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WHITHER IOWA'S TAXES?

February 21, 2005

This legislative session has been bubbling with talk of tax changes. The Governor put the ball in play last year by proposing elimination of the Iowa deduction for federal taxes, coupled with a reduction in individual rates. Legislative response has ranged from the thoughtful (David Miller's comprehensive tax overhaul) to the impractical (the proposal to let border counties opt out of the income tax) to the risible (no taxes for the youngsters!).

Your author was interviewed last week by a reporter for The Des Moines Register on aspects of Iowa's tax system. We have no idea if or when her story will come out, or whether any of our interview will be in it, but we'll pass along some of the points we hope we got across. These are, of course, only Joe Kristan's points; my colleagues may or may not agree with any of them.

THE TAX SYSTEM EXISTS TO COLLECT TAXES.

With insights like that, you may be thinking that the interview didn't last long, but bear with me. It's evident that any attempt to get the tax system to do things besides funding the government makes it harder for taxpayers to comply and for the authroties to administer.

The tax system is used for many worthy causes. It's used to promote investment, to promote charities, to help state businesses, to lure businesses, and so on. Unfortunately, each tax break imposes a cost on every taxpayer; they make it harder to figure taxes out, and they increase the risk that others will use the complexity to game the system. This is important because

EVERY TAX BREAK IS PAID FOR BY OTHER TAXPAYERS.

Iowa doesn't get to run a deficit. If somebody gets a tax break, it means somebody else is paying more.

I used a little newsroom fable to try to make this point:

Reporter Bill goes to his editor for a raise because his car is old and he needs a new one. He has done a statistical study explaining how good it would be for the paper for him to have a car -- better stories, more circulation, and so on.

The editor feels his pain, but has no money in the budget for raises. He has an idea, though: he will reduce the state tax withholding from Reporter Bill's paycheck by enough to cover his car payments. He will make it up to the state by increasing the withholding from everyone else in the newsroom.

Just imagine how excited everyone in the newsroom will be to help Bill pay for his car - especially when the editor explains how it's for the good of the paper.

Targeted tax credits work much the same way as the Reporter Bill withholding system. Bill isn't necessarily a bad guy, and neither are people who use targeted tax credits. Still, you can't escape that they are getting others to pay taxes for them.

WE LOVE TO USE TAX CREDITS

Nothing is more fun in tax practice than figuring out a way to use an obscure tax credit to wipe out someone's liability. Our clients are worthy folks, and as long as the credits are out there, Roth & Company taxpayers are the most deserving folks we can imagine.

But Roth & Company clients, and everyone else, also deserve a tax system that's not a nightmare to figure out and comply with. If taxes can be made simple at low rates, Iowa's 19 economic development income tax credits won't be missed much. Nobody in South Dakota is promoting an income tax so they can use tax credits, as far as we know.

ARE MORE CREDITS WHAT WE NEED?

If 19 credits haven't made Iowa an economic juggernaut, it's still possible that a few more might just do the trick. But Charlie Brown thought the same thing about Lucy holding the football, and he hasn't kicked it yet. Maybe it's time to look at a different approach.

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