If they have a confessional at the Iowa Department of Revenue, this would be a good time to remodel it. Nobody will be using it for the next 13 weeks or so.
Governor Culver has signed the tax amnesty bill, SF 580. The bill forgives penalties and 1/2 of the interest during the amnesty period, which runs from September 4 thorugh October 31 of this year.
The Governor's website touts this as a "one-time" amnesty. Yes, one time, just like the last one in 1986.
The Tax Policy Blog has a post on the policy implications of tax amnesties:
What we wrote in 1985 holds true today: if lawmakers decide to implement tax amnesty programs, they should be accompanied by fundamental tax reform that makes the tax code simpler and easier to comply with.
Iowa has gone in the opposite direction, adding more
loopholes targeted tax incentives to its tax law while doing nothing to lower rates or broaden the tax base. Iowa's incentive is purely a cheap temporary revenue fix that does nothing but build an expectation of future amnesties while making chumps of law-abiding taxpayers. But for those of us who charge for tax work by the hour, it truly helps our economic development during an otherwise slow time of year.
Governer Culver yesterday signed SF 566, the bill to increase the cap on Iowa's rehabilityation credits. For some time the credit applications have exceeded the cap, which goes to $10 million (from 6.4 million) immediately and eventually to $20 million annually.
The bill also contains a lucrative giveaway for people who already have applied for credits but haven't yet used them. The credits can be claimed in cash even if they exceed your Iowa liability; formerly the credits had to be "discounted" to claim a cash refund. The bill eliminates the discount. This means that people who already had committed to do work under the old rules get a windfall -- one that the Des Moines Register calls "adjustments in how the credits are administered so they can be used more quickly."
The Moral? You pay taxes so the state can pay rehabbers a bonus.
Governor Culver yesterday signed a bill increasing the Iowa earned income credit to 7% of the federal credit. SF 590 also makes the credit refundable, which means it will be available to low-income taxpayers even if they had no withholding.
Tax Analysts' state tax guru David Brunori has noticed Iowa's new credit for moviemakers ($link):
I've been deriding tax credits for the movie industry since their inception. People who understand tax policy will tell you those credits are unnecessary, unfair, inefficient, and so forth. They serve no purpose other than to let politicians hobnob with glamorous people. Maybe I'm old school, but I think all movies should be made in Hollywood.
Politicians in Iowa and Indiana disagree. Both states passed tax incentives for filmmakers. Interestingly, the tax incentives are identical in Iowa and Indiana, which makes me wonder if the industry has the same lobbyists working in all states. (emphasis added)
Amazing. Does Senator Dotzler have a twin brother in Indianapolis?
The Iowa legislature has gone home for the year. They leave behind a tax law in even worse shape than the one they found when they started the session in January. Having made some big spending commitments, we shouldn't expect anything better when they return next year.
The principal tax legislation of this session was SF 128, the $1 per pack cigarette tax. This will be an economic development boon to cross-border convenience stores from East Dubuque, Illinois to Princeton, Missouri.
The tax bill that spur the most economic development for those of us who give tax advice by the hour is the tax amnesty bill, SF 580. The bill provides for a tax amnesty to run from September 4 through October 31. It will cover the following taxes:
individual and corporate income taxes; franchise tax; sales and use taxes; hotel and motel tax; local city, county, and school district sales and services taxes; automobile rental tax; equipment tax; petroleum diminution charge; inheritance and estate taxes; motor fuel and special fuel taxes; cigarette and tobacco taxes; and controlled substance tax.
If you think you may have issues with any of these taxes for prior years, it's a good time to discreetly discuss getting your amnesty application in September 4. Taxes paid under the amnesty will be penalty-free, with 1/2 the interest. What? You paid your taxes on time all these years? The legislature appreciates all of us dedicated
chumps law-abiding taxpayers.
Surprisingly, the legislature failed to pass a gas tax increase or a combined reporting requirement for corporations doing business in Iowa.
What's missing? Any effort to make serious improvements to Iowa's dysfunctional, complex, high-rate loophole-ridden tax law. A pathetic effort at property tax relief fizzled at the end of the session. No effort at all was made to lower our high income tax rates or eliminate loopholes. Instead, the legislature is even more committed to taxing its existing businesses and individuals to lure their competitors and subsidize the well-connected. This should solidify our ranking as the worst state for new business startups.
The Iowa House of Representatives cleared the tax amnesty bill, SF 580, this morning. While the Senate passed the bill almost unanimously, the bill had to overcome significant opposition in the House, passing 55-38.
This bill is expected to raise some millions to help finance the Governor's spending surge as tax delinquents come in from the cold. Unfortunately, the bill fails even the basic "carrot and stick" test of most tax amnesties by failing to increase penalties and enforcement efforts for non-filers. It instead offers only carrots - 1/2 interest and no penalties for those who come in from the cold between September 4 and October 31 of this year.
And if you're behind on your taxes now, the smart bet is probably to do nothing until September 4. If you have been living frugally to pay your taxes on time, or to catch up on your tax debts, the legislature has these words of comfort: sorry, chump!
The legislature passed the tax technical provisions bill (HF 923) without the provision that would have required folks downloading ringtones and iTunes to file personal sales tax returns on the downloads. Radio Iowa reports:
The Iowa House has voted against a Senate-backed plan that seeks to tax music, movies and ring tones that're downloaded from the Internet. Critics of the idea said it was ridiculous to expect people to keep track of their Internet downloads, and send the state a check for sales tax on each transaction.
Representative Thomas Schueller, a Democrat from Maquoketa, said the debate had been an eye-opening experience. "I now understand what a ring tone is. Before this bill, I had no clue," he said. "...I think I might actually be able to download one now, too." The tax on Internet downloads have been stuck in a bill that dealt with all sorts of tax issues. The Senate now must decide whether to insist on what some have called the "iPod" tax.
