t agree on a way to improve Iowa’s awful commercial property tax, but maybe we’ll be better off in the long run making it an issue in the upcoming election.  It would be even better if they would take up the issue of tax reform generally.  I suppose an election over the merits of the Quick and Dirty Iowa Tax Reform Plan would be too much to hope for.

The Quad City Times has more coverage of the end of the session.

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

Thursday, 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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Iowa leads the world!

Tuesday, April 10th, 2012 by Joe Kristan

The Tax Policy Blog maps the nation’s state corporation tax rates.  Iowa is number 1, at 12%.

http://taxfoundation.org/UserFiles/Image/maps/CIT_large.png

Now that the U.S. has the highest corporation tax rate in the world, that means Iowa’s tax is the highest of the highest!

Oddly, having the highest rate raises only a pittance, as the Iowa tax law is so shot full of loopholes and special interest subsidies that only the unlucky and the unlobbied pay the full rate.  It’s time for the Quick and Dirty Iowa Tax Reform Plan already.

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Iowa: the highest of the highest!

Monday, April 2nd, 2012 by Joe Kristan

Effective yesterday, a corporate rate cut in Japan left the US with the highest corporate tax rate in the developed world.  The Tax Foundation observes the occasion with a video.

 

Iowa has the highest state corporate tax rate in the U.S., so that means for those who haven’t gotten their Iowa taxes eliminated with help from their lobbyists, Iowa has the highest corporation tax in the developed world! 

It doesn’t have to be this way.  The Iowa legislature seems to be at an impasse; they could break it and bring our tax system into the developed world with The Quick and Dirty Iowa Tax Reform Plan!

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Fields of dreams and cash cows: the Iowa legislature at work on the tax law

Friday, March 23rd, 2012 by Joe Kristan

Fields of Dreams: The Iowa General Assembly is poised to pass a sales tax giveaway for a “Field of Dreams” athletic complex at the site where the Kevin Costner movie was shot.  The deal is similar to one set up for the Newton race track, allowing them to charge sales tax but keep it for themselves.  The legislature is charging ahead despite wise warnings against it:

“I think it’s a very dangerous road to go down,” Iowa House Ways and Means Chairman Tom Sands, R-Wapello, told IowaPolitics.com. “The state started down that road just a little bit with the racetrack, and now, here are two other proposals that are coming off of that. So the next question is, so where will this end?”

If it’s anything like the film tax credit program, supported with even more enthusiasm in the legislature, it will end in scandal, embarrassment and disgrace.

100% state funding for “innovation.” The “Economic Growth/Rebuild Iowa” committee voted for HSB 648, increasing a 20% tax credit for investments in a “innovation fund” to 100% (100 freaking percent) for a three-year period.  The credit would ratchet down to 75% the next year, then 50% for a year, before returning to 20%.  The tax credits could be sold.    This means that “investors” in the fund would be fully subsidized by you and me, but the profits will be private.  Downside to us, upside to them.  What could possibly go wrong?

Special tax break for executive stock bonuses.  The Iowa House Ways and Means Committee is considering HF 2311, a bill that would provide a one-time election to not pay Iowa tax on gains from stock received by employment, if you work for the right company.  Because of the way it is written, it would apply mostly to executives of big companies.  Because Iowa needs a special tax exemption for executives of big companies with big stock gains more than just about anything.

ESOPs. Meanwhile, HF 2284, creating a special tax exemption for certain stock sales to employee stock ownership plans, hasn’t moved since arriving in the Senate Ways and Means Committee two weeks ago.  Is it possible that the legislature will actually refrain from passing a narrowly-crafted tax break?

Instead of trying to shovel our money to all of these narrowly targeted and well-lobbied interests, it would be far better to just give us all a simple system with low rates.  I’d hate for the legislature to go into overtime, but it would be worth it if the result was enactment of the Quick and Dirty Iowa Tax Reform Plan.

