Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. The good news is that his latest proposal to accomplish that goal seems to have fallen short; unfortunately, this one was coupled with an increase in the state’s earned income tax credit (EITC), so it also fell by the wayside.

Last year we explained that Branstad’s first  proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). The plan was estimated to cost as much as $500 million annually, but it ultimately failed.

On Tuesday, a Senate bill which offered a targeted property tax credit aimed at small businesses (and in some cases offering more relief to businesses than the Governor’s original proposal) was also narrowly voted down, 24-23. The Senate refused to even vote on a more costly tax cut proposal that passed the House, which would have assessed commercial property taxes at 90 percent of their actual value for tax purposes, taking effect over five years. Reports point to effective lobbying by cities and towns whose leaders came out against drastic cuts to business property taxes. One county, for example, stood to lose $7.3 million in just one year.

Governor Branstad is not giving up, though, and called on Iowans to vote out any legislator who voted against these business tax cuts. For now, it appears that counties and cities can breathe a sigh of relief. The same is not true, however, for the working poor who rely on the EITC to fill gaps in their household budgets; any increase in their tax credit won’t come around again until next year, either.

• The Maryland Budget and Tax Policy Institute just unveiled a “Doomsday Clock” on their website.  The countdown shows how many days are left until massive budget cuts take effect on July 1.  The Institute explains that these cuts can be avoided if Governor O’Malley calls a special session and lawmakers pass the progressive income tax package agreed to in conference committee.

• Former Mississippi Governor Haley Barbour continues to lobby for taxing internet sales even after leaving the Governor’s mansion. In fact, in his farewell address to Mississippians the Governor said, “It is time for the federal government to allow Mississippi and every other state to choose to enforce our laws and to collect these taxes. They are owed us today, and there is no longer any public policy reason to keep us from collecting. Indeed, good public policy says it is past time that our brick-and-mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the Internet. That they get fair treatment for paying our taxes.”

• Thanks to an obscure tax loophole which offers Iowans the ability to write off all of their federal income taxes paid, Governor Terry Branstad had a 2011 tax bill of just $52. One state senator is pondering whether or not the state needs a “ Branstad rule” to ensure that upper income Iowans pay more in state taxes. The Governor’s lack of a tax bill illustrates just how preposterous the loophole is – and why there are only six states that allow it.

• Now that the rush to make sure our taxes are filed on time is over, here’s a downright beautiful essay from a priest in Kansas reminding us the good that comes from all the frenzy.

• Here’s a thoughtful editorial from the St. Cloud Times describing Minnesota’s need to fund important transportation projects. Lawmakers there are looking into toll roads because the political will to raise gas taxes doesn’t exist – yet the editors rightly conclude, “It’s not that we oppose building this bridge or expanding roads. It’s just that the fairest revenue stream to do so is the gas tax. Legislators just need the courage to adjust it as needed.” To see how Minnesota’s gas tax has effectively shrunk over time, check out this chart from the Institute on Taxation and Economic Policy ( ITEP).

Our nation’s gas tax policy is horribly designed, and the consequences have never been more obvious at either the federal or state levels.  Construction costs are growing while the gas tax is flat-lining, and the resulting tension has made even routine transportation funding debates too much for our elected officials to handle.  Just last week, President Obama signed into law the ninth temporary, stop-gap extension of our nation’s transportation policy since 2009, and numerous states are similarly opting to kick the proverbial can down the crumbling road.

Much of our collective transportation headache arises from our “fixed-rate” gas taxes that just don’t hold up in the face of rising construction costs.  The federal gas tax hasn’t been raised in over 18 years, and most states have gone a decade or more without raising their tax.  There’s no doubt that we’re long-overdue for a gas tax increase, but political concerns have kept that option largely off the table.  In addition to the embarrassing federal Band-Aid fix just signed into law by the President, here’s what we’re seeing in the states:

The Michigan Senate has voted to permanently take millions in sales tax revenue away from health care, public safety, and other services in order to complete basic road repairs.  But as the Michigan League for Human Services explains, the state would be much better off modernizing its stagnant gas tax.

Both the Oklahoma House and Senate have voted to raid the general fund as a result of lagging gas tax revenues.  These proposals are very similar to the one under consideration in Michigan, and when fully phased-in they would divert $115 million away from education and other services in order to improve some of the state’s wildly deficient bridges.

Luckily, Virginia lawmakers didn’t agree to Governor McDonnell’s proposal to raid the general fund in a manner similar to what’s being considered in Michigan and Oklahoma.  But they also failed to enact a much smarter proposal passed by the Senate that would have indexed the state’s gas tax to inflation.  It looks like rampant traffic congestion will remain the norm in Virginia for the foreseeable future.