The legislature did take action against a menace facing Iowa youths: candy machines stocked with smokes.
Another provision tucked into the bill, and which got House backing, would forbid businesses from stocking vending machines with both snacks and smokes. Representative Schueller nicknamed it the "Twinkie Clause." "This is an obvious good change. It prohibits cigarettes and cigars from being displayed and/or dispensed from the same vending machines as snacks or candies," he says. "No one wants junior going to the (vending) machine to buy a Twinkie, and come back with a Marlboro instead."
Except junior, maybe. Actually, I have never seen a vending machine that carried Twinkies and cigarettes. Seeing either one of these products would ruin my appetite for the other, but maybe Twinkies and smokes are just meant to go together.
Meanwhile, the the legislature may see some last ditch action on new tax bills today. The Des Moines Register reports that Senate Majority Leader Gronstal is likely to push through his chamber a bill to replace the 1% local option sales tax with a statewide 1% levy, but that it may not make it further:
But beyond Senate support for the tax plan, its fate is uncertain, Gronstal said, citing reservations by Gov. Chet Culver and House Democratic leaders.
Brad Anderson, the governor's spokesman, said Culver "has made it clear that the sales and use tax is not on his agenda for the session."
House Majority Leader Kevin McCarthy, a Des Moines Democrat, said House action on the tax issue was unlikely at the tail end of the session. "I don't see it having enough momentum at this stage," he said.
The bill would also increase the "use tax" on vehicle sales - in effect, the sales tax on cars - by 1%.
The Sioux City Journal reports that plans to increase the gas tax and vehicle registration fees are dead for this year.
Follow tax legislation through the close of the session at our2007 Iowa Tax Legislation page.
The Iowa Senate shamelessly sold its soul for a mess of servers yesterday, passing a package of tax breaks (HF 912) for the company with a motto of "Do no evil, but it's ok to shake down the states for giveaways." ZDNet has more:
Google is playing its you need us more than we need you card with the Iowa state legislature, and seems to have a winning Googley hand. Not only has Google once again achieved its Google only special "top secret" government privileges, it has apparently succeeded in wooing a legislative representative to serve as a prime Google spokesperson, Senator Bill Dotzler, a Democrat from Waterloo.
According to Dotzler, the trend now is away from having a computer with all the bells and whistles — the software programs — and toward "server farms" which give computer users access to a wide variety of options they'd be hard-pressed to store on a single computer.
Senator Dotzler has to be on the top of the list of every business that wants to be subsidized by Iowa taxpayers since he led the charge for the recently-passed filmmaker subsidy. But he is an expert on this sort of technology, clearly:
Dotzler has undoubtedly been well coached by Google:
"Really, the biggest problem with these server farms is the heat that's generated in them. Just one server panel generates the equivalent of a seven-foot-high pile of toaster ovens, so can you imagine the amount of heat?"
Google has buried the legislature in seven feet of something, but it's not toaster ovens.
Follow the progress of all Iowa tax legislation at our 2007 Iowa Tax Legislation page.
UPDATE: More on Google's shakedown history.
The Governor's much-ballyhoed effort to reform Iowa's commercial property tax system has laid its first egg.
The House Ways and Means Committee yesterday voted to send HF 905 on to the full house. The bill provides a refundable income tax credit for commercial property taxes paid of up to $320. Refundable credits generate tax refunds even when no tax is owed to begin with. The bill would apply only to taxpayers with $300,000 or less in improved real property. The Des Moines Register covers this today.
Considering all of the attention paid to commercial property taxes at the start of the session, this is a very lame result. It shows the futility of attempting to deal with property taxes while ignoring the problems with Iowa's income and sales taxes. The problems of state finance are all interrelated. You can't deal with property taxes alone any more than you can deal with a weight problem by reforming milk shakes and ignoring Oreo consumption.
The House also approved the increase in the rehab credit ceiling (SF 566). The bill includes a retroactive giveaway of credits to people who have already committed to projects, but it excludes the provision to allow artists to take fair market value deductions for artwork donations -- once again thwarting my artistic vision. Curses.
Follow all of the 2007 session tax legislaton at our2007 Iowa Tax Legislation page.
David Yepsen's Des Moines Register column today says the soon-to-end legislative session comes up short. Take taxes:
Tax reform? In 1965, they created tax withholding, repealed outmoded sections of the tax code and raised the gas tax. This one did nothing on a par with that. Iowa's commercial property taxes remain among the highest in the country, our income-tax system remains complicated and uncompetitive.
Mr. Yepsen understates the case. The legislature didn't just neglect Iowa's tax system; they're making it significantly worse.
Iowa's tax system is a rat's nest of high rates made tolerable to the well-connected by complex loopholes. The main tax policy achievement of this session is more loopholes and higher rates, including:
- A new tax credit/subsidy for filmmakers.
- Bigger and better rehab credits, including a giveaway for projects that were already underway anyway.
- A credit for giving away land for conservation.
- A huge increase in the cigarette tax, creating boom times for northern Missouri convenience stores.
The legislature also looks like it will approve a tax amnesty without any corresponding tightening of enforcement or penalties - a short-term fix that helps undermine tax compliance long-term by creating an expectation of future amnesties.
And the legislature is also working to pass combined corporate reporting to increase corporation tax collections. The worst thing that Iowa could do for economic growth is to make our current corporation income tax actually apply to people. Our 12% top rate is the highest in the nation, and the only reason it doesn't stop economic activity altogether is that it's usually easy to avoid.
Any progress - that is, moves to lower rates, broaden the base, and eliminate loopholes - seems unlikely. Resistance to the bad policy of the current session has been feeble, even from those who should know better. It looks like nothing but dark days ahead for Iowa tax policy. Unless, of course, they pass my loophole.
