Too many tax breaks?

Iowa lawmakers must figure out what works and what's waste

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On a recent Friday, State Reps. Ken Rizer, R-Cedar Rapids, and Ashley Hinson, R-Marion, stood before a large room filled to capacity with constituents and others gathered for a legislative listening post.

The crowd easily topped 200 people. Like so many legislative forums across Iowa in recent weeks, it was standing room only. And intense.

Many came to express anger at moves made by the Republican legislative majority to curtail collective bargaining rights for public employees, provide just a 1.1 percent funding increase for public schools and approve a package of current-year budget cuts harming state university students and others.

The questions were pointed. The audience was vocal in its displeasure.

“We’re not Iowa nice anymore,” an audience member proclaimed.

Behind the bluster, much of our current political turbulence reflects a tense tug of war over scarce resources and tight revenues.

Republican legislators contend they sliced bargaining rights to save taxpayer money at the state and local level. They argue that the small, $40 million increase in state school aid was necessitated by limited revenues. A decline in expected tax collections forced lawmakers to cut the budget for universities, community colleges and other agencies. It can’t be helped, lawmakers insist. The money is not there.

But why isn’t it?

How much revenue, and to whom, have legislators given away in the form of tax cuts, credits and exemptions over the years? What kind of return has the state seen on those investments? The questions came up at the forum. They have been on our minds, as well.

It is difficult to get a crystal clear picture of just how much these “tax expenditures,” as they are commonly called, are sapping the flow of state revenues, but the figures we do have are startling.

CUTS, EXEMPTIONS AND CREDITS

According to a Department of Revenue study of the Fiscal Year 2010 — the most recent comprehensive study available — 259 tax cuts, exemptions and credits previously passed by legislators added up to $12.1 billion in a single year. That’s an astounding number in a state where the entire state general fund budget is $7.2 billion.

More recent studies of specific types of tax breaks and credits show their economic impact is steadily rising:

• According to the Iowa Department of Revenue’s latest Tax Credits Contingent Liabilities Report issued in December, the revenue impact of more than three dozen tax credits will add up to $404.2 million during the current budget year ending in June. That’s up from $353.8 million last year. By Fiscal Year 2021, the report projects that cost to hit $437 million.

• The largest among these is the Earned Income Tax Credit, which cuts taxes and provides refunds to low-income workers to encourage employment. Close behind is the $58.1 million the state delivered in credits for historic preservation projects and $56.8 million for research and development activities by Iowa companies. Rockwell Collins has been a major recipient of the credit, which not only offsets tax liability but delivers a taxpayer-funded check to its recipients. Still, in the big scheme of Statehouse tax cutting, this is just the tip of a very large iceberg.

• In 2010, sales and use tax breaks alone added up to $3.9 billion. A new report by the department shows that in Fiscal year 2015, that number rose to $4.7 billion — an increase of 21 percent in five years and of 98 percent since 2005.

Among the largest sales tax breaks is the exemption for food items, saving consumers $435.6 million at the grocery checkout in FY 2015. Exempting medical services saves $570.5 million. Numerous sales tax exemptions benefit farmers, including a $117.4 million break on the purchase of commercial fertilizer, a $53.4 million break on herbicides and other chemicals and a $311.4 million break on the purchase of feed.

• And none of these very big tax break estimates include a package of commercial property tax reductions and credits approved on bipartisan votes in 2013.

According to the non-partisan Legislative Services Agency, the cost of providing business tax credits, replacing lost local revenue and covering school funding that otherwise would have come from local property taxes now tops $300 million annually.

MORE TAX BREAKS PROPOSED

Many tax breaks serve a compelling public purpose. But the case for others would appear far less compelling, and lawmakers, for all their talk of comprehensive studies, have been done remarkably little to figure out what works and what’s waste. Their actions carving holes in the tax code have been expensive, but talk of reviewing those calls has been cheap.

And the cuts keep coming. During the current legislative session, two-dozen bills creating tax breaks, cuts and exemptions have been filed. It’s unlikely many will become law, but it’s a good measure of the Legislature’s appetite. The hunger to hand out more breaks remains strong.

Hinson sponsored HF 103, which would provide a sales tax exemption on sewer bills paid by paper recycling mills. Rep. Zach Nunn, R-Bondurant, sponsored HF 132, which would provide a sales tax break on supplies purchased by nonprofit blood centers.