Iowa and Maryland appear likely to follow Virginia’s lead and do nothing substantial on transportation finance this year.  Iowa House Speaker Kraig Paulsen says that after much talk, a gas tax increase is not happening.  And while Maryland Governor Martin O’Malley is trying hard to end almost two decades of gas tax procrastination in the Old Line State, it doesn’t look like the odds are on his side.

Connecticut lawmakers aren’t just continuing the status quo, they’re actually making it worse.  Connecticut is among the minority of states where the gas tax actually tends to grow over time, since it’s linked to gas prices.  But the Governor recently signed a hard “cap” on the gas tax that prevents it from rising whenever wholesale prices exceed $3.00 per gallon.  Lawmakers in North Carolina briefly considered a similar cap last year, but as the Institute on Taxation and Economic Policy ( ITEP) explains, blunt caps are very bad policy and there are much better options available.

For more on adequate and sustainable gas tax policy, read ITEP’s recent report, Building a Better Gas Tax.

Photo of Governor Martin O'Malley and Sunoco Gas Station via  Third Way and MV Jantzen Creative Commons Attribution License 2.0

Here’s a huge tax fairness victory in Iowa. The state Senate voted unanimously to increase the Earned Income Tax Credit from 7 to 13 percent of the federal credit to help working families make ends meet.

Matt Gardner, Executive Director of the Institute on Taxation and Economic Policy ( ITEP), blogs about lessons for Georgia from a new ITEP report on the economies of states with and without income taxes.  Gardner writes that Georgia lawmakers “wanting to join the non-income tax club are simply idolizing the wrong states.  Most states without income taxes are doing worse than average … and the states with the highest top tax rates are actually outperforming them.”

Also in Georgia, anti-tax guru Grover Norquist is weighing in on collecting taxes on internet sales, warning that it is a violation of his group’s “no new tax” pledge to vote for legislation requiring online retailers to collect sales taxes on purchases.  But the fact is, Georgians who shop online do, by law, have to pay the sales tax on those purchases if the e-retailer does not collect the tax, but the requirement is basically unenforceable.  Collecting taxes legally due is not a tax increase.

Missouri lawmakers are falling all over themselves to come up with revenues without “raising taxes” because the trust fund that pays for veterans’ services in the state is insolvent.  Silly “non tax” ideas being floated by legislators include casino entrance fees and a special lottery, which have already proven to be unsustainable revenue sources for veterans’ and other programs.  Missouri is notorious for its failure to tackle serious tax reform; will a backlog of military veterans in need of care give lawmakers incentive to do the right thing?

Bills in both the Iowa House and Senate are advancing that would finally raise the state’s long stagnant gas tax rate.  ITEP recently found that Iowa hasn’t raised its gas tax rate in 22 years, and that since that time the tax has lost $337 million in yearly value relative to rising transportation construction costs.

There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax.  Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy ( ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.

Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act.  Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history.  Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.

These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax.  ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes.  All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.

View the charts here, and read Building a Better Gas Tax here.

Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates.  It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s.  Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.

Example:

A slew of tax credit programs in Iowa that have failed to live up to their job-creation promises is further evidence that while companies will happily take taxpayer money when it’s offered, no amount of corporate pork can make a company hire people when there’s no demand for its products.

An excellent piece of journalism from The Des Moines Register reveals that 15 companies enjoying tax credit dollars given to them by the state have defaulted on the job-creation requirements tied to those credits.  All together, those companies created one-third fewer jobs than they promised when they took the money.  (This story echoes a recent report from Texas showing that just 26 percent of projects receiving funding from the Texas Enterprise Fund (TEF) fully complied with their 2010 job creation requirements.)

The reasons for these failures should be obvious.  When the economy is weak, businesses generally can’t sell as much of their product as they used to.  You can throw money at them and ask them to hire more people, but ultimately it doesn’t make sense for a company to bring on more employees unless there’s some new, unmet demand that needs to be filled.  In good economic times, companies simply rake in tax credit dollars and create jobs they would have created anyway. But in bad economic times, companies rake in tax credit dollars, the façade collapses, and you end up with exactly the situation we see in Iowa.

Iowa State University economist David Swenson provided some valuable insight to The Des Moines Register on this issue: “Tax credits in Iowa are used very injudiciously.  Everybody qualifies for something. It makes no sense from a business or government point of view. … But government officials can’t take credit for job creation if they don’t hand out some sort of subsidy.”

He goes on to provide an important recommendation to legislators currently reviewing 35 of Iowa’s tax credits: “Everybody is living with a lot less,” due to the down economy. “That really does mean businesses should be living with a lot less public subsidy.”

Photo of Iowa State Capito via  Jimmy Wayne Creative Commons Attribution License 2.0

Being a member of the working poor has never been easy, but these past few years have been particularly tough on working families who must contend with increasing health care costs, high unemployment, food inflation and high gas prices, among other things.  This makes now an ideal time for policymakers to work together to make it a little easier for families to make ends meet.