Governer Culver has snuffed the attempt to pass an end-of-session tax break for EarthPork, the indoor rainforest proposed for
Des Moines Coralville Dubuque Grinnell Riverside Pella. From today's Des Moines Register:
Proposals to give millions of dollars in government assistance to a rain forest complex near Pella and an adjacent water park, marina and condominium project are unlikely to be approved by the Legislature, a key lawmaker said Monday.
"I don't think it's a good use of legislative time to push something that doesn't appear to have a lot of momentum at this stage," said House Majority Leader Kevin McCarthy, a Democrat from Des Moines.
Earlier in the day, McCarthy said the incentive package was likely to be debated. His revised assessment came after he talked with aides to Gov. Chet Culver, Senate leaders and other House members.
Given the Governor's opposition to the plan in his election campaign, recounted here, it is almost surprising that anybody even tried to move aid for EarthPork. Still, considering some of the other silly things that have gone right through this session, you can't blame the rainforest people for thinking they might have a shot.
The Senate did pass the poorly-thought-out but lucrative land conservation donation credit, SF 587. The House now has to take it up, but it doesn't look like any opposition has formed.
Track the end-of-session tax legislation at our 2007 Iowa Tax Legislation page.
It's the wild, crazy, going out of session giveaway at the Iowa General Assembly. Those guys are giving away everything that's not nailed down! Everything must go!
Starting with tax breaks for EarthPork, the indoor rainforest jungledome proposed for
Des Moines Coralville Dubuque Grinnell Riverside Pella. HSB 315 would let the owners of EarthPark charge and keep sales taxes - the same deal given to the Newton Speedway.
Bill Dotzler, flush from giving away a bunch of our money to finance filmmakers, now is looking to give away even more!
Dotzler said Earthpark "has the potential to be a huge tourism draw." He said, "I think this is going to be a huge economic engine for central Iowa."
Those crazy legislators are also giving away the store to lure an undisclosed web search company (Yahoo? Google?) to locate here. Some company is playing states against one another to get the sweetest possible subsidy package, which the rest of us get to pay for. This has produced HF 912, a package of sales and property tax breaks.
When it comes to giving away our money, our legislature won't be outdone! But lobby now, while there is still money left to give away. It can't last forever! And follow all of the crazy hijinks at our 2007 Iowa tax legislation page.
More coverage of EarthPork tax breaks here.
Another piece of data indicates that we should require the legislature to go home about March 1 emerged yesterday. The chief taxwriter in the Iowa House of Representatives proposed a refundable personal income credit of 7 cents per gallon for purchases of "blended biodiesel fuel."
Never mind that it would require consumers to keep track of how many gallons of blended biodiesel they used. Or make up a number ("lots!"). Never mind that it would be an enforcement nightmare. We're going to be "energy independent."
A scene from the heydey of Iowa energy independence.
Follow the progress of every wacky piece of Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.
As it enters the final weeks of its 2007 session, the General Assembly is turning into a frenzy of bad tax policy. Take yesterday:
The Senate Ways and Means committee voted unanimously to make chumps out of people who pay their taxes by approving an amnesty (SSB 1168) plan for those who don't. The companion bill for this shortsighted budget gimmick was introduced in the Iowa House (HF 893), and it no doubt will slide right through.
THE LEGISLATURE GIVETH
Meanwhile, two new tax credit bills were thrown into the hopper, providing special tax breaks for a few and shifting their tax burdens to the rest of us. SSB 1349 would give a whopping 50% tax credit for donations of up to $100,000 of land for conservation purposes; meanwhile a new amendmnet to HF 883 would give teachers a $250 credit for school supplies purchased.
These are classic examples of good intentions run amok. There are already generous federal tax benefits for donations of conservation property. This 50% credit is huge - far more so than the federal benefits. These two credits would result in tax breaks equal to over 80% of the value of donated property. Meanwhile, the various ethanol breaks provide incentives to reduce conservation and plant fencerow to fencerow. It's like sleeping pills to get you to sleep and meth to wake up.
The teacher credit has the double disadvantage of favoring a specified profession and providing a tax benefit that's too small to audit. Cynical teachers will take the credit, whether they spend $250 on their kids or not, knowing that there is almost no risk that they'll be required to substantiate the spending. Other teachers will save their receipts, take only the credit their entitled to, and feel like schmucks after talking to the cynics in the Staff Room.
THE LEGISLATURE TAKETH
Meanwhile, SSB 1350 was introduced to deny pollution control property tax credits to large farms; we don't want to encourage the farms that can make the biggest messes to buy the latest pollution control equipment, after all. Don't even think of repealing this special tax favor entirely. And HSB 305, the "Satellite Video Equalization Tax," was introduced to stick it to satelitte providers who enable users to bypass the government-mandated local cable monopoly.
THE LEGISLATURE FLIPPETH OUT ENTIRELY
Finally, in a stunning non-tax display of delusion, we saw the introduction of HSB 304, "An Act establishing the office of energy independence and the Iowa power fund ..." The idea that Iowa could be, or should be, "energy independent" is so incredibly ridiculous, only a legislator could talk about it while looking earnest. So we're going to re-open the strip mines of Davis County? There's certainly still coal underneath the new subdivisions in Waukee; if we're really serious about this energy independence thing, we can just drop some mine shafts in people's backyards, I'm sure nobody will mind if its in the name of "energy independence." Unless, of course, it's just a cynical and inane excuse to pass out taxpayer money to buy votes or something.
The heydey of Iowa energy independence.
Follow all Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.
For procedural reasons that escape me, a new version of the filmmaker giveaway bill was introduced and referred to the Iowa House Ways and Means Committee yesterday.
The bill, HF 892, has three separate giveaways for people who want to make movies in Iowa:
-A 25% tax credit for production expenses;
-A 25% tax credit for investors in film projects, and
-A tax exemption for income "sale, rental, or furnishing of tangible personal property or services directly related to the production" of a film project.