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Iowa tax code conformity update sent to Governor

Tuesday, March 6th, 2012 by Joe Kristan

The legislature yesterday passed annual tax code maintenance bill, sending HSB 544 to the Governor for signature. Most of Iowa’s income tax is based on the federal income tax; the bill updates references to the federal tax code as it stands at January 1, 2012, instead of January 1, 2011.
There were few changes to the federal tax late last year, so this bill is relatively minor. It doesn’t change Iowa’s non-conformity to federal bonus depreciation. While Iowa taxpayers can take Section 179 deduction on their Iowa returns the same way as on federal returns, Iowans can only take regular MACRS depreciation on their state returns.
In some years the code conformity bill has been controversial. It’s a silly exercise; Iowa should automatically adapt federal changes, with the option to vote out specific ones (an option that should rarely be used).
There has been no recent action on the few substantive (using the word loosely) income tax proposals before the legislature. The half-baked Iowa ESOP bill and the misbegotten “Anchor manufacturing” bill appear to be flying virtually unvetted towards passage, making real tax reform that much less likely to ever happen.

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Corporate tax: how Iowa plays favorites

Thursday, March 1st, 2012 by Joe Kristan

Iowa is a good place for capital intensive manufacturers. Everyone else, not so much.
That’s the scoop from an excellent new study “Location Matters” by the Tax Foundation of how the 50 states tax corporations in different industries. Iowa’s single-factor apportionment, and it’s lack of personal property taxes on equipment and machinery, make Iowa a good place for a capital intensive manufacturers. Its 12% corporation tax rate and high property taxes make it tough for everyone else. From the Iowa section of the report:

Iowa ranks 50th in two categories: the new retail establishment and the mature distribution center. Both operations face the highest property tax of their firm type in the nation. The mature distribution center also faces the highest income tax of its type in the country.

This chart summarizes the findings for Iowa; the “Rank” line shows how Iowa compares to other states for different types of businesses:

Source: The Tax Foundation. Click to enlarge.
That helps explain why Iowa has to bribe outfits like Google and Microsoft to get them to locate their data centers here. With enough bribes, they will, but they aren’t likely to relocate headquarters here. Again from the study:

Corporate headquarters in Iowa have high tax costs. The state ranks 48th for mature headquarters and 47th for new headquarters. The mature headquarters has a tax burden that is 52 percent above the national average while the new operation has a tax burden that is 67 percent above average. Again, these results are attributable to high property taxes and Iowa

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The map that the Iowa General Assembly isn’t talking about this year

Monday, February 27th, 2012 by Joe Kristan

The weekly map from the Tax Policy Blog:

Yes, Iowa’s among the worst. It doesn’t have to be.

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Who knew they manufactured anchors in Iowa?

Thursday, February 23rd, 2012 by Joe Kristan

The supergeniuses in the “Economic Growth/Rebuild Iowa” Committee have found a sector of the Iowa economy that actually pays Iowa’s corporation income tax. It’s the highest corporation tax in the country, so it’s grievous to those few who actually have to pay it — so they want to do something about it.
No, they aren’t repealing Iowa’s futile and awful corporation tax. They are building in yet another tax break: a convoluted adjustment to income for “certified suppliers to anchor manufacturers.” (HSB 604) Apparently the single-factor apportionment — allocating income to Iowa based on the destination of items you sell — doesn’t do much good for Iowans who sell to other Iowa manufacturers.
It would work like this:
The supplier gets a certificate from a customer saying the customer is an “anchor manufacturer,” which means an Iowa manufacturer that sells at least half of its production out of state.
Then, if the taxpayer
-has at least ten percent of its payroll, or alternatively 100 employees, located in Iowa, and
-it “agrees to annually provide to the authority information and data on jobs created and capital investments made in the state by the business,”
It will get to reduce its Iowa taxable income by the amount that it exceeds 110% of its prior year income apportioned to Iowa.
In other words, it would cap annual income tax increases for the taxpayers qualifying for this break at 10%.
There is so much wrong with this bill and the thinking behind it.
The legislators apparently think they can fine tune an already byzantine tax law to help a favored constituency to cure an otherwise punitive income tax. They act as if they knew that helping the taxpayers that qualify — and nobody else — is the key to a healthy economy. They act as though manufacturers are uniquely burdened by Iowa’s corporation tax, when it’s at least as awful for every business subject to it. They act as though a manufacturer that sells outside of Iowa deserves more support than somebody who sells stuff we want to buy.
The reporting requirement is clearly designed to enable the politicians to crow about the jobs they “create” with this thing.
Searching a comprehensive 50-state technical service on state taxes reveals no other “anchor manufacturer” break. A search for the euphemism of “supply chain incentive” in various forms generates nothing. This appears to be an Iowa-only brainstorm.
If they really wanted to do something for Iowa’s economy, they’d get rid of the Iowa corporation tax — a minor part of Iowa’s tax revenue, but a major source of complexity and administrative expense. They’d get rid of Iowa’s rats nest of special interest credits and deductions and use the savings to lower tax rates. They’d enact something like the Quick and Dirty Iowa Tax Reform.
Image credit: Flickr image courtesy Stew Dean under Creative Commons license.