But Iowa Governor Branstad appears to be moving in the opposite direction. Exhibit A is his veto last week of a minor increase in the state’s Earned Income Tax Credit (EITC). This credit has received bi-partisan support for decades because of its unique ability to lift working families out of poverty. It is smart, targeted policy that everyone can get behind.

But the Governor couldn’t find his way clear to increase Iowa’s EITC credit from seven to ten percent of the federal credit; and with 15 percent being the national average, ten is not even particularly generous.  For now, Branstad says he is most interested in “reducing those taxes that are impeding our state’s ability to compete for new business and jobs.” Yet another governor who’s been drinking the Chris Christie kool aid.

This may be one of the worst cases we’ve seen of kicking them while they’re down.  We share the sentiments of the Iowa Fiscal Partnership when they write the veto “hurts working people and the economy.”

Photo via Gage Skidmore Creative Commons Attribution License 2.0

A group of Iowa business leaders recently voiced their support for an increase in the state fuel tax to pay for much needed road repairs. Speaking in front of Governor Terry Branstad’s Transportation 2020 Citizen Advisory Commission, a wide array of business (subscription required to view link) interest groups called for the fuel tax hike, including the Associated General Contractors of Iowa, Iowa Farm Bureau, Iowa Bankers Association, Iowa Motor Truck Association, and the Iowa Good Roads Association.

The Commission is tasked with assessing the condition of Iowa’s roads and the revenue sources used to pay for those roads.  More specifically, the Commission is seeking to address what the state’s Department of Transportation estimates is a $215 million shortfall in transportation spending, relative to the amount of money needed to complete certain high-priority projects. 

Most of those who spoke at the July 7th hearing agreed that the best way to address this shortfall would be through an increase in the fuel tax.  One virtue of the tax is that it functions like a “user fee” in that those who drive more (and wear down state roads more) pay more to have them maintained and repaired.  Advocates for progressive taxes, on the other hand, point out that the gas tax impacts low-income taxpayers most heavily.  If the regressivity of the gas tax is mitigated through an expansion of the state’s EITC, however, an increased gas tax could be a very responsible and equitable way of fixing Iowa’s – or any state’s – deteriorating roadways.

Ultimately, it’s refreshing to see these business leaders – a group that too often exhibits a knee-jerk opposition to all tax increases – recognize that new tax revenues will be absolutely essential in bettering the state of Iowa and its roadways.  Iowa business leaders are well aware that working roads are the kind of infrastructure that allows them to succeed economically and transport their goods and services around the state. It’s also worth noting that the path being urged by Iowa business leaders is preferable to the one taken just next door in Nebraska, where chronic transportation funding shortfalls have been “addressed” by simply taking money away from education and other public services.

Photo via Will Merydith Creative Commons Attribution License 2.0

In the final hours before the state’s new fiscal year was to begin, Iowa lawmakers agreed on a two year, nearly $6 billion, budget plan. The new budget was heavily debated during the state’s third longest legislative session. The state’s budget is now balanced for the next two fiscal years, and compromise on some key issues was reached.

For example, the Press-Citizen reports that Democrats agreed to freeze school spending for the current fiscal year and then to increase funding by two percent in 2013. Republicans agreed to provide $59 million for the state's preschool program, more than they originally proposed.

In the case of costly cuts to corporate property taxes, however, no final agreement was reached; and that is a victory for tax justice advocates.

Governor Terry Branstad wanted to drastically reduce corporate property taxes. His proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). When fully implemented, the price tag for this measure was about $500 million. 

House Republicans weren’t willing to go that far, offering to shelter 25 percent of a property’s value. Senate Democrats were only interested in allowing targeted tax credits instead of across the board cuts. Ultimately, Iowa policy makers weren’t able to come to any sort of agreement.

But then, when it comes to handouts for corporations, that's not such a bad thing.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

Iowa Governor Terry Branstad has made it very clear that he prioritizes corporations over working families. Earlier this week, the Governor vetoed a slight increase in the state’s earned income tax credit (EITC) from 7 to 10 percent of the federal credit. The EITC is one of the most effective and popular anti-poverty programs states can offer, but Branstad has insisted that Iowa’s “limited budget” requires a single-minded focus on slashing business taxes instead.

The Governor’s veto letter makes his reasoning crystal clear, saying "Iowa should instead focus its energies on improving our state's long-term competitive tax position for new job creation.”  The letter goes on to explain that in Branstad’s mind, this means that corporate income taxes and commercial property taxes must be slashed.

In an effort to fulfill Branstad’s vision, legislation was introduced Wednesday that, when fully phased in, would allow businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). When fully implemented, the price tag for this measure is about $500 million.  

