The Elbert Files: Something is amiss
DAVE ELBERT Dec 19, 2017 | 5:33 pm
3 min read time611 wordsBusiness Record Insider, Opinion, The Elbert Files
A gap has opened between Iowa’s economy and the taxes collected by state government.
From all appearances Iowa’s economic engine is chugging along better than most in the Upper Midwest.
We’ve got a lower unemployment rate than any of our neighbors. Plus, our manufacturing growth was larger last year than other nearby states’, while expansion of our financial services industry and education and health services was also top-drawer.
But last year state officials dropped the ball when it came to predicting how much revenue state taxes would produce. Three consecutive times, the Iowa Revenue Estimating Conference had to revise downward its estimates of future growth by a combined total of nearly $300 million.
They made smaller changes again earlier this month and probably should have cut deeper.
The three members of the REC panel left their estimate for the current fiscal year (2018) unchanged. They pretty much had to. After last year’s cuts, lowering the estimate for 2018 was not an option. They did, however, make a small cut for next year (2019) to 4.0 percent growth from 4.1 percent, a reduction that amounts to about $9 million on income of $7.5 billion.
That move came after REC member Holly Lyons of the Iowa Legislative Services Agency proposed a lower estimate of 3.5 percent. But neither of the REC’s two other members — David Roederer, director of the Iowa Department of Management, and private sector representative David Underwood, a Mason City businessman — supported Lyon’s lower estimate.
That was a mistake, because state revenues have not grown by anything like 4 percent for some time. In fact, I’d be surprised if they even reach Lyon’s 3.5 percent estimate.
Under Iowa law, the REC’s thrice-yearly revenue estimates effectively set spending limits for state lawmakers. The estimates are supposed to be a budgeting tool. It hasn’t gone well recently.
When revenue targets are unrealistically high, as they have been lately, recipients of state money, including schools and health care providers, are led to believe they will receive more than they do. Also distressing is the fact that the overestimating of state tax collections has taken place during a period of relatively strong economic growth.
What will happen when times turn bad?
REC member Underwood hinted during the December meeting that tougher times might lie ahead. Iowa’s farm economy is already on a slippery slope, the Mason City businessman noted. Iowa’s economy will suffer more if President Donald Trump succeeds in dismantling the North American Free Trade Agreement (NAFTA) and fails to replace it with something beneficial to Iowans, he added. Without strong sales of farm equipment, electronics, meat and grain to Canada and Mexico, Iowa’s economy will suffer setbacks, Underwood said.
The reasons for Iowa’s income shortfall are simple. Our tax code has loopholes big enough to hold giant fertilizer plants and data centers.
Mike Lipsman, formerly the top tax analyst at the Iowa Department of Revenue and now retired, wrote a revealing essay earlier this year in which he noted that too many provisions of Iowa’s tax laws favor out-of-state businesses over Iowa businesses.
The most obvious example is that Iowa’s sales tax does not apply to goods and services purchased online. Taxing internet sales would bring in an additional $200 million a year, Lipsman said.
Another loophole is that out-of-state businesses can reduce taxes by manipulating ledgers to move revenues out of the state while bringing costs into their Iowa operations. A similar problem exists with out-of-state banks. Closing those loopholes could bring in $120 million a year, Lipsman said.
It’s really not that difficult. If Iowa wants to close state government’s performance gap, lawmakers need to close the tax loopholes.