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What’s the opposite of tax reform?

Monday, February 6th, 2012 by Joe Kristan

Martin Sullivan at Tax Analysts loses hope that the Obama administration will attempt tax reform:

It wouldn’t be so bad if Obama simply remained a lackadaisical supporter of tax reform. But his proposals are actually moving us in the opposite direction. As the election approaches, he and his advisers are feeling the need to dish out new tax breaks. So the president who on national television shouted at Congress to “get rid of the loopholes” now wants to add a bunch of new loopholes of his own.

Instead of cleaning up code and lowering rates, we see a batch of focus-group inspired tax breaks:

Just as with Clinton’s parade of tax breaks, the growing list of Obama’s special benefits includes features that are absurdly complex. The president wants to double the tax deduction currently available to manufacturing in the case of “advanced manufacturing technologies.” It has been difficult enough to figure out how to differentiate manufacturing from other businesses under section 199. What in the world is “advanced manufacturing technology”? Are we talking about technologically advanced production processes or about technologically advanced products? If a product or production line includes advanced technology, is the entire product or production line eligible for the benefit, or just the components with the advanced technology features?
The questions are endless. There will certainly be major disputes between the IRS and taxpayers. We can add a nice, new chapter to the book on everything we hate about tax law.

Unfortunately the tendency to make the tax law more difficult to enact pretty-sounding tax breaks isn’t confined to Washington. While the President and the Governor of Iowa are from different parties, they both are proposing to jerry-rig new narrow breaks to an already byzantine tax law. In Iowa, ESOPs are the flavor of the month. And, of course, special tax breaks do more harm than good. From Mr. Sullivan:

Only in exceptional circumstances do violations of tax neutrality promote growth. Just because these tax breaks are well intentioned and targeted to sympathetic causes does not make them exceptional.

Iowa, with the nation’s highest corporate rate and one of its most complicated tax laws, would do much better with simplicity and lower rates — with the Quick and Dirty Iowa Tax Reform, for example.
Link to Tax Analysts content courtesy of their special arrangement with the TaxProf. Tax Notes subscribers can follow this link.
UPDATE, 2/8: Free link to Sullivan story at Tax.com.

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True in Washington, true in Des Moines

Friday, February 3rd, 2012 by Joe Kristan

As Iowa rushes to pass yet another narrowly-targeted tax break, Iowa’s legislators would be wise to ponder this from Roseanne Altshuler at TaxVox:

We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government. The current system is riddled with tax provisions that favor one activity over another or provide targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, impose enormous compliance costs, breed perceptions of unfairness, create opportunities to manipulate rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become less stable, increasingly unpredictable, and more and more difficult for taxpayers to understand.

