Tax Justice Digest stories about Iowa
Last week, Iowa policymakers decided that their constituents might at least want to know where those millions are going. Governor Chet Culver signed a bill requiring that any business receiving a research credit check from the state of more than a half million dollars have its name made public.
Iowa is unusual in its generosity to businesses conducting (or claiming to conduct) research. Of the 38 states offering a research credit, only five actually pay businesses for conducting research even if their tax credit exceeds the amount of taxes they paid.
Despite the unusual generosity of the Iowa credit, one business industry representative had the gall to suggest that businesses may decide to conduct their research elsewhere as a result of the measure. The phrase "crying wolf" comes to mind.
But ultimately, the new Iowa law is little more than a baby step. It's hard to believe that Iowans are not also interested in knowing which businesses receive $100,000 or $200,000, for example, from the state for conducting research. Furthermore, even businesses not receiving refunds, but nonetheless benefiting from the research credit, are effectively being subsidized by the state and should be identified as well. And limiting the disclosure provision to only the research credit is also disappointing.
If Iowa really wants to improve government transparency, it should consider reporting on the jobs and other benefits created as a result of this and other subsidies -- as opposed to just offering the company's name. See this report from Good Jobs First for more on appropriate state subsidy disclosure practices.
Efforts
to limit or to repeal these deductions -- and to use the additional
revenue to provide tax reductions for low- and moderate-income
taxpayers -- have been underway in two such states. In Alabama, Representative John Knight
has proposed legislation to pare back his state's federal income tax
deduction in order to finance a sales tax exemption for groceries.
Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate.
Meanwhile, in
For more on efforts in
It's
hard to believe, but there may actually be a trend in state tax policy
more prominent than increasing cigarette taxes. Business tax credits
aimed at spurring economic development have been among the most popular
ideas in statehouses scrambling for ways to reduce unemployment. Just
last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.
In
Iowa, Republican lawmakers have suggested paying (via tax credit) half
the salary of each new job created by private businesses. Oddly,
because this payment would be administered through the tax code rather
than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".
An excellent op-ed
out of Kentucky helps clear things up a bit, noting that Gov. Beshear's
proposed expansion of business tax incentives would be a costly,
nontransparent, and likely ineffective way of encouraging job growth.
The op-ed goes on to argue that a "broader" approach, including better
targeted and more closely scrutinized spending programs, could do far
more good than creating more tax credits.
Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission
of at least one legislator that he is a "recovering tax credit addict"
helped to shine some light on the unfortunate politics behind these
types of tax credits. These programs can cost a state enormously, and
are rarely defensible on principled tax policy grounds. Instead, they
constitute a type of spending done through the tax code -- commonly
referred to as "tax expenditures"
-- which add complexity, shrink the tax base, require higher marginal
rates, and offer little if anything in terms of making the system more
responsive to individuals' and businesses' ability to pay.
The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.
Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.
With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.
This week, the
In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in
The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.
The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.
As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.
Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include
Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code.
In
These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.
Most states have a “per gallon” gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon.
Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to
Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it “an unnecessary and onerous burden” as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn’t adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor’s position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately,
For many, there will never be a “right time” to raise the gas tax. It wasn’t the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it’s never the “right time” to raise any kind of tax – no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in
Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.
