Taxes and Economics

(music)

Governor Kim Reynolds approved a new tax plan on March 1st. How will this so-called flat tax impact Iowa's economy and future tax revenue? We sit down with a pair of economic experts, Ernie Goss and Peter Fisher, on this edition of Iowa Press.

(music)         

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. Fuel Iowa is a voice and a resource for Iowa's fuel industry. Our members offer a diverse range of products including fuel, grocery and convenience items. They help keep Iowans on the move in rural and urban communities. Together we Fuel Iowa. Small businesses are the backbone of Iowa's communities and they are backed by Iowa banks. With advice, loans and financial services, banks across Iowa are committed to showing small businesses the way to a stronger tomorrow. Learn more at IowaBankers.com.

(music)                            

For decades Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating 50 years of broadcast excellence on statewide Iowa PBS, this is the Friday, March 18th edition of Iowa Press. Here is Kay Henderson. 

(music)

Henderson: The Federal Reserve was in the news this week responding to inflation. At the state level, a batch of tax policy will be going into effect soon. And our guests this week are here to talk about the economy and economic issues. Peter Fisher is Research Director at Common Good Iowa and Ernie Goss is a Professor at Creighton University. Welcome back to the show, both of you.

Goss: Thanks, good to be here.

Fisher: Good to be here.

Henderson: Also joining the conversation are Stephen Gruber-Miller of the Des Moines Register and Erin Murphy of the Gazette in Cedar Rapids.

Murphy: Gentlemen, in a few years all Iowans will be paying a flat income tax rate of 3.9% and wanted to get both of your takes on that. It was pitched as something that is flat and fair, that everybody pays the same rate. Peter Fisher, we'll start with you. What will be the ultimate impact of that transition?

Fisher: Well, I think it's important to start with that presumption that flat is fair. And it's also important to look at the overall tax system. If you look at taxes of all kinds in Iowa, income, sales, property taxes, gas taxes, you find that the existing tax system is not flat at all, it's actually somewhat regressive, people at the bottom pay a higher share of their income than people at the top. So the income tax is the only progressive part of it and when you cut the income tax, particularly when those cuts are targeted very much at the top incomes, that tax becomes much less progressive and the overall tax system becomes actually less flat.

Murphy: Ernie Goss, how about you?

Goss: Erin, I think it was necessary. We're talking about a system that's, you've got to be more competitive these days in terms of your income tax. Now, why is it different today than it was say in 2017 in December when the tax reform was passed, a bill was passed under the Trump administration? What that did is kept the deductibility of state and local taxes at $10,000, which meant that any high tax states, and I would argue that Iowa is a high tax state, is going to suffer and suffer they did with people moving out, out-migrating. And also then you've had remote working that now individuals can work in Des Moines and be in Hawaii, time differences aside. So, it is a move to make Iowa more competitive and I think it absolutely did. Now, I think Peter makes a good point about regressivity. But if you really want to do something that reduces regressivity in Iowa, get rid of your casinos. That is high taxes on those who make less. So we don't hear anything about that. What about lotteries in Iowa and Nebraska and Nebraska's new adoption of casinos as well? We seem to talk about it only when it comes to income taxes and ignore what it does in terms of high taxes on the lower income groups.

Gruber-Miller: Well, I want to ask about something you said a second ago, which was outmigration. Another part of this tax bill would eliminate taxes on retirement income, 401Ks, pensions, things like that. And part of the stated rationale was they want to stop people moving out of Iowa when they retire. I'm curious if you think that the bill will have that effect?

Goss: It will have some of that effect. In other words, and people will say, where do you get this that people respond to incentives? Where do you get this that people are motivated by increasing their net income, the reduction in taxes? How about the Old Testament? That's what we're talking about. That has been around a few years. In other words, people, individuals do respond to incentives and if you punish them in terms of taxing their Social Security they will take the Social Security to another state, Florida perhaps. So, it will have, now the question is how much. That I'm not certain of but it is certainly where other states are moving. In other words, for example, Arizona just passed a flat tax, a flat tax in Arizona and also you're going to see more and more states doing that. So we've got these baby boomers, and I'm one of them, you move in, you're going to get your Social Security, where are you going to take it? You're going to take it to Wyoming no tax, South Dakota no tax. So these are no tax, no income tax states. And Nebraska is going to probably move to do the same in terms of Social Security taxes. Now we have to wait and see when the session is over. But I think it's a good move. States have got to get more competitive. This is not that last century, that old century or that other millennium. We're talking about being competitive and this is a move to, I think Governor Reynolds and the legislature made a good move here.

Gruber-Miller: Peter Fisher, what do you think will be the impact of that eliminating taxes on retirement income?

