Working in Iowa
Tax Cutting Our Way to Prosperity
Apr 7, 2010
By Dave Swenson
By Dave Swenson
It is an old saw among the conservative crowd that tax cuts boost business growth, and I-want-to-be-governor-again Terry Branstad has a business tax cut plan for the Iowa economy. He would, were he elected, reduce Iowa’s corporation income taxes by half and substantially cut the property taxes on commercial properties. Those actions, he argues, would revitalize growth prospects and induce enough business investment to boost jobs by 200,000. He knows this because he says he cut taxes in the 1980s, and the state’s economy grew. Ipso facto.
Not true. In the 1980s, the state’s economy eventually grew despite then Governor Branstad’s bumbling of state government accounts, increasing the state’s sales tax in 1983, and accumulating a structural fiscal deficit to the tune of $800 million that required a commission to fix plus another sales tax increase in 1992 to pay-off the mess. Mr. Branstad increased far more taxes than he cut during his tenure in office. To claim otherwise is laughable.
In practice, Iowa corporation income taxes and commercial property taxes are not high at all, most especially when considering all of the state and local government programs and policies in place that offset them. A vast array of state tax credits will likely reduce a quarter or more of corporation taxes this year. Nearly 17 percent of the state’s commercial valuations and over 20 percent of its industrial tax base are located within Tax Increment Financing (TIF) districts where all of the property taxes they are paying are either only underwriting infrastructure that benefits them directly or are in a large fraction of instances rebated back to them in full.
Our recent film tax credit fiasco notwithstanding, the word was out long ago that Iowa would bend over backwards to make sure a new or expanding firm does not have to pay a lick of taxes in its first several years of operation. So if we are already famous for our willingness to give away the store, what is there left to give? The answer is of course the sum of all state and local government goods that would be paid for with those reduced receipts. But that is another problem for another day for the tax cutters.
A much better argument can be made for reallocating responsibilities within those targeted taxes to aid Iowa firms. First, Iowa has many multi-billion dollar corporations paying not a penny in state corporation income taxes. Those taxes are levied based on in-Iowa sales only. If sales are mostly to the rest of the country or international, like a Rockwell Collins for example, comparatively little in taxes get paid to the state even though the firm, its workers, and its overall profitability are directly and indirectly underwritten by state government programs, our educated workers, and the overall quality of life or governments support.
Iowa’s corporations only contributed a measly 5.0 percent of the state’s total taxes in 2008, and it is much less this year. If there is a gripe among corporations it is among those selling substantially within Iowa, say a HyVee, which must pay the lion’s share of corporate income taxes. By redistributing the corporation tax burden away from firms primarily doing business in Iowa towards those that do not helps equalize tax responsibilities.
I concede that a legitimate argument can be made our commercial properties are the Rodney Dangerfields of property taxes. Residential and agricultural properties in Iowa receive huge tax breaks and are taxed at less than half of their market values. Firms using manufacturing machinery and computers also do not pay property taxes on the asset value of those capital goods. Most commercial establishments do not have those types of breaks.
This means there are long-term inequities built into the system that rewards homes and agricultural land yet ignores commercial properties. An equitable reallocation of taxing burdens by increasing the fraction of taxes levied on residential and agricultural properties while implementing an across the board reduction in commercial taxable value percentages would leave the systems revenue neutral and not unfairly hamstring already devastated local government accounts.
As to the claim of boosting the economy by 200,000 jobs? Fat chance. From the state’s peak employment in June 2000 prior to the previous recession, to March of 2008, the peak prior to this recession, the state added 57,000 jobs in those intervening eight years.
There is no combination of tax policy or economic development voodoo to be had that will add 200,000 jobs to that March 2008 total over the next decade or so.
Mr. Branstad certainly knows that, but I’ll bet he is banking that those who would vote for him don’t.
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Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and an extension-to-communities economics educator. He also teaches community and regional planners (those nefarious agents of totalitarian control) how to do economic things in their profession.
| Comments |
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Dave You are always on the money. The smartest and most grounded economist I know!
steffen
| sws@iastate.edu
| Apr 8, 2010 6:22 PM
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