Rep. Jarad Klein, R-Keota, filed HF 177, removing sales tax from the purchase of European honey bees. Reps. Dawn Pettengill, R-Mount Auburn, and Rob Taylor, R-West Des Moines, co-sponsored HF187, which exempts limousine service from sales tax. A bipartisan group of 14 House members back HF 374, exempting sanitary hygiene products from sales taxes.

Rep. Tedd Gassman, R-Scarville, filed HF 300, giving an income tax credit to married couples who complete premarital counseling.

Sen. Brad Zaun, R-Urbandale, sponsored SF 34, phasing out state income tax on all retirement income over five years. In year five, the break would top $340 million annually.

Zaun also wants to phase out the state inheritance tax over nine years, SF 82, a $196 million cut by 2029.

CLEANING HOUSE

Rizer and Hinson both have conceded that our state’s lengthy list of tax breaks deserves a comprehensive review.

“I believe there are tax credits that are given out that are not doing what they’re intended to do,” Hinson, vice chair of the House Appropriations Committee, said at that recent listening post. “I do support that close and in-depth analysis of our tax credit program because I don’t think we should be giving out tax credits piecemeal across the state.”

But if either of those lawmakers — or any other — have drafted a bill that would roll back breaks with unproven value, or calling for a true comprehensive review of tax giveaways, we haven’t seen it.

If Iowa’s system of tax cuts, credits and breaks is allowed to keep growing, we could soon see the state giving away $2 in potential tax revenue for every $1 it collects.

And if state revenue growth evaporates before it can be used to meet state obligations — including K-12 education, state universities, public safety functions, our court system, mental health treatment and other priorities — it’s misleading to call Iowa’s budget challenges a spending problem. Nor will it work to try to solve those challenges simply by cutting budgets.

Of course Iowans expect and deserve state departments and services to be run efficiently, but the blame also lies with politicians who too rarely said no to requests for tax breaks from interest groups. They add up. And now the sum of all those cuts and nibbles is taking a bite out of Iowa’s future.

It’s long past time for lawmakers to stop paying lip service to the idea of cleaning up the tax and to roll up their sleeves. If a credit, break or exemption doesn’t clearly contribute to the common good, then it should go.

Lawmakers should approve no new tax reductions until they’re able to show Iowans the value of the tax measures they’ve already approved. Lawmakers who strenuously and correctly insist all new programs and state regulations should be fully assessed for their economic impact and taxpayer value should apply the exact same logic to tax expenditures.

Lawmakers who are eager to reform the state’s tax structure, with hopes of flatter and even lower taxes, must start by assessing the patchwork of favors already handed out by legislators who came before them. Seeking to simply superimpose more breaks and favors on top of the existing hodgepodge would be public policy malpractice.

In the past, commissions, committees and panels have been assigned to look at tax credits and exemptions. But they only have scratched the surface. What we need now is a long, hard look at exactly what benefits Iowans are buying for more than $12 billion.

Iowans deserve such a review, which places the state’s future needs above the present pull of partisan politics. They’re expecting more than apologies for the next round of harmful budget cuts, excuses for why their community priorities still are short of cash and vague promises to clean house ... someday.

• Comments: (319) 398-8469; editorial@thegazette.com

BY THE NUMBERS

2013 Property Tax Reform Act (FY 2017)

Business Property Tax Credit: $125 million

Property Tax Backfill to Local Governments: $152.2 million

Additional state school aid to replace local property taxes: $25.1 million

Total state general fund budget impact: $302.3 million

Source: Legislative Services Agency

Top 10 Iowa Income Tax Credits (FY 2017)

$70.9 million — Earned Income Tax Credit: A refundable tax credit for low- and moderate-income workers intended to encourage employment. Size of the credit depends on income.

$58.1 million — Historic Preservation/Cultural and Entertainment District: This tax credit, administered by EDA and the Iowa Department of Cultural Affairs, provides a 25 percent tax credit for qualified expenditures made in the rehabilitation of eligible historic properties.

$56.8 million — Research Activities Tax Credit: This credit is available to taxpayers who increase research activities in Iowa. The Iowa research tax credit relies on the federal definition of qualified research expenditures.

