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THREE MORE DUMB IOWA POLICIES

September 10, 2008

Yesterday we listed seven foolish Iowa tax policies. After sleeping on it, we came up with three more to round it out as a "top ten" list of policy inanity. The three new ones:

Special tax breaks for old folks. Iowa exempts old folks from tax entirely on net income up to $24,000. Iowa is also phasing out all taxation of social security income, a process to be complete by 2014. Given that old folks are a prosperous group, in general, why should they get such a break?

Taxing non-resident income of Iowa investment partnerships. If Iowa really wants to be a financial center, this policy is foolish, and it probably is contrary to the law. This is the only top ten stupid policy that is entirely correctible by the Department of Revenue itself.

Different tax results for individual owners of partnerships and S corporations. S corporation shareholders get a credit that approximates single-factor apportionment of multistate S corporation income. Partners don't. Partners can own their partnerships through S corporations, but why should investors have to go through that trouble?

For convenience, the whole "Top Ten" is in the extended entry below, in increasing order of foolishness.

THE TOP TEN DUMB IOWA TAX POLICIES

Different tax results for individula owners of partnerships and S corporations. S corporation shareholders get a credit that approximates single-factor apportionment of multistate S corporation income. Partners don't. Partners can own their partnerships through S corporations, but why should investors have to go through that trouble?

Historic rehab credits and tax breaks that have helped create a glut of unsold housing in Downtown Des Moines at a time when houses are also languishing unsold in the suburbs.

Having the highest corporation tax rate in the nation (12%), and coupling it with a tax system so riddled with loopholes that very little tax is collected. It's the worst of both worlds - it scares away business without actually raising revenue.

A bi-partisan refusal to lower rates in exchange for eliminating deductibility of federal taxes. This creates year-end tax planning headaches to no economic purpose. Except, of course, creating fees for me for year-end planning work.

De-coupling state rules from federal rules. This increases compliance headaches for businesses and individuals while creating a fiscal problem down the road when the federal breaks turn around (e.g., depreciation).

Targeted Iowa tax breaks for "new jobs" and "expansion." These breaks go to businesses that would be in Iowa anyway. Iowa takes money from existing businesses and uses it to lure and subsidize their competitors, and they reward shakedowns from businesses that threaten to leave.

Enormous tax breaks individual companies, notably Microsoft and Google. At $500,000 per job, I could give the state at least as much economic bang for the buck if they gave me the money to hire a household staff.

Tax credits for film production. Iowa has tax credits to fund half of the cost of films produced here. It's difficult to imagine a policy that could be stupider than taxing every other business to fund Hollywood projects.

Tags: iowa tax policy.tax administration.