Tax Plans, Budget and the Iowa Economy

Mar 23, 2018  | 27 min  | Ep 4528 | Podcast | Transcript



The Governor and republicans in the legislature want to cut and reform taxes this year. But which ones and how much will it impact state revenues and budgets? We'll talk with two Iowans well-versed in tax policy on this edition of Iowa Press.

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For decades, Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Now celebrating more than 40 years of broadcast excellence on statewide Iowa PBS, this is the Friday, March 23 edition of Iowa Press. Here is David Yepsen.

Yepsen: Last month Governor Kim Reynolds and Senate republicans proposed two major tax packages. They're quite different and lawmakers have yet to settle on a final bill to send to the Governor's desk. The Governor's plan cuts $1.7 billion over the next six years. It lowers income taxes about 23% but does not cut corporate taxes or eliminate tax credits. Federal deductibility would end and more online sales tax collections would begin. And the plan has revenue targets and triggers to speed up or slow down tax cuts depending on state revenues and the economy. Now, Senate republicans recently passed a bill that cuts more than $1 billion annually, lowering both individual income and corporate tax rates. It eliminates or reforms some tax credits. It also ends federal deductibility and it raises taxes on the state's largest credit unions. House republicans are still working behind closed doors to craft their bill but they have said they're using the Governor's plan as a starting point. Some house republicans say the Senate cut too much. Well, here to help us sort through the pros and cons of these tax reform ideas we welcome Peter Fisher, Research Director for the Iowa Policy Project, a left-of-center organization that researches and analyzes important policy issues in Iowa. And Tom Sands, President and CEO of the Iowa Taxpayers Association, a business-sponsored tax policy group. He is also a former republican state representative who chaired the tax writing House ways and means committee. Gentlemen, welcome back to Iowa Press. Good to have you with us again.

Sands: Thanks, David.

Fisher: Good to be here.

Yepsen: And across the table, Kathie Obradovich is the Political Columnist for the Des Moines Register and Kay Henderson is News Director at Radio Iowa.

Henderson: Tom, when you were a legislator you voted for a bunch of different kinds of tax cuts on the income tax, that is. Would you vote for either one of these? And does your organization urge legislators to pass one or both of these?

Sands: Presently the ITA, or Iowa Taxpayers Association, has registered on both bills and we have registered neutral. There are some good things in both bills we really like and there are some things, some concerns as well that I think and we think that need to be addressed.

Henderson: What are your likes?

Sands: Our likes are on the Senate bill the policy is really good. There's some little dangers in there, red lights, but mostly the policy is really good. But one thing that ITA is known for besides our tax principles is our sound budgeting principles and the Senate bill is a little sound on how they balance the budget, especially in fiscal year '19. So we need more information on how that is going to happen to go in full support of the Senate bill. On the Governor's bill that is referred to anyway as House study bill 671 that is in the House, obviously it's silent on corporate income taxes. We believe it needs to do both because if you do one without the other the other one just won't get done.

Henderson: Peter, I would guess that neither of these proposals meet your I guess rubric for being effective. What, in your view, would be effective in terms of individual income tax rates?

Fisher: Well I think the first thing to think about is we have been in a budget hole for the last couple of years and the first thing you ought to do when you're in a hole is stop digging. Both of these bills would take quite a bit out of the state general fund over the years, particularly the Senate bill, a massive amount. So if you're asking me what I would do for reform I think the important thing to understand is that you can do tax reform without slashing the budget and without forcing more service cuts. And there are some things in both bills that I think are the sensible kinds of reform but I think other features of it go too far in reducing revenues and that's the main problem.

Yepsen: Give us an example of things that go too far or things that you like.

Fisher: Well, the total amount of the Senate bill is simply unrealistic. I think a lot of people don't think it's a real bill. You could eliminate all state funding for Regents institutions and community colleges and you still wouldn't have come up with a billion dollars a year in budget cuts that you're going to need when that bill goes through.

Obradovich: Tom, you said it's a good idea to cut the personal and the corporate at the same time because otherwise it may not get done. But the Governor argued that there needs to be time for the impact of the federal law, first of all, and second of all frankly that is where some of the big difference is as far as the revenue impact. The state does not know where the revenues are right now because it has been pretty flat. So why would it be a good idea to do both at the same time other than just the pragmatic legislative action?