Many local officials are wary of the proposed change since local governments are heavily dependent on the property tax to fund their day-to-day operations.  The state has promised to replace the revenue localities are sure to lose as a result of this legislation, but most would prefer to have control over their own revenue streams. Making matters worse, House Ways and Means Committee Chair Thomas Sands has acknowledged that “the state doesn’t always honor its commitments.”  

The Governor has chosen to favor corporations over middle class Iowans. What remains to be seen is how far the state’s legislature is willing to go to give handouts to corporations while working families struggle.

Earlier this week, the Institute on Taxation and Economic Policy released a new report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head.  The report highlights an unusual tax break that currently exists in only six states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon): a state income tax deduction for federal income tax payments.  Collectively these states stand to lose over $2.5 billion in tax revenues in 2011 due to these tax breaks, with losses ranging from $45 million to $643 million per state.

Unfortunately, the high price tag of this tax giveaway yields remarkably little benefit to low-and middle-income families.  In states where the deduction is uncapped, the best off 1 percent of taxpayers enjoy up to one-third of the benefits from this provision, while the top 20 percent enjoy up to 80 percent of the benefits.  Wisely, several states have eliminated or scaled back this expensive and poorly targeted deduction in the last few years.  North Dakota, Oklahoma, and Utah have all eliminated the deduction, and Oregon lawmakers voted recently to further limit their deduction.

Deductions for federal income taxes seriously undermine the adequacy and fairness of state income taxes. These deductions also leave state budgets vulnerable to changes in federal tax law.  As the recession lingers and states look to enhance their long term fiscal solvency, elected officials in states with a deduction for federal income taxes paid have a real opportunity to close fiscal shortfalls in a way that has minimal impact on low-and middle-income families.

Read the Report

The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 1 percent of Iowans would receive an average of $6,822, while those in the bottom quintile would enjoy a break of just $18 on average.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they're just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, "Nobody is saying we're flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don't dig a bigger hole with unnecessary and unwise cuts in revenues." For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. "When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.

The Iowa House of Representatives has approved a bill to cut income taxes by 20 percent, despite an analysis from ITEP showing that the richest 1 percent of Iowans would receive an average of $6,822 while those in the bottom quintile would enjoy a break of just $18 on average.

The bill, H.F. 194, which reduces income tax rates by 20 percent across the board, will now go to the Senate. For more information, see the Iowa Policy Project’s brief on this enormous tax cut.

It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state's corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state's corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.

Lawmakers in a handful of states are pushing tax cuts for corporations and other businesses under the guise of spurring economic growth.  Florida, Kansas, Iowa, Missouri, and Arizona all made headlines this week for proposed tax cuts of this sort.

In Florida, Governor Scott’s proposed budget plan was released on Monday, and as expected, it included enormous cuts to both corporate income taxes and property taxes.  Under Scott’s plan, which he unveiled before a crowd of tea party activists, the state’s already low corporate tax rate would fall from 5 percent to 3.5 percent.  At the same time, state spending would plummet by $4.6 billion, with pre-K through university education making up $3.1 billion of that total.  Fortunately, even the state’s conservative legislators don’t seem the least bit interested in Scott’s ultra-conservative (and exceedingly vague) ideas.

Kansas lawmakers generated similar headlines this week as bills were introduced in both the House and Senate to phase out the state’s corporate income tax.  According to the Wichita Eagle, proponents of the measure are actually claiming that phasing out this major tax would somehow increase tax revenue.  We seriously doubt it.

In Iowa, Governor Branstad’s proposal to slash the corporate income tax in half and cut business property taxes by 40 percent received renewed attention this week as the Des Moines Register attempted to summarize the absolutely massive number of tax cuts being proposed by Iowa lawmakers. 

Fortunately, Senate Majority Leader Michael Gronstal isn’t impressed, saying, “Taken as a whole, the Republican budget basically says we're going to squander the opportunities for the next generation of kids in this state — in terms of education, in terms of access to community college and training programs — we're going to push that aside and say the most important thing is to make sure corporations have tax cuts.”

Missouri lawmakers also garnered some attention this week when the state Senate endorsed legislation to repeal the state’s franchise tax on businesses over the course of the next five years.  Currently, a business must have more than $10 million in assets to be subject to the franchise tax.  The St. Louis Post-Dispatch ran an excellent editorial this week in response to the plan, noting: “Businesses were given tax breaks, tax credits, tax incentives, low corporate taxes and tort reform. So where are the jobs? Or did they just pocket the savings? … Business-friendly is one thing. Business-promiscuous is quite another.”

It probably wouldn’t change anything, but it sure would be nice if Arizona lawmakers gave the Post-Dispatch’s editorial a read before beginning debate on the business tax cut package that Governor Brewer plans to release on Monday.