Fisher: Well, I think first of all, if you look at what determines where people move, there have been a lot of studies of migration of people in general and the elderly, climate is a major factor, being close to jobs if you're pre-retirement age, being close to family are the more important factors. So, taxes are going to matter to a small number of people. But if you look at the magnitude of the outflows it's less than 1% of seniors leave the state of Iowa in a given year. We're talking about a pretty tiny number of people and we're trying to deal with that supposed problem with a $400 million tax cut if you look at just the pension exclusion part of it. It's a very expensive way to address that I would say is hardly a problem to begin with since the numbers are very small.

Henderson: Just to be clear for our viewers, Iowa does not currently tax Social Security benefits, just to be clear that was something you brought up, Mr. Goss. There is a relatively new kind of tax break for retired farmers in that they can receive cash rent payments for the land they own tax free. Peter Fisher, is there any research on what effect this might have?

Fisher: If there is I don't know about it. I think, I suspect that is there because they are proposing let's exempt pension income, retirement plans and a lot of farmers don't have much. So they said, well what are you going to do for us? Well, your income in retirement, you move to a nursing home, you're collecting rent from the farmland you still own, so I think that is why they did it.

Henderson: Mr. Goss?

Goss: Well, this comes from the Federal Reserve of Chicago. Farmland in Iowa increased from January of 2020 to January of 2021 by 30%. So we're talking about some hefty increases. And what's going to happen, of course, is the taxes, the property taxes on that and in many cases you're taxing individuals out of their land in some cases. In other words, farmers -- I'm a little off target here I understand -- farmers are not in the business of selling their land, they're in the business of farming and then later on getting rents. So I'm not familiar with the impact of that issue. But back to the point, and this is coming out in my next newsletter -- I'm talking back to the income taxes if I can do that, if I may -- the top 10 states in the U.S. that have the lowest income tax burdens gained about 1.8 million residents, individual workers between 2017 and 2021. The top 10 income tax states lost about the equivalent. So we're talking about individuals really moving and they do respond, I disagree with what Peter is saying, that there are obviously more important, there may be more important reasons. But when you're on the margin, a thousand here and a thousand there, you're talking about motivating, incentivizing individuals to move out of the great state of Iowa, Nebraska, South Dakota, well South Dakota is different no tax there, but luckily for Iowa you're bordering two high tax states. Now, the question is what happens in Illinois, what happens in Minnesota and what happens in Wisconsin, the other third state, they are three high tax states and you've got to be competitive. Nebraska, you're not competitive, Iowa is not competitive against Nebraska, competitive against Missouri or South Dakota, three other states that you border.

Murphy: So we want to also ask, because this ultimately has a financial impact which we got a first look at recently when the state's Revenue Estimating Conference put together its projections for state revenue for future years and we're already seeing the impact in a reduction in future state revenues and that number figures to only grow as these tax cuts become more implemented. Legislators tell us that it'll be paid for, the state won't have to reduce services as these taxes come to full, these tax cuts come to full implementation. Ernie Goss do you believe -- have they done solid math? Do we believe them?

Goss: There will be cuts, I think it's more proper to say the growth in the programs going forward will be less than it would be otherwise. And when you talk to, in some cases you talk to a local and state individuals, you say we're going to cut the growth, they're like you can't cut our taxes. We're not talking about cutting the taxes, we're talking about cutting the growth and that is what we will see here. And this is, we've all in academics, all of us, we have to become more competitive and I say state and local government agencies whether it's schools, schools have to be more competitive, the school systems have to be more competitive. By that I mean we can't say there's not any fat to be cut out there. In universities, believe me there's fat there. And I may be a good example of that fat, I don't know.

Murphy: Peter Fisher, what do you see when you look years down the road?

Fisher: Well, first of all, I don't think Iowa is a high tax state for business taxes or individually. If you look at the reports produced by a couple of the major accounting firms periodically on overall business taxes in Iowa we're right in the middle, we have been for a long time and we still are. And if you look at the individual tax levels in Iowa compared to other states we're in the middle of the pack. We're not at the top. So I think the competitiveness argument is largely a rationale for cutting taxes on businesses and people at the top because that's what we've been doing, whenever we hear that argument for the past 20 years that's what we've ended up doing. But if you look at the income tax cuts in this bill, the income tax finances half of the state general fund and what we have done is we have taken 40% of the income tax revenue out of that revenue stream. And we can't do that without sooner or later feeling the consequences. Education is over half of the general fund, it's about 54%, K-12 and Regents institutions and community colleges. There's going to be an impact on education down the road. The surpluses have allowed us to postpone that. So the day of reckoning is three or four years down the road and that's a long time for a legislator. That's going to be somebody else's problem. But there will be consequences and we're not going to be able to fund education at the levels even required to keep pace with inflation. We haven't been in the last few years.