Sands: Well, fortunately I don't have to put my political hat on anymore as the President of the Iowa Taxpayers Association. But it has been 1998 is when the last time the individual tax cut was put through. At that time it was across-the-board cut, not really any reform. It has been 1981 since corporate has been done. And we do have the highest top marginal rate in the nation and that is not necessarily anything to be very proud of. So there is a good argument that something needs to be done. Governor Reynolds in her State of the Union Address raised the concerns you did that it would be better to wait one more year to gather more information, that was back in January. The department has done, keeps doing a little more research on the effect and corporate income tax provides anywhere from $300 to $500 million of revenue annually depending. So it isn't as big an impact on the general fund. And maybe it has to, it obviously has to fit in the budget, it has to fit inside the triggers that she established to make it a little more fiscally responsible, but you can do that and still delay the impact a little bit but get it into law.

Obradovich: The reason obviously to cut corporate income tax is try to attract business to Iowa, right? But Iowa's biggest problem right now is lack of skilled workers. So why not just concentrate on personal income tax to attract skilled workers first?

Sands: Well that's a great point other than you also can't pick one over the other because it goes back to what comes first, the chicken or the egg. And yes, we do have a shortage of skilled workers, you talk to employers across this state and they'll all tell you that. But there is also a need to grow jobs. So they need to grow in tandem with one another and I think that's why you do both together.

Obradovich: Peter, chicken or egg, first of all? And do you think the tax code is the best way to attract either business or people to work in those businesses?

Fisher: Well, I think we need to recognize something and that is that Iowa's overall taxes on businesses are not out of line, we're right in the middle, and that comes from not some left wing organization but from KPMG, from Anderson Economic Group, from the Tax Foundation who finds us actually a little bit below the middle when you look at overall business taxes. So there really isn't an argument we need to cut the corporate income tax for competitive reasons and even if we did I think it would have very little effect on economic growth.

Obradovich: What about attracting workers because the Governor I think has pretty widely acknowledged, bipartisan acknowledged that skilled worker shortage is holding back Iowa businesses from expanding?

Fisher: Well, and I think we need to keep investing in our workers, in our education system, in our training system and that costs money. So my concern is that in the long run we are shooting ourselves in the foot if we keep doing tax cuts, if that is the only strategy that we have for growth.

Yepsen: Why do you say that we're shooting ourselves in the foot?

Fisher: Because we're underfunding the kinds of things that are really important. The state has an important role in the state economy, most significantly in the area of education where we're looking at a 1% increase in school funding this year, which doesn't begin to keep pace with the rising costs of educating students.

Yepsen: Mr. Sands, isn't the business community really looking not just for skilled workforce but a cheap skilled workforce? Why don't you want to pay the kind of money that you need to attract workers? Why don't you raise their pay?

Sands: Well, there's many employers across the state do pay a very good wage and benefit package. So it isn't the lack of pay that is motivating, or the lack of skilled workers. In fact, we can continue to do what Peter is suggesting in developing or providing more information into the training. But if you do that without growing jobs as well all you're doing is educating a workforce for surrounding states and that is what we have been doing for the last several states so I believe you have to do them together.

Yepsen: Doesn't corporate Iowa bear some responsibility for paying the costs of training workers?

Sands: Well I think definitely when you look at a skilled workforce that shouldn't be all up to the taxpayers of Iowa, that is a shared responsibility that falls inside of community colleges today as well as employees as well as employers to help do that and they can help train and they are partnering with a lot of community colleges.

Yepsen: Mr. Fisher, the big news right now, tariffs. It looks like we could be entering a trade war. What do you say to -- why are we even messing around with a tax bill when we don't know what the effect of this trade war is going to be on the Iowa economy? The Chinese are already talking about pork, eliminating pork exports, soybeans are next. What do you say?

Fisher: Yeah, the uncertainty I think is an important issue because we have been overestimating revenue growth for the last several years. We're having trouble figuring out exactly what we're going to have to work with next year. And now we're looking at a budget with probably more cuts in services with a shrinking pie and in the face of that additional uncertainty I think that's a problem.

Yepsen: Mr. Sands, isn't that a bad idea for us to be doing any of this, cutting these taxes, when we could be throwing the state into a recession as a result of what is happening just in the last few weeks on trade?

Sands: Well, I think if you put the wrong tax bill out there and all it does is simply cut with no actual reform in there it could create some problems with some of the uncertainty, but there's always uncertainty in life. And reform is more than just cutting or slashing, there is some reform in there, especially on the sales and use tax division on modernizing the Iowa code. And I don't believe that not touching the income tax system is a good idea, it just needs to be taken into consideration.

Yepsen: Dr. Fisher, I saw you nodding your head when he said sales tax. What do you want to see done there?