The credits can be sold, which means the filmmakers get cash from the state for their projects. Since the credits will likely be sold at a discount, it's just like a subsidy, only with built-in waste. With a total of 50% in credits, taxpayers get to foot the bill for half of a project's costs.
But there's more! It's not enough to subsidize the filmmakers. We also give a tax exemption to the direct beneficiaries of these subsidies - the hotels, the extras, the local Wal-mart that sells stuff to the film company. Everybody wins! Everybody, that is, except the 99.9% of the taxpayers that have nothing to do with a film project.
Follow all of the Iowa tax legislative boondoggles at our 2007 Iowa Tax Legislation page.
Link: Prior tax update coverage.
The Iowa House Ways and Means Committee yesterday approved the Governor's tax amnesty bill yesterday. HSB 298 would give Iowans two months to come clean on taxes without penalties and with only half the usual interest.
This, of course, is bad faith. Those of us who have paid our taxes, and those who got behind and had to scrimp and save to pay full penalties and interest, get treated like schmucks in order to give the legislature a temporary cash boost. This only encourages the temptation to cheat in anticipation of an amnesty.
When both parties agree, it often means they're ganging up on us. That seems to be the case with SF 566, a bill that passed the Iowa Senate yesterday without dissent.
The bill increases the annual cap on Iowa building rehab credits to $20 million, from the long-oversubscribed $4 million. That's pretty straightforward.
What's sneaky is the way the bill also increases the value of tax credits that have already been issued for work already done or committed to. These credits are "refundable" if they exceed your Iowa tax without the credits; the state writes you a check. Up to now the refund has been discounted based on a formula in the Iowa code. This bill eliminates the discount, making credits already issued worth that much more.
Economic development credits may or may not be wise (I tend to think not), but even proponents of such credits don't support increasing them for work already committed. The credit was so oversubscribed under the old formula that they quintupled the amount allowed, so you wouldn't think it needed to be sweetened at all. But the Iowa Senate does, 48-0.
A bill introduced in the Iowa Legislature yesterday, HSB 299, would repeal the property tax exemption for "forests." This provision has become notorious as a tool for developers who buy land for future development and fill it with saplings, claiming a tax exemption until the time comes to bring in the bulldozers.
The bill comes in late in the session, so it probably won't pass, but at least somebody is on to this one.
Follow all 2007 Iowa tax legislation at our 20078 Iowa Tax Legislation page.
Two bills were introduced that seem designed to make the good Iowans who save to pay for their kids' education and who pay their taxes on time feel like chumps.
Iowa City's Senator Bolkcom, the chief Senate taxwriter, introduced SSB 1334 to allow employers a credit for amounts used to pay their employees student loans. This is supposed to help get kids to stay in Iowa after school. So your kid worked summer jobs, studied hard, and even won a scholarship, while you saved and covered the rest of the tuition so you wouldn't have student loans? Chumps!
Meanwhile, Governor Culver's tax amnesty bill, HSB 298, was introduced in the House Ways and Means Committee. You got behind on your taxes, but you worked hard, lived frugally, and paid off your tax debts and penalties? Chump! says the Governor.
Follow all of the 2007 Iowa tax bills at our 2007 Iowa Tax Legislation page.
For some reason the daily emails from the Iowa House and Senate, listing bills introduced and noting their progress, have stopped. Now all we get are messy text files that make it much harder to identify bills of interest.
I hope the emails resume, but I can see why they wouldn't want people to know what they are doing.
While tax credits are sweet, they can always be made sweeter. The legislature is trying to do just that.
The state credit for rehabbing old buildings has always been capped at a maximum of $4 million per year, and it has long been badly oversubscribed. SF 556 would increase the annual ceiling to $20 million. But there's more!
If your Iowa rehab tax credit wipes out your tax liability, you can claim it as a tax refund under current law, but the refund gets trimmed under a discounting formula. SF 556 would get rid of the discounting formula for tax credits "applied for or reserved prior to July 1, 2007."
So, think about this. The credit is already generous enough to be oversubscribed years in advance. But now, even though it's already generous enough to be in great demand, it's made more generous. Such a deal! For somebody.
AND FOR THE ARTS...
SF 556 also has the most generous version yet of the artist subsidy that has appeared in two other bills. This version would give artists a 100% dollar-for-dollar credit on donations of their own artwork, at fair market value, and it doesn't have the $25,000 limit included in the other bills. My dream of setting up the Museum of Deductible Art gets ever nearer.
And there's still more! This bill piles on the economic development. It includes subsidies for recreational trails, "workforce training" funds, and money for the "main street program." It will be interesting if throwing money to enough groups will assemble enough votes to slide this through the legislature.
You can follow the progress of HF 556 and the rest of this session's tax legislation at our 2007 Iowa Tax Legislation page.
Governor Culver signed the new $1 per pack cigarette tax increase last week. Now the legislature will set to work on spending the new fiscal windfall.
This is the second big step to align the interest of Iowa's government with that of the tobacco industry; the first step was the multistate tobacco lawsuit settlement. Both the tobacco companies and the legislature will enjoy more revenue from more smokers. The Tax Policy Blog has a nice discussion of the issues: "Tax Cigarettes to Save Lives, But Not Too Many Lives."
It's a common occurrence for politicians like Culver to say that we are saving lives by raising cigarette taxes. But we could save lives by passing many different tax hikes. How about taxes on unhealthy cheeseburgers? Sound ridiculous? Just wait - they're coming, and their advocates are using the exact same argument used by Culver.
Well, the Governor may have his own reasons to restrict cheeseburgers...
On the other hand, by the governor's argument, why doesn't he just ban cigarettes? If smoking is so deadly and it's somehow morally right for government to stop people from killing themselves, then why not save 100,000 Iowans instead of 20,000? Oh...that's right --- tax revenue. He wants to make those who continue to smoke pay more to fund programs that, for the most part, have nothing to do with smoking. It's an easy political sell to impose taxes on smokers rather than raise taxes on everyone.
