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The Elbert Files: When taxes don’t measure up

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I have a confession. I’ve been trying to make sense of Iowa’s tax code, which is something my accountant, Ted, has advised me never to do.

Ted tells the story about one of his tax law professors who began each semester by telling students: “When you look at the tax code, you are going to want to apply logic to it. Don’t, because if you do, you will fail. This is not a course where logic will help. It’s a course in memorization.”

That works for Ted, but I’m not as focused.

There are several things about Iowa’s tax code that I don’t get. The thing that’s bothering me the most now involves corporate income tax collections, which I’ll get to in a minute. 

I’ve been watching Iowa’s tax receipts ever since the Great Recession. Technically, the recession began in December 2007, but no one knew it at the time, so most of us call it the 2008 recession, or sometimes the 2008-09 recession, because, again technically, it didn’t end until June 2009.

A little background: After spending two decades tracking and writing about so-called leading economic indicators, I came to the conclusion that most “leading” indicators aren’t particularly good predictors of anything. At best, they are reflections of the current situation, given the delays in obtaining meaningful data. If you think about it, you’ll see that’s why we didn’t know until many months later that the Great Recession started way back in December 2007.

Anyway, at some point I learned that Iowa’s Legislative Services Agency was producing monthly reports on state tax receipts. The LSA breaks each month’s receipts into categories — personal income, sales/use taxes, corporate income, and other taxes and receipts. And it compares them with the previous year.

For my money, the LSA’s monthly tax receipt reports are a better reflection of where the Iowa economy is, and where it might be headed, than many of the more popular economic indexes produced by government agencies, trade associations and educational institutions. 

The best LSA indicator is personal income taxes. If you go back over time, Iowa’s personal income tax receipts provide a better record of the economy than my other favorite indicator, employment data, which does not track farm income. 

The monthly LSA reports also show how the retail sector is doing based on sales/use tax receipts. Corporate tax receipts, it turns out, are interesting but dangerously unpredictable. 

For several years, the increases and decreases in corporate receipts appeared to be magnifiers of what was happening in personal income tax receipts. 

For example, in 2009, when personal income tax receipts fell 5 percent, corporate receipts were down 24 percent. Or last year, when personal income tax receipts increased 6 percent, corporate receipts grew 19 percent.

But this year, personal and corporate income tax receipts have gone in opposite directions. As of last week, the LSA said personal tax receipts for the year ending June 30 are up 2.8 percent, while corporate receipts are down 16.5 percent.  

Jeff Robinson, a senior fiscal analyst for the LSA, gave me a half dozen possible reasons for the unpredictability of corporate tax receipts, including federal deductibility and tax credits. 

Iowa corporations can deduct half of the amount they pay in federal taxes, he noted. As a result, when businesses make big profits and pay more federal taxes, their Iowa tax payments may actually shrink, and vice versa.

Plus, Robinson said, “corporations can earn tax credits, some of them refundable” for actions that include plant expansions and research and development activities. Or they can “purchase tax credits from other entities, like history preservation tax credit projects,” he said.

In the end, it’s like Ted says: When it comes to tax law, logic need not apply.