Fisher: I think both bills have, particularly the House bill, the Senate modified a couple of things, but yeah we do need to bring our sales tax system into line with all the changes that have happened because of technology. I think that is an important part of reform.

Henderson: But do you think that the students in Iowa City want to pay sales tax on their Netflix?

Fisher: Do they want to?

Henderson: Should they?

Fisher: Sure they should. I don't know if, nobody wants to, nobody is saying hey tax things that aren't taxed now. But yeah I think it's only fair to the brick and mortar stores in Iowa, the Main Street businesses, that have to collect sales tax and are finding it harder and harder to compete with the Internet giants that don't collect it.

Henderson: Tom, legislators have struggled with this for years and it just keeps getting worse. How do you really as a state capture this sales tax when people are making all sorts of purchases online?

Sands: Well, there's a lot of eyes and ears watching the Supreme Court and their ruling on overturning Quill obviously and that goes for every state --

Yepsen: Excuse me, overturning --

Sands: The Quill decision that was in a South Dakota case. We tend to use everything in slang. But it determined states had to have a true nexus to ask --

Yepsen: Sorry to interrupt, go ahead.

Sands: That's quite all right. And what I've seen, I was first elected in 2002 and first served in 2003, the amount of sales being lost online was minimal. But we've seen a societal change and it's a growing change. Nobody knows for sure how many dollars are being lost or not collected. All we know is it will be more next year and the following year. So now I'm exactly in agreement with Peter, it has become an equitable issue with businesses that are brick and mortar in this state that are treating, are getting treated differently than those out of state.

Henderson: So, Peter, would this be a fail if legislators take that sales tax part out of the final package?

Fisher: Well, I think it would because I think if you're really talking about reform that and a couple of other things are important. And also that is the big revenue producer. So then if you take that out then the whole package becomes even more costly to the general fund.

Obradovich: The sales tax piece it's interesting because it is on digital services, things like the Senate bill included things like Uber and Lyft, etcetera. But democrats have often said that sales tax increases are not progressive because they hit lower income people more than higher income people as a percentage of their income. Is that really true though with this digital increase? Is this really kind of a more progressive type of sales tax increase than you might if you just raised the rate generally?

Fisher: I think it is certainly more so than the general sales tax. But it's not a whole lot of money though. When you look at what the impact of this would be on the average taxpayer it's $40, $50, maybe $100 a year. And if you're using that to increase or to maintain funding to schools and other things that are important to people across-the-board I think it's a benefit and the regressivity issues becomes less significant.

Obradovich: And Tom, the Des Moines Register's polls show all the time that people find the sales tax to be the least offensive tax, they don't mind paying sales tax, probably because they don't really realize how much they're paying, right? But should this, are they missing the boat, are lawmakers missing the boat by not looking at opportunities to shift more of state revenue generating onto sales tax as opposed to just focusing on income tax generally speaking?

Sands: Well, with some states obviously like South Dakota that doesn't have an income tax their base is pretty broad and they charge sales tax on almost everything. Then for those that are worried that sales tax is too regressive is probably more of a case in South Dakota. In Iowa it may not be progressive but it's certainly not regressive because we take a lot of the sales tax and exempt it off of food, drugs, the needs. So it really becomes should it be fair, equitable and treated the same no matter where it's purchased? And I believe that is where most people would fall in.

Henderson: Let's shift to discussing how deep the cuts should be. Because of what happened at the federal level, and I don't want to explain why, the state of Iowa will get a tax windfall. Should this bill cut deeper than that? Or should it be, in other words, revenue neutral, in fact, giving Iowans back the extra taxes that they pay?

Sands: That is one of the big discussions that is going on right now I would assume in all caucuses. Yeah, I think Iowans will see like a $1.78 billion tax decrease at the federal level and in turn will see 90% to 95% of Iowans that pay income tax will see an automatic tax increase on their state returns. So you can take what the Department of Revenue estimates for increase in revenue, it's $28 point something million in fiscal year 2018, $188 million in 2019 fiscal year --

Henderson: So should this cut deeper than $188 million?

Sands: Yes.

Henderson: Why?

Sands: And it's got to be in triggers and fix, but if you just take that $188 million and give it back to Iowans it's still an automatic tax increase to certain Iowans because you can't do it in an equitable way. There will be people that aren't seeing an increase in their state returns that would get money back.

Yepsen: Dr. Fisher, what do you say to that? Is it a wise policy for the state to make sure that its citizens don't see a tax increase because they're getting a break from the federal government? Do we capture any of that for government use?

