Iowa’s legislators get $800 million to play with for Christmas. Naturally, many of them think they can spend it better than those of us who gave it to them, based on a Des Moines Register report today quoting a bunch of prominent state politicians.
For example, Joe Bolkcom, Iowa City Democrat and Chair of the Senate Ways and Means Committee:
“We have a silent crisis in the number of kids and the number of our children living in poverty in our state,” Bolkcom said. “One of my top priorities will be addressing that crisis as a matter of tax policy. We need to use some of this tax surplus to make a substantial boost in the earned income tax credit.”
Bolkcom also favors appropriating $20 million as a state match to help secure an $87 million Federal Railroad Administration grant to establish passenger train service between the Quad Cities and Iowa City, a move he says would create hundreds of jobs.
That’s two awful ideas. As we have pointed out, increasing Iowa’s earned income credit would impose a brutal combined effective income tax rate of over 50% on low income workers — rewarding dependency and punishing taxpayers for emerging from poverty.
And for the passenger rail plan — that’s ten kinds of crazy. With the Megabus making three daily runs between Chicago and Iowa City for no more than $39.50 — and for as little as $1.50 — it’s hard to imagine a less urgent priority than pouring $20 million into a $310 million federal-state boondoggle to establish rail service that will lose millions annually selling $42 tickets for slower service.
Unfortunately, none of the politicians quoted by the Register proposes using the surplus to overhaul Iowa’s dysfunctional and business-hostile income tax. There is a better way: Lower the rates, simplify the system, repeal the job-killing corporation income tax, and eliminate the corporate welfare deductions and tax credits. In other words, The Quick and Dirty Iowa Tax Reform Plan.
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate. That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit. For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.
An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.
Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.
That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax. Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:
Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.
Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.
Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.
If it’s worth backing up, it’s worth backing up twice.
Russ Fox, Ref Fouls Out. A group of rec-league refs set up an identity theft-based tax fraud scheme. It worked great, until suddenly it didn’t. Russ wisely points out:
All told, the four individuals involved in the scheme must make restitution totaling $200,000. As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.
These guys ran their scheme for 12 years before it blew up. The longer you do something like this, the closer your chance of getting caught approaches 100%.
The Iowa Fiscal Partnership, the big-government think tank joint venture of David Osterberg’s Iowa Policy Project and the Child and Family Policy Family Center, has a new Peter Fisher report saying Iowa’s business taxes are just hunky-dory.
Business tax breaks are an expensive and inefficient way to attempt to stimulate a state economy. Because of the small effect of tax breaks on business costs, and the much larger importance of other production costs and location considerations, tax breaks will have little if any positive effect on private sector employment.
I would agree with that conclusion if “business tax breaks” meant special interest “incentives” like the Iowa Film Credit program or the “green jobs” tax rebates proposed yesterday by Democrats in the Iowa legislature. Where the Fisher report goes off the rails is the way it treats reductions in Iowa’s highest-in-the-nation corporation tax rate as just another “tax break.”
Details matter, and marginal rates matter more than most. Marginal rates are the ones that affect the start-up, the new business that is getting off the ground and can’t afford expensive tax help or fancy lobbyists to qualify it for tax credit pork. It’s not coincidental that Iowa has a poor record at creating and sustaining start-ups. Growing economies grow from the ground, not by stealing businesses from neighboring states. With a 12% rate kicking in at only $250,000 of taxable income — and 8% at only $25,000 — Iowa is not a good place for a struggling corporation.
If rates don’t matter, why doesn’t Peter Fisher just propose a 100% rate? They obviously do matter, and the only question is how much. If they matter at all, it’s not good to have the highest one.
Yes, get rid of “tax breaks” directed at politically-favored industries and companies. But use the savings to lower the tax rates for everyone. Let the little guy benefit from a simple and inexpensive to comply with tax system. Stop taxing businesses that are already here to lure and subsidize their competitors. Impossible? I say not. Keep reading to see how we can have both low rates and a simple system that doesn’t favor the powerful and well-connected.
Other coverage: Think tank report says Iowa businesses taxed lightly
The proposal would increase casino taxes from 22 percent or 24 percent to 36 percent. The increase would raise an estimated $200 million and set the rate at one even level for all casinos and at a rate the Legislature originally intended, Branstad said.??The extra money collected from casinos would allow the state to lower its sliding-scale corporate income tax, now ranging from 6 percent for companies making $25 million or less in net income to 12 percent for companies that make $250 million or more.*
Branstad, who said all Iowans must take part in budget sacrifice, proposed lowering the corporate tax rate to a flat 6 percent.
*An alert reader points out that the Register’s rate schedule is a bit off. The actual rates:
6% to $25,000;
12% over $250,000
A reduction in Iowa’s highest-in-the-nation corporation tax rate is long overdue. So is a comprehensive clean-up of Iowa’s tax law, which is a rats nest of special-interest breaks and corporate welfare tax credits. While the Governor is proposing an improvement over the current system, funding it with a raid on the Polk County Board’s Prairie Meadows pinata passes up an opportunity to combine a corporate rate reduction with a cleanup of the corrupt system of special interest tax breaks. If the legislature is interested, there is another way.
More coverage at Radio Iowa.
Link: Budget Documents from the Governor
An Iowa House subcommittee yesterday passed a bill calling for a 20% across-the-board tax cut in income tax rates. Its prospects for passage are uncertain, and the Governor hasn’t yet come out for it. Radio Iowa says the bill would reduce state revenues by $204 million. Meanwhile, a proposal for a repeal of the corporation tax is believed to be circulating.
Reaction divides on predictable lines, according to the Radio Iowa report:
John Gilliland of the Iowa Association of Business and Industry told lawmakers over two-thirds of Iowa businesses are partnerships, limited liability companies or sole proprietorships and therefore pay individual income taxes.
Keep in mind the statutory tax rate in the U.S. is 35 percent, but companies can often lower their bill thanks to dozens of deductions and credits. At one end were the winners: Cisco reported an effective income tax rate of 19.8 percent, Johnson & Johnson 22 percent, and GE just 3.6 percent. At the other end: Wal-Mart paid 33.6 percent, and Disney paid 36.5 percent
Des Moines Register reporter Jason Clayworth is moved by Iowa’s poor ranking in the current Tax Foundation State Business Tax Climate Index to ask: Does Iowa really have a poor business tax climate? He cites a 2005 report by the leftish think tank Economic Policy Institute that criticizes the Tax Foundation’s approach.
The Tax Foundation is perfectly capable of defending their own methodology; I’ll just point out what I see in doing business returns for Iowa and elsewhere for clients operating in most states. Compared to most other states, Iowa truly does have high tax rates. Our corporate rate is the highest in the entire country — the second highest when the partial deduction for federal taxes is taken into account — and our individual tax rate, even after federal deductibility, is higher than that of all our neighbors except for Minnesota. Iowa’s taxes are very complex. You have to compute both regular tax and alternative minimum tax for Iowa, and a third computation can apply for low income individuals. There are many differences between Iowa and IRS tax rules. Iowans have to cope with dozens of narrowly-crafted deductions and loopholes, and some weird addbacks, to compute their tax. Iowa’s taxes are grossly inefficient. Mr. Clayworth reports:
Iowa has a top corporate income tax rate of 12 percent, the highest in the nation. However, the tax applies only to in-state sales and, along with numerous tax breaks, few companies pay the top rate, said Mike Lipsman of the state revenue department. In the fiscal year that ended June 30, the state collected less than $190 million from the tax, less than 4 percent of the state