Tools exist for robust oversight of state tax expenditures
Tax expenditures — special tax credits, deductions, exclusions, exemptions, deferrals and preferential tax rates — substantially reduce the revenue the government collects but can help achieve statewide social and economic goals.
Since 2010 a group of Iowa lawmakers have been tasked with reviewing and evaluating the benefit of more than 250 tax expenditures that deflect more than $12 million from state coffers, but even those who serve or have served on the committee aren’t confident the group is meeting its goal.
LEGISLATIVE TAX EXPENDITURE COMMITTEE
The piece of Iowa Code establishing the Legislative Tax Expenditure Committee also requires the group to “evaluate any tax expenditure available under Iowa law” to “assess its equity, simplicity, competitiveness, public purpose, adequacy, and extent of conformance with the original purposes of the legislation” that established it. Specifically, the committee is to list the goals of expenditures and offer a calculation of return on investment.
Certain tax expenditures were placed on a multiyear timeline, although group members can add others at any time. Following review, the committee shares its findings with the larger General Assembly through a written report to the Legislative Council. It’s also charged with creating and maintaining a system to make expenditure information and the group’s findings accessible by the public.
“Return on investment calculation means analyzing the cost to the state of providing the tax expenditure, analyzing the benefits realized by the state from providing the tax expenditure, and reaching a conclusion as to whether the benefits of the tax expenditure are worth the cost of the state providing the tax expenditure,” notes the Iowa Code.
The mandate looks good on paper — especially now that the state is struggling with lower than expected revenues. But, from a practical standpoint, the committee has not provided the intended levels of scrutiny or transparency.
For instance, there is no public portal where citizens can easily access the committee’s work, or view comprehensive summaries of expenditures already reviewed. The committee does publish a list of documents, but there is no link to that repository from the committee page on the legislative website.
Time-consuming manual searches are needed in order to cross-reference committee work with legislative action.
Members we surveyed couldn’t point to any tax expenditure changes that stemmed directly from committee review, although many said knowledge gained informed their decisions on other related legislative proposals.
That might be because there is no metric for calculating return on investment, despite the Code’s requirement.
Instead of thoughtful and deliberate expenditure program reviews that culminate in fact-based cost analysis, the legislature continues to debate bills during times of crisis, like now, when revenue estimates fall short. Even worse, many of the lawmakers behind those bills aren’t basing their proposals on the knowledge that is being gathered through the committee.
CURRENT STATE OF REVIEW
Members of the Legislative Tax Expenditure Committee meet once a year, outside of the legislative session.
One of its first reviews, summarized in a June 2012 report, focused on the High Quality Jobs Program and is typical of the committee’s work.
The group heard from legal counsel for the Iowa Economic Development Authority, which administers the program. The agency provided a written report, and the representative gave a presentation. Both documents are available to the public as separate downloads from the committee document online repository.
The committee’s report to the Legislative Council is five paragraphs, or about one typed page. Roughly 90 percent is a summary of the program.
The final paragraph focuses on evaluation: “(Counsel) provided an explanation and analysis of the High Quality Jobs Program’s performance. (Counsel) then proposed a method for calculating the state’s return on investment by analyzing both the cost to the state and the benefits realized by the state. According to (counsel), however, many factors make it difficult to accurately measure the cost and benefit to the state.”
Committee members, at least in the official record, do not attempt to calculate return on investment. Further, no data points such as total program cost, number of awards given or capital investment amounts are part of the committee report.
A much more simple expenditure program, the Tuition and Textbook Tax Credit, is given two paragraphs in the 2013 committee report. Without also downloading the related presentation from the Iowa Department of Revenue, report readers would know how the credit is calculated, the number of households that claimed the credit in 2010, the average claim that year, and that the program mostly benefits middle- and upper-income Iowans. The record does not reflect what the committee thought about this information, or any attempt to discern a return on investment.
Review after review in committee reports focus on how expenditure programs work, and offer no insights as to whether or not the programs are good state investments.
MEETING THE SPIRIT OF THE LAW
Sen. Joe Bolkcom, D-Iowa City, and former Rep. Tom Sands, R-Muscatine, led their chamber’s respective Ways and Means Committees and thus were tasked with co-chairing the Legislative Tax Expenditure Committee from 2012 to 2016 — effectively since its inception. Both say the committee’s work has value, but also that the mandate for a return on investment calculation is more easily written than accomplished.
Bolkcom says reports from administrating agencies are largely centered on expenditure logistics and statistics, and occasionally include suggestions for improvement. State agencies that oversee the programs believe policy makers — the political bodies that established the expenditures — should be responsible for evaluations.
“After the reports, members would have time to discuss any changes,” he said. “There were suggestions, but not much action.”
Sands, who now leads the Iowa Taxpayers Association, believes politics will always hinder motivation.
“I don’t think there is a system for the legislature to set up a methodology to determine ROI,” he said. “But I do believe that the legislature should always work to get information from the Legislative Services Agency, Department of Revenue and the Department of Economic Authority to make decisions in moving Iowa forward.”
Part of the problem is that while some incentives have specific goals, such as increasing the number of area jobs that pay above a certain level, design and implementation can be more complex and subjective. Qualifying investment for the High Quality Jobs Program, for instance, is based on capital investment with jobs a later factor in the award calculation. In some circumstances, such as facility modernization, businesses don’t need to create any new jobs in order access the credit — and that’s not necessarily a bad thing, but such program flexibility does make it more difficult to determine the bang taxpayers are getting for their buck.
Another issue is that at least some state tax expenditures, including the initial version of the High Quality Jobs Credit, were created by expert committees organized by the state economist. But Iowa hasn’t employed an economist since 2001.
Advocates of reviving the post say an economist could provide valuable market patterns and trends, such as analysis and predictions of the state’s dwindling retail revenues. Others question if a political appointee could be a truly independent voice, and point to the lack of qualifications associated with title of economist.
Without an economist or another committee of experts, lawmakers are tasked with untangling and evaluating tax expenditures developed by groups of tax professionals, academics and economic development specialists.
“We may disagree on how to get there, but we can all agree that we want to move forward and do what is best for Iowa,” Sands said.
The level of work that lawmakers need to do to increase understanding of tax expenditures, even within their own ranks, and to calculate a return on investment simply isn’t possible given the limits of the existing committee.
“This was established as an interim committee, which means it isn’t active during the legislative session,” Bolkcom said, noting that the group meets for a few hours once or twice each year. “Six hours each year isn’t going to provide the results that we need.”
Moving the group into the regular legislative session, perhaps as a standing appropriations subcommittee as Bolkcom suggests, would allow ongoing and dedicated focus.
Another option would be a completely independent task force comprised of economists from state college and universities. The group would work with state agencies to develop metrics to evaluate each expenditure, and send its findings to the legislature.
Since political will is often an issue, we’d like the state to explore something similar to the federal Defense Base Realignment and Closure Commission. That group uses Congressional criteria to evaluate military base recommendations from the Department of Defense, effectively creating an open, objective and non-partisan review process. BRAC’s recommendations are forwarded to Congress and can either be accepted or denied, but cannot be modified. Unlike the federal process where review must be requested, however, we believe Iowans would be best served by a schedule of review, perhaps once every few years.
That’s because citizens deserve a clearer, non-partisan view of diverted state revenues — and so do lawmakers.
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