Fisher: Well, first of all, even with -- if we did nothing Iowans would have to give back 6% of the federal tax cut. Somebody at the top it's a $4,000 tax cut from the feds and they give back a couple hundred to the state, it's not, the impression out there is that we're taking a big chunk of it back, it's 5% or 6%. And in a year, last year we cut $84 million midyear and borrowed another $140 million to solve the budget problem. That would be a good use of that money to restore some of those funds.

Henderson: Tom has been talking about triggers and we're not talking about guns, we're talking about a mechanism in this bill that would enact the tax cuts if the state's economy is growing and the state collects at least 3.5% more in taxes from one year to the next. Peter, what do you think about that concept of putting that in the bill so that the taxes don't get cut unless the economy is growing?

Fisher: Well, I think it's not a bad idea in the face of it but I think you have to understand that over half of those tax cuts are going to occur right away in the first year, no triggers taking effect regardless of what happens to revenue. And after that the revenue targets are not that hard to meet, so we're probably going to see all of those tax cuts.

Yepsen: I want to switch the conversation to the issue of tax credits, big debate in Iowa about giving too many tax breaks to large businesses. Dr. Fisher, what do you say to that argument that we have to be plugging some of these credits?

Fisher: Well, when you look at what has happened to the budget overall and services that have been cut, school funding in the last five years has gone up a total of 4.9% and then you look at business tax credits in the last five years, they have doubled from $200 million to $400 million a year. So one question is why are business tax credits held harmless? Why are they not part of the discussion when we have to do belt tightening? It seems to be off the table.

Yepsen: Mr. Sands, what do you say about that? Big business, big business getting all kinds of tax breaks, Apple, some of these major corporations, why does the business community think they need that?

Sands: Well, I've heard all the political arguments over the years and most of these, the increase in tax credits is come in with Senate democrats having control and House republicans, we're all guilty of doing that and they're largely there because of our terrible tax code at the corporate level. What our association says is we don't want to separate tax credits from tax reform, that it all needs to be in the same bill.

Henderson: So is it as robust as you think it should be in either one of these proposals?

Sands: On the --

Henderson: Tax credits.

Sands: I think the Senate certainly makes a good step forward. And the part of the argument that never gets talked about is the credits, we know that they're up to $400 million liability today, no one talks about the revenue that they generate because they do generate revenue, but the $400 million is pretty healthy if we reform our tax code. But business doesn't get all of them, they only get about 49%. And if you look at the social and close to social they get about 40% and energy gets 10%.

Obradovich: Another tax issue that is before the legislature is the property tax and how much the state is paying back local governments because of the property tax cut that passed when you were in the legislature and that came with a promise that some of that revenue would be repaid. Now the legislature is looking at backing away from that. Good or bad idea?

Sands: Well that was, I remember that very well, it took about three years and some  years off my life I think. When the first bill started I think it had like a 40% rollback for commercial property with no backfill to local government and we ended up with a 10% rollback and backfill that was --

Obradovich: Should they keep their promise though? Should they keep that backfill going?

Sands: I believe that the revenue for the, especially for the cities that have seen assessment growth and construction growth where their assessed value is actually in surplus of what it was in 2013 the taxpayers shouldn't be penalized both ways.

Yepsen: Dr. Fisher, how do you think about this backfill issue?

Fisher: Well, I think, I don't think it's a surprise to anybody, maybe a surprise that it came this soon, but that has been the history of backfills is that they have been ended.

Obradovich: Is the state taking on too much that property tax should be paying for? They did some changes in the school funding formula, they have done some other things where they have taken over some property tax, originally property tax paid items, are they doing too much of that or not enough?

Fisher: Well that's a good question. I think they made some progress in mental health which arguably should be a state function and not a county one. But it was advertised as the biggest property tax cut in history but it's going to end up now with I think $59 million of that backfill that is, what I've heard, is probably all going to be ended, is to schools and that's just going to be all expressed in property tax increases.

Yepsen: Gentlemen, we have to leave it there. I'm out of time. Thank you both for being with us today, appreciate it.

Thank you.

Thank you.

Yepsen: And thank you for joining us. We'll be back with another edition of Iowa Press next week at our regular airtimes, Friday night at 7:30 and Sunday at Noon on our main Iowa PBS channel with a rebroadcast on our .3 World channel Saturday morning at 8:30. For all of us here at Iowa PBS, I'm David Yepsen. Thanks for joining us today.


Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are there is an Iowa banker who is ready to help you get where you want to go. Iowa Bankers, allowing you to discover the genuine difference of Iowa banks.     

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