Guest Opinion

Still waiting for comprehensive, principled tax approaches
By Andrew Cannon, Research Associate

As published in the Saturday, Aug. 20, 2011, Sioux City Journal



In explaining his item-veto of an improvement in the Earned Income Tax Credit (EITC) for low- and moderate-earning families, Iowa Gov. Terry Branstad expressed his desire to address tax policy in a "comprehensive and holistic manner," according to "sound budgeting principles."

What would that approach look like?

It probably would not include expanding a business tax-credit program before estimating its cost, or expanding a pilot program before its performance has been analyzed. Both happened with an expansion of the Targeted Jobs Withholding Credit.

Increasing funding for a program that has been difficult to police, such as the School Tuition Organization credit for private-school scholarships, might not easily fit sound principles, either. This is particularly so in a year in which lawmakers froze public-school per-pupil spending.

A comprehensive approach would consider the recommendations of a tax-credit review panel to cap, scale back and more carefully target certain credits.

Nevertheless, when the governor vetoed the small EITC expansion from Senate File 533, he signed off on the two credit expansions cited above in the same legislation.

Here's what we know about these three credits in SF533, one treated differently from the other two.

The School Tuition Organization Credit allows individuals and corporations to claim a credit worth 65 percent of a contribution to an organization that provides scholarships to private-school students. The Tax Credit Review panel called this the most generous of Iowa's tax credits, and recommended reducing the credit rate to 40 percent and lowering the total annual cap on the credit from $7.5 million to $5 million. The cap already had tripled from its introduction in 2006; SF533 raises it to $8.75 million.

The Targeted Jobs Withholding Credit allows Sioux City and four other Iowa border cities to enter agreements with businesses creating new jobs in Iowa to finance city infrastructure projects benefiting the business. Businesses remit to the city an amount equal to a percentage of the new jobs' gross wages; they are then credited for that amount by the state. SF533 expands the credit to retained jobs in Iowa, not just new ones. This change offers a substantial departure in the original purpose and scope of the credit, yet it passed without an estimate of the potential cost.

Vast research has shown that the EITC helps working families and provides economic boosts to local economies. In Woodbury County alone, 19 percent of 2008 federal tax filers claimed the EITC. It encourages and rewards work, rising with employment earnings then declining and phasing out when family earnings reach about $45,000. The proposed increase would have meant about $150 more for Iowa families earning between $12,600 and $21,550. Families at such income levels would spend the boost quickly on necessities, providing stimulus to the economy.

Sound budgeting principles demand that tax credits are targeted and easy to police, benefit the broader community or economy, and have reasonably accurate cost estimates. The one tax-credit expansion in SF533 already shown to meet those criteria was the EITC — the only one struck by the governor.

andrewcannonphoto

ANDREW CANNON
is a research associate for
the Iowa Policy Project
part of the Iowa Fiscal Partnership.
a nonpartisan public policy analysis initiative.
Its reports can be found at
www.IowaFiscal.org.