The Elbert Files: A billion-dollar backfire

/wp-content/uploads/2022/11/BR_web_311x311.jpeg

The billion-dollar tax cut approved by the Iowa Senate last month will backfire if it, or anything like it, becomes law, according to one of Iowa’s most knowledgeable tax experts. 

Mike Lipsman was the top numbers guy at the Iowa Department of Revenue until 2011 when he left to become a partner in Des Moines-based Strategic Economic Group, where he’s continued to follow and analyze tax issues.

He wrote in a recent white paper that several aspects of the billion-dollar tax cut bill proposed by state Sen. Randy Feenstra are similar to tax cuts approved by Iowa lawmakers in 1997 and 1998. Those earlier cuts, he said, put a damper on Iowa’s economic growth by returning too much of the savings to business owners and high-income individuals who reinvested or spent the money outside Iowa.  

When those beneficiaries did not keep their Iowa tax savings in Iowa, the state’s economy slackened and fell behind other states, Lipsman said.

The problem was particularly pronounced during the 2001 recession, which followed the dot-com crash and terrorist attacks of Sept.11, 2001.

In 2004, while Lipsman still worked for the state, he wrote an analysis that recalled how the nonfarm personal income of both the country as a whole and Iowa grew 28 percent during the five years before Iowa’s 1997-98 tax cuts. 

But during the next five years, Iowa fell behind with 22 percent growth compared with 27 percent for the entire country. During those years, Iowa’s economy suffered a 1.8 percent decline and the state lost 47,000 nonfarm jobs, he noted.

One danger with Feenstra’s billion-dollar tax cut proposal, Lipsman said, is that most of its benefits will again go to high-income individuals who can be expected to invest their gains outside Iowa.

The bill is also skewed to benefit big businesses, which will again hurt Iowa’s economy when those businesses spend their Iowa tax savings outside Iowa, Lipsman said.

He added that Feenstra’s bill “does not address the biggest loophole in Iowa’s corporate income tax — not requiring combined reporting.” 

By not reporting activities outside Iowa, multistate businesses are able “to reduce their Iowa tax liability by shifting costs into Iowa and revenues out of Iowa,” Lipsman said.
 
Closing that loophole would generate $80 million to $100 million that could be used to lower tax rates by 30 percent or for other purposes, including worker training, which is a growing concern with businesses, Lipsman noted.

As things now stand, with either Feenstra’s bill or a less aggressive tax cut favored by Gov. Kim Reynolds, Iowans should be asking the question: Will the proposed tax cuts produce the desired results?

“Both proposals will require large reductions in public services, and these cuts are likely to fall disproportionately on education because it is hard to see how much more can be cut from social services, corrections and Medicaid,” Lipsman said. 

No one worried about unintended results when tax law changes were made in 1997 and 1998, Lipsman said. And Iowa paid the consequences when growth slowed and unemployment rose. 

As Lipsman wrote in 2004: “Tax increases can stimulate increased economic growth, while tax reductions can have the opposite effect. This is particularly true at the state level because money and commerce flow freely across state borders.” 

A separate problem with the Feenstra bill, which Lipsman did not address, is that, like last year’s reform of public-sector collective bargaining, the bill was written in secret with virtually no public input.

If the Feenstra bill is approved, don’t be surprised when it leads to a 3 percent slowdown of the Iowa economy and the loss of 50,000 jobs, which is what Lipsman believes could happen.