As we've said time and time again, there is absolutely no justification for imposing additional taxes on smokers solely for the purposes of raising additional revenue to fund general programs. If there is a true negative externality from smoking, then the tax should be imposed for that reason only -- no more or no less.
If a private company made so much money off of cigarettes, nobody would trust it to fight smoking. Yet it's taken for granted that the government can have a lucrative stake in cigarette revenues and still lead the war on smoking. Go figure.
The noble effort to
provide me a lucrative retirement encourage the arts in Iowa by providing artists a "fair market value" deduction for their own work continues its progress through the legislature. Now called HF 812, the bill improves on its predecessor (HF 411) by allowing all artists the deduction, rather than just those living in "cultural and entertainment districts." The first version of this bill passed the House Economic Development Committee; the current version is now at the Ways and Means Committee.
You can follow the progress of all 2007 tax action in the Iowa legislature at our 2007 Iowa Tax Legislation page.
Prior coverage: THE ART OF SPECIAL INTEREST LEGISLATING
Just when you think that the Iowa Legislature couldn't possibly find stupider tax legislation to propose, they surprise you. Consider SF 547, introduced yesterday by Dubuque's Senator Michael Connolly. It would add the following to Iowa's tax law:
422.76 TAX HAVENS AND SHELL CORPORATIONS.
In order to assist the department in collecting individual and corporate income taxes and overcome tax avoidance, financial institutions doing business in this state that open an account for a foreign trust or corporation on behalf of a resident of this state or business doing business within this state shall report, on forms approved by the department, the name and taxpayer identification number of any person involved with the account, moneys deposited into the account, and other information deemed necessary by the department.
If the department determines that a foreign trust or corporation was created primarily for the avoidance of taxation within the United States, the department shall treat any moneys deposited into such account as income earned in this state and shall impose the appropriate income tax on such income to the extent the income is not taxable in another state or the trust or corporation establishes beyond a reasonable doubt that the moneys in the account are not income taxable in this state.
There is so much wrong with this bill that it's hard to know where to begin. The bill in effect imposes state-level foreign exchange controls on Iowa businesses and financial institutions - an economic approach usually associated with failing third-world dictatorships.
It would give the Department of Revenue almost unreviewable power ("beyond a reasonable doubt") to impose punitive taxes on offshore investments. Never mind that it's entirely normal to conduct cross-border operations using corporations set up in the country where operations take place. If the sophisticated financial geniuses at the Hoover Building decide you are doing it to avoid taxes, you are out of luck.
Senator Connolly isn't just an obscure legislator, either. He is "assistant majority leader" in the Iowa Senate and he is on the Senate's tax-writing committee, the Ways and Means Committee. That makes this even more astonishing. He really should know better.
Senator Connolly apparently hasn't noticed that multinational financial operations drive a lot of Iowa's economy. Or maybe he just thinks a six-figure job, say, running currency derivative investment operations at Principal Financial Group isn't a real manly job, compared to a union position at an ethanol factory in Dubuque.
A provision like this could kill Iowa's financial services industry dead. But the finance jobs at Principal, Wells Fargo, Nationwide, ING and the other big players in Des Moines aren't union, so they just don't count, apparently. At this rate, the Iowa Legislature might as well just change the motto on Iowa's flag to "Ethanol and union jobs or bust!"
Follow the progress of this bill and all astonishing 2007 Iowa tax legislation at our 2007 Iowa Tax Legislation page.
The Iowa Leglislature sent the $1 per pack cigarette tax boost to Governor Culver for his signature last night. Let the spending frenzy begin.
Follow 2007 session tax legislation at our 2007 Iowa Tax Legislation page.
Iowa's House Economic Growth Committee passed the movie-maker subsidy bill, HF 411, earlier this week. The bill creates transferable tax credits for filmmakers to sell at a discount to finance their projects. It's like a direct state film subsidy, but more expensive.
Still, it's worth taking a moment to list the names of all of the brave and principled members of the committee who stood up for the taxpayers against this bipartisan naked special interest cash grab: .
The committee also unanimously passed the special interest tax breaks in two other bills. It passed HF 246, allowing the sale of loss carryforwards by biotech companies. And it passed HF 456, which allows artists to deduct the appreciated value of charitable donations of their own artwork if they live or work in a "cultural or entertainment district." We're one step closer to my dream of becoming curator of the Digital Museum of Deductible Art.
Heaven help the artist that smokes, though.
Follow the progress of these and all other execrable Iowa tax legislation at our 2007 Iowa Tax Legislation page.
Prior Tax Update Coverage:
An interesting pair of bills were thrown into the hopper in the Iowa Senate yesterday.
SF 321 is pretty straightforward:
This bill provides, for purposes of state and local sales taxes, that inspection and repair of fences, livestock monitoring, and viewing and inspection of crops are activities related to production of agricultural products. The sales price of farm machinery and equipment used in production of agricultural products is exempt from state and local sales tax.
That seems straightforward enough, but it doesn't say what items it's getting at. Four-wheel off-road vehicles? Snowmobiles? Binoculars? SUVs? All of these arguably could be used in inspecting fences, monitoring livestock, and inspecting crops (ok, so the snowmobiles would be a stretch for inspecting crops). Maybe it's obvious to a farmer, but to a city boy, it looks like another step towards a tax-free existence for the ag sector.
SF 323 is a bit more mysterious, starting with its official description:
An Act relating to certain property eligible for an exemption from property taxation, providing a refund of property taxes in certain circumstances, and including effective and retroactive applicability date provisions
That's pretty obscure. "Certain circumstances?" Which ones?
Part of the bill is routine - it allows exempt organizations to claim a property tax exemption for property they purchase even if they buy it after the normal deadline for claiming an exemption has passed.