Gruber-Miller: I want to switch gears to another economic issue that the state is looking at. Politicians in Iowa are talking a lot about the state's worker shortage. One of the things that the Governor did last year to try to address this was she cut off federal pandemic unemployment programs earlier, including an extra $300 a week for people on unemployment in Iowa. I'm curious to get your thoughts on this because a Wall Street Journal analysis last year found that of about half the states in the country, those that cut those unemployment benefits off earlier added jobs at a slower rate than those that kept the benefits. I'm curious if you have thoughts about sort of what impact these kind of moves have on getting people back to work. Peter Fisher?

Fisher: Well, I think it's pretty clear they didn't have much impact. And I think there's some reasons for that. One is that you have to realize that less than half of the people who are unemployed are collecting unemployment benefits so it's not the whole unemployed population that you're affecting. Secondly, unemployment benefits at that time were pretty generous, the pandemic benefits. But now they're back to replacing about 40%, 45% of your wages. So you're not, people today on unemployment are not, they're making less than half of what they would if they had their old job back. And then I think the other factor is that people have been leaving the labor force, it's not people sitting on unemployment, it's people who dropped out of the labor force and have only just started trickling back in again in the last six months. That is the real issue in terms of the labor shortage and that has to do with a whole range of factors, originally child care issues, job safety issues, now a variety of other factors including possibly some recent evidence that long COVID actually is keeping people out of the labor force.

Gruber-Miller: Ernie Goss, your thoughts on the Governor's move last year to cut those benefits off earlier?

Goss: Stephen, I think that was correct. In other words, when you pay somebody more to remain unemployed, and that's what we're talking about, then what do they do? They remain unemployed. Now, the impact, how many is the question. But the idea that it didn’t' have an impact sort of goes against economic theory in the sense that people are motivated by you're paying them more to remain unemployed or you're paying them more to not work then there are some individuals that will not work. Now, the other part of this is we're forgetting many other parts of the stimulus package passed by the Trump administration and the Biden administration which weren't just unemployment benefits, there are others that continue and remain and we're talking about most states, and Iowa is one of them, states across America are still below pre-pandemic employment levels. If you look at February of 2020 versus today we're not back there. What has happened is, as Peter is saying, a lot of folks left for other reasons and when you cut the unemployment benefits that was not a big motivating factor for them to come back to work, but it did in some ways have some impacts because we know that food stamps were, the food stamp program was increased by 50%, the payments. Now that's, I don't want to argue against that, I just think we need to recognize it wasn't just unemployment benefits, there were other programs.

Henderson: Well, there is another proposal at the Capitol related to unemployment.

Gruber-Miller: Right, the Governor is now proposing cutting off those benefits earlier, the maximum benefits from 26 weeks to 16 week maximum. If you're saying that there are other effects I'm kind of curious.

Goss: Well, it's hard to argue that our surveys, we do two surveys a month at Creighton University, the number one issue is finding and hiring qualified workers. Iowa has a very low unemployment rate, Nebraska has one of the lowest in the nation. It's hard to argue that you can't find a job. We all, those who are viewing this broadcast are saying, well wait now, my dry cleaners they're closing down two days a week because we can't find workers. So there's something wrong here. In other words, if we've got lots of job openings, why aren't those job openings being filled?

Henderson: Peter Fisher?

Fisher: Right, well I think there's, the question has been puzzling a lot of people. Where have the workers gone? What are the sources of the job shortage? And I think there has been a variety of explanations including the inertia one. Well, people were finally forced out of a job by the pandemic and discovered they can get a better job. People get a better job, maybe the spouse doesn't need to work, maybe they can get rid of that second job. So that will show up as some people dropping out of the labor force. But we've got about, if the labor force participation rate were now what it was before the pandemic, there would be about another 75,000 Iowans at work. So the question is why aren't they in the labor force? It's not they're collecting unemployment, they're not in the labor force.

Murphy: And to Stephen's point, lawmakers are trying to address this right now. They have taken some steps. I would be curious to hear from each of you if a legislator came to you and said, how can we get these Iowans back to work, how can we help these businesses fill these open jobs, Peter Fisher, what would you tell them?

Fisher: Well, one of the things we could do is do something about the child care issue and that has been a broadly supported issue but we can't seem to get anything done on it. The business community recognizes child care as a major burden to people coming back to work and during the pandemic for health reasons, probably still to some extent there has been trouble getting those slots restored. But for a family with young children, child care can take 20%, 25% of your income.