While she is talking about the federal income tax, it all applies just as much here in Iowa. But it is hoping for way too much to expect wisdom under the domes.
Related: The Quick and Dirty Iowa Tax Reform.

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New Iowa ESOP break clears House committee

Thursday, February 2nd, 2012 by Joe Kristan

The Governor’s proposed new break for ESOPs moved closer to passage yesterday when it cleared the House Ways and Means Committee. Like too many bad bills, it passed unanimously.
The bill, HF 2085, provides an exclusion on sales of stock to Employee Stock Ownership Plans if the corporation owns at least 30% of the company’s stock after the transaction.
The key language of the bill:

(1) To the extent not already excluded, the net capital gain from the sale or exchange of employer securities of an Iowa corporation to a qualified Iowa employee stock ownership plan when, upon completion of the transaction, the qualified Iowa employee stock ownership plan owns at least thirty percent of all outstanding employer securities issued by the Iowa corporation.
(2) For purposes of this paragraph:
(a) “Employer securities” means the same as defined in 1 section 409(l) of the Internal Revenue Code.
(b) “Iowa corporation” means a corporation whose commercial 3 domicile, as defined in section 422.32, is in this state.

Even if you think extra state breaks for ESOPs are a great idea (they aren’t), this bill is a mess. It meshes badly with Federal Code Section 1042, which provides an elective deferral for sales to ESOPs owning 30% of the corporation stock if the proceeds are re-invested in public securities. The gain is deferred until the public securities are sold.
The way this bill is written, it may make people selling stock to ESOPs choose between a federal deferral of taxable income and a permanent state exclusion. Remember, the Iowa break only applies on a sale of “employer securities.” The securities purchased when proceeds are re-invested under Section 1042 are not “employer securities,” so the Iowa break will not apply when they are eventually sold. If language excluding the deferred Section 1042 gain is added to the bill (Iowa gain is normally the same as federal), it would require taxpayers taking advantage of the federal break to remember to reduce the gain on the eventual sale of the rollover securities for their Iowa returns.
So why are state ESOP breaks not a good idea? The ESOP rules are incredibly complicated, and for many closely-held S corporations, almost hopelessly so. A state break adds an additional layer of complexity to an already byzantine part of the tax law. It also makes the Iowa tax law even more complicated. It will do about as much good for the Iowa economy as a bill signed yesterday “RELATING TO FINANCIAL ASSISTANCE FOR PURPOSES OF THE BATTLESHIP IOWA.”
We shouldn’t be adding more small-beer tax breaks to an Iowa tax law already full of them. Like the Battleship Iowa, the Iowa income tax is obsolete. It’s time to start over with a simple system with low rates — something like the Quick and Dirty Iowa Tax Reform plan. Unlike this break, it could actually more than a token difference for the Iowa economy.

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Meet the new Iowa tax ideas, just like the old Iowa tax ideas

Monday, January 30th, 2012 by Joe Kristan

Iowa again scored in the D-/F range on the Tax Foundation’s new State Business Tax Climate Index released last week. Iowa did move up from 45 to 41 on the survey, but not because its tax policy improved; it barely changed. Iowa looks better only because other states, notably Illinois, got much worse.
Why is Iowa’s business climate perennially awful? Because we have high rates and a complex tax system. The high rates and complexity finance a bunch of deductions and tax credits for favored constituencies. So what what will Iowa do about it?
More Tax Credits! The Des Moines Register reports:

Iowa business leaders, hoping to jump-start a proposed $100 million seed fund, are expected to ask lawmakers to sweeten the tax credits available to lure investors into backing startup companies.
What wouldn

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At least one lawmaker wants to drag Iowa’s tax law in the right direction

Thursday, January 19th, 2012 by Joe Kristan

Mark Chelgren of Ottumwa has proposed SF 528. From its explanation:

This bill rewrites the state individual income tax by creating a flat tax structure and imposes a single rate of 6 percent on the taxable income of every taxpayer subject to the individual income tax.
The bill creates a flat tax structure by eliminating most of the deductions and exclusions previously available when computing net income and taxable income for Iowa tax purposes and by eliminating the alternative minimum tax.
The bill provides for a standard deduction equal to $1,000 for each personal exemption the taxpayer is allowed to take under the federal Internal Revenue Code.