Another provision is much more interesting. From the SF 323 explanation:
The bill also requires the board of supervisors of a county with a population of more than 88,000 but not more than 95,000 to refund the property taxes paid by a religious, literary, or charitable institution or society or by an educational institution for FY 2002-2003 and FY 2005-2006 on property purchased by the institution or society if the institution or society was unable to or failed to file for a property tax exemption in a timely manner for those fiscal years.
The population used in the bill is from the last census. A quick look at the 2000 census data ahows that this is for some well-connected exempt organization in Dubuque County - population 89,143 in 2000.
Letting exempt organizations claim a property tax exemption in the year they buy property may be reasonable, but this refund deal is for a specific exempt organization. It means that every other exempt organization that had the same problem is just out of luck. That's never sound tax policy, but that's our legislature. At least they find it embarassing enough that they don't say who it's for.
You can follow the progress of these bills at our 2007 Iowa Tax Legislation page.
The legislature is likely to pass combined corporation reporting this year. It's part of the governor's budget, and bills arre in the hopper in both the Iowa House (HF 326) and the Iowa Senate (SSB 1074).
The bills would apply to groups eligible to file a federal consolidated return. They attempt capture income steered to affiliated corporations in low-tax states by means of management fees and other intercompany income-shifting devices.
Example: Roy, Inc. is incorporated in Delaware; it has no Iowa nexus (taxable presence) and Iowa sales are $0 of its $90 million gross receipts. It has taxable income of $1 million, aside from management fees. It owns 100% of Gately Inc.
Gately has Iowa nexus. It has $5 million Iowa sales of its $10 million gross receipts. It has net income of $1 million before management fees. Gately pays Roy Inc. management fees of $1 million.
Without combined reporting, Gately allocates 50% ($5 mm ÷ $10 million) of $0 net income to Iowa and pays $0 tax.
With combined reporting, the Roy Inc. group allocates 5% ($5 mm ÷ $100 mm) of $2 million of income to Iowa, resulting in approximately $10,100 in Iowa tax.
A bolder and wiser move would be to repeal the state corporation income tax, which contributes insignificantly to Iowa's tax revenues (@3%), even though it imposes the highest tax rate of any state - 12%. Boldness and wisdom aren't in surplus this year, it seems.
We are tracking all tax bills in the legislature at our 2007 Iowa Tax Legislation page.
A tremendous new "economic growth" bill was introduced this week in the Iowa legislature. HF 456 would do three big things:
1. It would broaden the definition of "cultural and entertainment district."
2. It would allow artists to deduct the appreciated value of their own work when it is donated to charity; and
3. It would allow artists living and working in cultural and entertainment districts to skip Iowa income tax on the first $25,000 of income from the sale of "a unique work of art."
This could have two tremendous effects on my practice. First, the deduction for appreciated self-created work of arts would finally enable me to realize my long held dream: opening the Digital Museum of Deductible Art.
Second, I consider everything I do to be a unique work of art, in its own way. I do almost all my work on a computer connected to the Internet, which is certainly worthy of designation as a cultural and entertainment district. That $25,000 tax exemption is as good as mine!
The Des Moines Register reports that the bill to subsidize Iowa filmmakers and their vendors with tax credits has been introduced (SF 183) in the Iowa Senate. The bill, as expected, provides tax credits that filmmakers can sell, so the state ends up providing a direct cash subsidy to Iowa film projects. From the Des Moines Register piece:
The effort in the Legislature to make Iowa more competitive is receiving encouragement from actor Tom Arnold, an Ottumwa native. He has conferred with leading House and Senate sponsors of the bills.
Arnold would like to do some of his acting work in Iowa, said Rep. Mark Davitt, an Indianola Democrat. "He'd like the same thing for young people in Iowa, so they can do their creative work here"
Oh, come on. It's for the "young people"? That's what Harold Hill said, too, but he didn't have 27 co-sponsors.
There are several bills in the hopper in the Iowa legislature to increase the allowable tax credits for rehabbing old buildings. One has an interesting twist: it would give money away for buildings that have already been rehabbed. HF 360, introduced by the "Committee on Economic Growth," increases the value of historic rehab credits that have already been issued but haven't been used.
Iowa's rehabilitation credit allows taxpayers to eliminate their Iowa tax tax with their credits dollar-for-dollar. If the credits exceed their tax, the state gives an actual cash subsidy of up to 75 cents for each dollar of credit, using a discounting formula. Taxpayers get a certificate showing the amount of credit they are entitled to.
HF 360 eliminates the discount for tax credits issued before 2007. This means people who have already been awarded credits will get a free windfall from the state for work that they've already done or committed to.
I think credits like this are at best questionable, but there's at least a logical argument for giving taxpayers a subsidy to rehab old buildings that haven't yet been fixed up. These credits, though, are for work that's already done, or that people have agreed to do for the credits that were already available. No business would pay a contractor that way, but that's economic growth, Iowa-syle.
Follow the progress of this bill and all other 2007 Iowa session tax legislation at our 2007 Iowa Tax Legislation page.
Explanation to SSB 1220, proposed by the chairman of the Iowa Senate Natural Resources Committee:
This bill adds black bears and cougars to the list of fur-bearing animals.
They'll be happy to give up the polyester, no doubt.
Actually, the bill is much worse than just silly:
Currently black bears and cougars are not addressed in the Code and as such are unprotected nongame animals. As fur-bearing animals, black bears and cougars may be taken legally only during an open hunting season established by the natural resource commission.
Just what we need. It's not enough to have deer killing people; now we'll throw real predators into the mix, under the protection of the state. We'll all be jittery going outside if they control wildcat numbers as well as they've controlled deer numbers. Maybe there will be a new DNR policy: "When you shoot them, they're our cougars; when they eat you, they're your cougars."