$42.5 million — Iowa Industrial New Job Training Program; This program, administered by Iowa’s Community Colleges, assists businesses that are creating new positions with new employee training. Participating companies divert withholding taxes that would be remitted to the Department of Revenue to a community college to pay for training for company employees.

$37.6 million — High Quality Jobs Program: This program, administered by Economic Development Authority, provides tax benefits to eligible companies that create high-paying jobs and make capital investments.

$23.1 million — Enterprise Zone Credit and Housing Component: This program, administered by Economic Development Authority, encourages investment in Iowa’s economically distressed areas by providing local and state tax credits, refunds and exemptions to qualifying companies that expand or locate in designated Enterprise Zones.

$17.8 million — Biodiesel Blended Fuel: This per gallon credit is available to retail dealers who sell biodiesel blended fuel.

$15.2 million — Tuition and Textbook: This credit is available to individual taxpayers who have one or more dependents attending grades K-12 in an Iowa school. The credit percentage is 25 percent of the first $1,000 paid for each dependent for tuition and textbooks.

$11.3 million — School Tuition Organization: This credit, administered by Iowa Department of Revenue, is for 65 percent of the amount of a voluntary cash contribution made by a taxpayer to a school tuition organization

$9 million — Renewable Energy: This credit is available to a producer or purchaser of energy from a renewable energy facility approved as eligible by the Iowa Utilities Board.

Source: Iowa Department of Revenue

Examples of Sales and Use Tax Exemptions (FY 2015)

$320.7 million — Transportation Services and Delivery Charges

$117.4 million — Commercial Fertilizer and Lime

$435.6 million — Food for Human Consumption

$465.8 million — Construction Services

$570.5 million — Medical Services

$137 million — Packaging containers and supplies sold to retailers and manufacturers

$311.4 million — Agricultural Feed

$53.4 million — Ag chemicals, herbicides, pesticides

$3.6 million — Annual Sales tax Holiday

$35.5 million — Electricity and equipment for Data Centers

$10.5 million — Fuel used in grain drying

$19.9 million — Lottery tickets

$7.9 million — Massage Therapy

$6.9 million — Newspapers

Source: Iowa Department of Revenue

Top 10 Iowa Income Tax Credits

$70.9 million — Earned Income Tax Credit: A refundable tax credit for low- and moderate-income workers intended to encourage employment. Size of the credit depends on income.

$58.1 million — Historic Preservation/Cultural and Entertainment District: This tax credit, administered by EDA and the Iowa Department of Cultural Affairs, provides a 25 percent tax credit for qualified expenditures made in the rehabilitation of eligible historic properties.

$56.8 million — Research Activities Tax Credit: This credit is available to taxpayers who increase research activities in Iowa. The Iowa research tax credit relies on the federal definition of qualified research expenditures.

$42.5 million — Iowa Industrial New Job Training Program; This program, administered by Iowa’s Community Colleges, assists businesses that are creating new positions with new employee training. Participating companies divert withholding taxes that would be remitted to the Department of Revenue to a community college to pay for training for company employees.

$37.6 million — High Quality Jobs Program: This program, administered by Economic Development Authority, provides tax benefits to eligible companies that create high-paying jobs and make capital investments.

$23.1 million — Enterprise Zone Credit and Housing Component: This program, administered by Economic Development Authority, encourages investment in Iowa’s economically distressed areas by providing local and state tax credits, refunds and exemptions to qualifying companies that expand or locate in designated Enterprise Zones.

$17.8 million — Biodiesel Blended Fuel: This per gallon credit is available to retail dealers who sell biodiesel blended fuel.

$15.2 million — Tuition and Textbook: This credit is available to individual taxpayers who have one or more dependents attending grades K-12 in an Iowa school. The credit percentage is 25 percent of the first $1,000 paid for each dependent for tuition and textbooks.

$11.3 million — School Tuition Organization: This credit, administered by Iowa Department of Revenue, is for 65 percent of the amount of a voluntary cash contribution made by a taxpayer to a school tuition organization

$9 million — Renewable Energy: This credit is available to a producer or purchaser of energy from a renewable energy facility approved as eligible by the Iowa Utilities Board.

Source: Iowa Department of Revenue

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