It would be a big improvement, but it could be more ambitious:

The bill retains the current tax credits available under the individual income tax with the exception of the minimum tax credit.

Why? We couldn’t get by without three venture capital fund tax credits? Yes, it would be a big improvement over what what we have now, but we can do better!

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Targeted tax benefits outside the lab

Monday, January 16th, 2012 by Joe Kristan

Tax Analysts in-house economist Martin Sullivan boldy calls for government to pick winners in business ($link). (Update, 1/17/12: free link now available via the TaxProf.)

Tax incentives for venture capital. Firms receiving financing from venture capital funds grow far more quickly and are far more innovative than other small businesses. Positive externalities from innovation are enough to justify preferential tax treatment for venture capital funding. Financial market imperfections provide additional justification. Venture capital funding suffers from a double moral hazard problem. Venture capitalists provide funding and experience to companies they fund. Companies funded by venture capital have imperfect knowledge of the effort venture capitalists will provide. That leads to low levels of venture capital that could be remedied by a reduction in capital gains taxes on venture capital investment. (See Keuschnigg and Nielsen.)
So there is a good economic case for extending tax benefits to venture capital…
…Tax incentives should be targeted to the subset of small businesses that are fast-growing and innovative.

Unfortunately, “targeted” tax benefits don’t work well outside the classroom. Iowa has tax incentives for start-up businesses, and a Cedar Rapids example, via Gongol, is instructive:

When he came to Cedar Rapids last year, Walter

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This doesn’t look like the year they’ll fix Iowa’s income tax

Tuesday, January 10th, 2012 by Joe Kristan

The Iowa legislature is back in session (lock your cars), and so far there hasn’t been a peep about reforming Iowa’s dysfunctional income system. Last year there was at least talk of some income tax reform, but so far, nothing. Perhaps the fiasco of the income tax provisions they passed at the end of tax season last year for the prior year has made them gun shy.
I wouldn’t be surprised if the Democratic leadership renews their push for an increased earned-income tax credit, but after last year’s increase was vetoed by the Governor, a renewed effort doesn’t seem likely to be any more productive.
That’s too bad. Iowa has an income tax that’s almost a model for dysfunction. We have high rates — and the nation’s highest corporate tax rate. Yet like a wormy old ship, the system is rotten with loopholes for the well-lobbied. So Iowa has the worst possible result – high rates, low revenues — especially in the corporation tax.
But if they decide they actually want to do something useful this session, the Tax Update Quick and Dirty Tax Reform Plan is ready to go!

(more…)

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Iowa: bodies move in, income moves out.

Wednesday, December 14th, 2011 by Joe Kristan


The Tax Policy Blog has a map showing which states have gained and lost income via moves over the last year. An interactive calculator shows that Iowa lost 411 returns and $83 million in adjusted gross income from 2009 to 2010, while gaining 1,681 exemptions. More kids, fewer earners, in other words. Going back to 1993, Iowa shows a net loss of 79,546 returns and $4.2 billion in AGI.
Hey, Iowa legislators: this is a clue that Iowa’s tax system of high rates and dozens of economic development tax credits doesn’t work. It’s time for simplicity and low rates. It’s time for The Quick and Dirty Iowa Tax Reform.

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Iowa still has no idea whether its economic development credits do any good

Wednesday, November 16th, 2011 by Joe Kristan

A state commission looking over Iowa’s mishmash of economic development credits two years ago could not show that even a single tax credit that was worth the money spent on it. The commission recommended “using sound cost-effectiveness analyses techniques that incorporate appropriate assumptions.” So how’s that coming?
Not well at all, according to a report in today’s Des Moines Register. Lee Rood reports:

More than two years after the state film office debacle, most of Iowa

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