The bill to impose combined reporting of income of "unitary" corporations filing consolidated returns (HF 326) has been introduced in the Iowa House. It's a key part of the Governor's budget and seems certain to pass. From the bill explanation:
This bill requires that the net income of affiliated groups of corporations engaged in a unitary usiness be computed on a combined return basis for corporate tax purposes if the group meets the requirements for filing a consolidated return for federal tax purposes. The affiliated group would include corporations with common ownership whereby one or more corporation sown 80 percent or more of another corporation. The bill would require that one Iowa corporate income tax return be filed that would include all unitary members of an affiliated group. Any nonunitary member that is subject to Iowa tax would file its own separate corporate return. Only Iowa sales of those corporations doing business in Iowa would be included in the numerator of the Iowa sales ratio. The bill also provides that only those corporations doing business in Iowa are jointly and severally liable for the tax of the combined return.
The bill applies retroactively to January 1, 2007, for tax years beginning on or after that date.
Because the bill is retroactive, it will affect estimated tax payments this year for many coporations.
Track all Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.
If you ever wonder how the tax law gets so complicated, look no further than the good folks we elect as our representatives. Three bills introduced on Monday in the Iowa House are instructive.
HF 218 would give dentists a special deduction for income they don't receive. The bill would give a special Iowa deduction of 50% of the amount by which state medical reimbursments fall short of their "normal" fee. This gives a double benefit - the dentists wouldn't have to pay tax on income they didn't get paid anyway, but now they get a special break. It's time for dentists to jack up their "normal" feel, for sure.
HF 219 would give a 75% property tax exemption for "recreational" property, including golf courses and amusement parks. Talk about a naked special-interest provision that would make it that much harder to reform Iowa's lame property tax system.
Finally, HF 228 would deny the property tax credit for pollution-control property to farms not qualifying for the "family farm" property tax credit. Strangely, it seems that they want to encourage large corporate farms to pollute. Great plan, that.
The legislative language of the tax amnesty proposed in Governor Culver's budget was introduced in the Iowa Senate this week. From the bill explanation:
This bill provides for a state tax amnesty program to be administered by the department of revenue from September 4, 2007, through October 31, 2007. The program covers tax liabilities delinquent as of December 31, 2006, and authorizes a taxpayer, during the period of the tax amnesty program, to pay this tax with one=half of the interest which would ordinarily be due without being subject to further penalty or civil and criminal prosecution. The taxpayer must agree to relinquish all administrative and judicial rights to challenge the imposition of the tax and its amount.
The taxes that are covered under the tax amnesty program are the individual and corporate income taxes; franchise tax; sales and use taxes; hotel and motel tax; local city, county, and school district sales and services taxes; automobile rental tax; equipment tax; petroleum diminution charge; inheritance and estate taxes; motor fuel and special fuel taxes; cigarette and tobacco taxes; and controlled substance tax.
This is likely to pass, as the legislature's desire to have a bit more money right now will trump the interests of sound tax policy. If you have unpaid taxes that Iowa hasn't noticed, you'd be crazy to 'fess up before this bill is signed. If you have been paying your taxes on time, well, you are allowed to feel a bit like a sap now. Meanwhile, Iowa is setting a pattern for tax amnesties every 20 or so years.
You can follow the progress of all 2007 Iowa tax legislation at our 2007 tax legislation tracking page.
A new bill in the state legislature this week (SSB 1139) would provide a 25% tax credit for "biomass burning stoves" used in residential buildings. Ah, yes, just what our cities need - the eye-stinging aroma of cinders. From the bill explanation:
A biomass burning stove is a stove or boiler designed to utilize agricultural or forest products waste, including corn, wood, and switchgrass for heating residential buildings and that has a capacity of 500,000 British thermal units. The amount of the credit equals 25 percent of the purchase and installation costs. The credit is to be claimed equally over five tax years. The credit is refundable.
That sounds like a big unit. I wonder if its the buyer or seller who is lobbying for this thing.
Follow this bill and all 2007 tax legislation at our 2007 Iowa Tax Legislation page.
The Des Moines Register has some new details about the proposed Iowa tax amnesty:
Under an Iowa Department of Revenue proposal, Iowans would be given roughly a two-month window of opportunity - from Sept. 4 through Oct. 31 - to pay delinquent taxes that are free of penalties, and with a 50 percent reduction in the amount of interest due.
The amnesty would cover the state income, sales, cigarette and motor fuel tax as well as other types of taxes collected by the state government. However, the program would not include property taxes or liquor taxes.
As a cheap gimmick to raise revenue, it's a bad enough idea to get support from both sides of the aisle:
Leaders of the 2007 Legislature agree it's worth a try to offer a new tax amnesty program - one of the budget recommendations that Culver, a Democrat, made Tuesday.
"I think it's a good thing to do. You don't have enough enforcement to catch everyone," said Senate Minority Leader Mary Lundby, a Marion Republican. "If you have an amnesty and get some money back from it, why not try it?"
This, of course, sends a bold bi-partisan message to the taxpaying public: "So you've paid your taxes on time all these years? Ha, ha, ha, Sucker!"
Among the new bills proposed last week in the legislature were efforts to make life for soldiers and veterans more tax-free. There was also a bill to expand the amount of Historical Rehab and "Cultural and Entertainment District" credits allowed each year.
The state has a generous credit to subsidize rehabilitation of historic buildings, but it is subject to an annual limit, which has been greatly oversubscribed. This bill, HF 130, would raise the cap from $2.4 million annually to $20 million.
These bills show how legislators look at tax bills as a sort of Swiss Army Knife of public policy - it can do everything, even if not particularly well. They also show how the road to Iowa's dysfunctional and complex tax system is paved with good intentions. Who can be against helping soldiers? Or fixing up old buildings? There's just no end to good causes, though, and ultimately these special breaks mean everyone else has to pay more, and the tax law just gets more complicated.
