Make sense of sales tax breaks

By The Gazette Editorial Board

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It's not difficult to see the reasoning behind some of Iowa's sales tax exemptions.

Giving consumers a break when buying food or medicine, for example, is a way to help keep those basic necessities affordable for those struggling to make ends meet.

But dry cleaning chemicals? Supplies for commercial carwashes? Where's the public benefit to those and possibly dozens of other special-interest exemptions?

A Gazette investigation published today found that sales tax exemptions cost Iowa an estimated $2.4 billion in annual revenue. That's not much less than the nearly $2.7 billion in sales tax Iowa actually collected in 2011.

Those are revenues some believe might be better used for other major public benefits, such as education. The exemptions raise another question: Does their cumulative loss force budget cuts or shift the burden to other tax and revenue sources for vital programs or services?

That's why a review or even an overhaul of Iowa's sales tax exemptions should be part of overall tax reform.

Legislators should examine current exemptions to determine what and how much value they're providing. And any new exemptions considered should require a detailed impact statement and a sunset if they're not producing what's promised.

List keeps growing

As lawmakers say, once an exemption is on the books, it's all but impossible to repeal. No one, especially in this day and age, wants to be remembered as a “tax raiser.”

But there should be an even greater stigma attached to handing out tax exemptions as political favors in a costly game of “you rub my back and I'll rub yours.” Which is, perhaps, how the state finds itself exempting service providers such as massage therapists from collecting sales tax.

And each year, the list of tax exemptions grow. Such as the new one for materials used in auto body repair shops.

Our own industry is among those longer established as an exemption recipient. Newspapers are exempt from sales tax, as are many of the materials used in the printing of those papers.

More than a dozen agricultural exemptions cost the state a total of $237 million each year in lost tax revenue.

Iowa Farm Bureau senior researcher and policy analyst Tim Johnson told Gazette reporters he felt the exemptions were justified, since agriculture is a driving force in our economy. Doesn't that mean the industry deserves a few breaks?

That may be.

Test its worth

We think the test of any exemption's worthiness should focus on how much it benefits the state and local economy, and thus the public good.

The trouble is, that's something not well tracked or reported, and rarely if ever required for a tax break to continue.

In 2004, after then-governor Tom Vilsack proposed expanding Iowa's sales tax base by taxing more business and professional services, the nonpartisan Center on Budget and Policy Priorities analyzed the research and found that tax exemptions themselves had little effect on economic growth, but that broadening the tax base provided greater revenue stability for the state (see http://www.cbpp.org/files/1-29-04sfp.pdf).

Exemptions are sometimes slipped into unrelated bills, Gazette reporters found. One example was when carwash owners lobbied lawmakers to exempt them from having to pay sales tax on their supplies. The exemption eventually was tucked into a bill that created tax credits for solar and geothermal energy systems.

Proponents of the exemption say it won't cost taxpayers all that much. The estimated fiscal impact is about $400,000 a year.

More accountability

But the cumulative impact of many exemptions shouldn't be ignored. And remember that revenue from Iowa's 6 percent statewide sales tax helps fund public infrastructure that benefits private business, too.

Legislators' should train their eye and draft legislation that is more accountable to Iowans rather than simply handing out sales tax exemptions to special interest groups.

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