Murphy: Ernie Goss -- sorry -- Ernie Goss, what would you tell legislators asking --

Goss: Well, Erin, this is probably going to surprise you but I agree with Peter there. I agree completely. However, it's not just the, it's the regulatory environment, there are regulations that have smothered some child care, ability to offer child care in Iowa and most other states so there are moves that need to be taken to remedy that, make it easier to provide child care. And that is, I would agree that is one of the major, major reasons that you have, we're not back to pre-pandemic levels of employment.

Henderson: Lots of questions, not much more time. Stephen?

Gruber-Miller: Yeah, I want to ask about the federal pandemic relief money that has come into the economy over the past couple of years. Obviously that has done a lot right, sort of shore up, there has been a lot of money circulating through Iowa's system and I'm kind of curious what you think is going to happen because that's one-time money. Is that money sort of done running through Iowa's economy and people's bank accounts? Or are we going to see a drop off as that doesn't continue? What do you think the long-term effects of the stimulus will be? Peter Fisher?

Fisher: Well, we've got another year or so before all of the federal pandemic aid to the state and local governments has to be spent. There's still quite a bit of that out there. Most of the financial assistance to individuals is gone other than what counties or the state may provide out of the -- those effects are going to diminish and I'm sure that was built into those revenue estimating council forecasts of declining revenues.

Goss: I think one of the issues that is very important right now is the cash balances out there because of the stimulus programs is quite large. And it will, as Peter says, diminish over time. However, what is not going to diminish in reaction to that is the Federal Reserve's interest rate hikes. The Federal Reserve has gotten behind the curve on this, they should have been raising rates much earlier than this, should be much larger. So what we're going to see in addition to these balances will diminish is higher interest rates. And we need to get ready for that. The Federal Reserve is probably going to raise rates by as much as 1.5% more percentage points more by the end of the year. So that is a big issue, a head wind for all businesses, individuals and the government for sure.

Henderson: A big issue for many individuals is when they go to the gas pump they see that prices rose when crude oil prices went up. Crude oil prices are down. Why aren't gas prices down, Ernie Goss?

Goss: Well, it's sort of they do go up faster than they come down, no doubt about it. But they will come down ultimately. And what we need to see of course, we've seen an administration that has been antagonistic toward oil, the petroleum industry. Now, the President was upfront initially about his antagonism toward the industry. Now he's saying, well I'm not really -- no, he is. And so when you start saying, how can you encourage more drilling, more oil because that's one of the things we need, when the industry recognizes that's not long-run, in other words, get me past the elections of November of this year 2022, then I'll get back to where I really want to go which is to stomp out the petroleum industry. That is the stated goal, one of the goal objectives.

Henderson: Peter Fisher?

Fisher: That's not the long-term solution there. You're right, the long-term solution is moving towards solar and wind and replacing fossil fuels both for environmental reasons and for energy independence reasons.

Goss: And I'm not denying that. But the idea that we're talking about base load, in other words, wind and solar at this point in time are not base load. We saw it in Texas, in other words, you have to have backup right now so it is somewhat expensive. But we do have to move in that direction, I don't deny that. But you don't move in that direction as the administration has done.

Henderson: But today when I'm filling my tank do I see price gauging, Peter Fisher?

Fisher: Well, when the worldwide price of crude oil goes up and domestic gasoline producers' costs rise very little there's some windfall profits for sure because their costs haven't risen but they can charge more at the pump because the price of gas is higher, because they can.

Goss: You didn't call it gauging though.

Fisher: I didn't call it gauging, I called it windfall profits.

Goss: Okay. The administration is talking about a windfall profits tax which is completely, it should not be. In other words, that will not serve the industry, will not serve consumers out there. If you're talking about this part of the country we are much bigger users of those products because we don't tend to have as much public transportation, we drive greater distances. So when we pull up to the pumps it's more expensive in terms of overall usage. So we have a special interest here in that industry, what happens there.

Henderson: My job is to tell you and our viewers that we're out of time for this conversation. Thanks to both of you gentlemen for joining us today.

Goss: Boy that was quick.

Henderson: You can watch Iowa Press episodes at any time at iowapbs.org or you can join us on Friday nights at 7:30 and on Sundays at noon. For everyone here at Iowa PBS, thanks for watching whenever you do.

(music)

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. Fuel Iowa is a voice and a resource for Iowa's fuel industry. Our members offer a diverse range of products including fuel, grocery and convenience items. They help keep Iowans on the move in rural and urban communities. Together we Fuel Iowa. Small businesses are the backbone of Iowa's communities and they are backed by Iowa banks. With advice, loans and financial services, banks across Iowa are committed to showing small businesses the way to a stronger tomorrow. Learn more at IowaBankers.com.