The rehab credits have another ugly effect. They subsidize one class of rental property at the expense of others. When the subsidized apartments financed by rehab credits hit the market, they compete with unsubsidized conventional apartments - taking money out of the pockets of the unsubsidized landlords. But that's harder to see than a nicely-rehabbed loft.
Follow all of the 2007 Iowa tax legislation at our 2007 Iowa Tax Legislation page.
The Iowa City Press Citizen has a one-sided piece up shilling for "incentives" for people to make movies in Iowa. It gives the standard excuse for offering subsidies to one business at the expense of the rest of us:
If neighboring states have incentive packages offering multiple tax breaks for filmmakers and Iowa does not, it is a no-brainer which state will get the film, (22-year old filmmaker Scott) Beck said.
The last time this came up, the welfare-seeking filmmakers were wanting "transferable" credits. These are tax credits that the filmmakers can sell at a discount to other taxpayers. They have the same effect as a direct cash subsidy.
The welfare-seekers act like films have some special magical economic impact:
One of the last larger films to be shot in the state is ï¿½The Final Season,ï¿½ shot in Norway and Cedar Rapids in summer 2006.
Producer Steve Schott estimates that for the film they spent about $1.5 million in the state for goods and services alone. He estimates that the crew spent another half a million dollars on food.
More than 3,000 hotel nights were booked and more than 30 cars rented.
That sure is special. Still, filmmakers come and go, leaving nothing permanent behind. Business subsidies are bad enough when the business is going to stick around, but subsidies for people who you know will pack up and leave at the end of a project? Maybe we should just pay California taxes and skip the middlemen.
Then there's this:
Bruce Heppner-Elgin, founder of the Iowa Digital Filmmakers Guild and a Washington resident, knows of dozens of filmmakers across the state who will be lobbying for the bill to pass.
ï¿½The film incentives are very important in that they first off give a level playing field so we can compete with states around us,ï¿½ Heppner-Elgin said. ï¿½There is money out there that Iowa is missing.ï¿½
Nothing compared to what will be missing when Harold Hill leaves town. Actually, there is money missing, but I don't think that's what they're talking about.
The article says Mark Davitt (D- Indianola) will introduce a money-for-Hollywood bill this week. We will track its progress on our 2007 Iowa Tax Legislation page.
The head taxwriter in the Iowa Senate has introduced a bill (SSB 1074) that would require multistate "unitary" corporate groups doing business in Iowa to report their income on a combined basis. This is an idea pushed by ex-Governor Vilsack, and Tax Analysts reports ($link) that Governor Culver will also likely support it.
The bill would apply to groups eligible to file a federal consolidated return. It is designed to increase state tax receipts by restoring to the tax base income steered to corporations in low tax states through management fees and other intercompany income-shifting devices.
A bolder and wiser move would be a repeal of the state corporation income tax, which contributes insignificantly to Iowa's tax revenues. Not bloody likely with the current political makeup of the legislature.
Two significant Iowa tax bills went into the hopper in the Iowa Senate on Thursday. One is a "code conformity" bill that would retroactively adopt all federal tax law changes enacted in 2006. I expect this one to pass.
Another bill, proposed by the new Democratic Chair of the Senate Ways and Means Committee, would increase Iowa's earned income credit from 6.5% of the federal credit to 15%, and would make it refundable. This is actually far more likely to help low-income families than the proposed increase in the minimum wage, but is far less likely to pass.
Several new tax bills have been put in the hopper in the Iowa legislature this week. HF 40 would provide teachers a $250 credit for out-of-pocket expenses; this would pair up nicely with the federal above-the line deduction for such expenses. This doesn't seem entirely hopeless, given that a former teacher now has a certain amount of influence in state government, but it might not fit in budget constraints.
Jamie Van Fossen has proposed to exempt gains from the sale of equity interests held for more than 36 months from Iowa income tax (HF 41). This would greatly liberalize the current exemption, which now requires 10 years of ownership and 10 years of material participation. This has no chance of passing.
From a policy standpoint, they are both misguided, as they benefit a targeted group of taxpayers. That means the rest of us get to make up the difference. But as a wise man once said,
They don't like to actually cut taxes; they prefer to move them from constituency groups to non-constituency groups.
Follow the progress of all Iowa tax legislation in the current session at our 2007 Iowa Tax Legislation page.
The bill (HF 14) to jack up the cigarette tax by $1 per pack is available online at the Iowa Legislature web site.
The state legislature is back at work. It's always a good idea to keep an eye on those people. We're adding a new feature to the site today: a listing of 2007 tax proposals in the legislature. It may be found at www.rothcpa.com/archives/2007taxbills.htm.
We will attempt to track the progress of all tax bills put in the legislative hopper. The bills are listed by bill number and introduction date, with a link to the introduced bill on the Legislature's web site. I include a brief description of the bill and a "prognosis" if I have any idea whether the bill is likely to pass.
I welcome any suggestions or input, and certainly any corrections, on this information. The list is linked in the blogroll on the left side of the main Tax Update page under "Legislation."
The Iowa legislature meets today. For the first time in my 20+ years of living in Iowa, a legislature controlled exclusively by Democrats will be sending its work to a Democratic governor.
From a tax side, it looks like higher cigarette taxes are inevitable. Higher gas taxes also seem likely, with the Des Moines Register beating the drums for more road money.
Meanwhile Governor-elect Culver is holding hearings on property tax relief. They may come to nothing, or they may be part of a package that tries to trade property tax relief for income tax increases. While a straightforward income tax rate increase is unlikely, we may see an attempt to repeal the deductibility of federal taxes on Iowa returns. An attempt to make Iowa a "unitary" state for corporate taxation - where related corporations get dragged into Iowa's corporation tax on a "combined" return when one affiliate is taxable in Iowa - is also a possibility.
We'll see how well my November forecast goes.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to