Yesterday Governor Branstad signed Senate File 295 into law, issuing the largest tax cut in Iowa history.

Branstad held the signing ceremony at Hawkeye Ready-Mix Concrete in Hiawatha, where he recognized the support of many individuals involved in this historic reform, including Speaker Kraig Paulsen who was on hand during the ceremony.

“Today, the largest tax cut in Iowa history will become law. I am proud to say this tax cut passed with bi-partisan support in both the Iowa House and Iowa Senate,” said Branstad. “This tax relief bill will put more money in the pockets of Iowa families and make it easier for Iowa businesses to invest and grow in our state. I am proud to say that today, we make it easier for Iowa families to grow and thrive in the Heartland of America.”

Lt. Gov. Kim Reynolds acknowledged the bi-partisan efforts.

“In Iowa, a group of thoughtful leaders differentiate themselves by a commitment to working together, and that commitment to working together is what helps make Iowa so great” said Reynolds. “This is a tax cut that will help Iowa families, farmers and businesses grow and prosper.”

Over ten years, this bill will provide an estimated $4.4 billion in property tax relief for Iowa’s hardworking taxpayers. Every class of property will see permanent property tax relief, with agricultural and residential property tax payers saving an estimated $500 million annually by year ten. On top of all the property tax relief, the bill includes nearly $90 million in annual income tax relief.

Video of Speaker Paulsen’s remarks:

(Source: Charter Pulse)

This session House Republicans passed House File 625, a bill that greatly improves school choice options.  You can see the bill analysis by clicking here.

From the Des Moines Register

By Jason Noble

Businesses as well as individuals will soon be able to take advantage of a tax credit for contributions to private-school scholarships. More money will be available for the credits under legislation signed into law Tuesday by Iowa Gov. Terry Branstad.

House File 625 expands the state’s existing school tuition organization tax credit, raising its annual cap to $12 million, from $8.75 million, and making it available to estates, trusts and businesses that are organized as partnerships, limited liability companies, s-corporations.

Under current law, only individuals can receive the tax credit.

The program provides a tax credit worth 65 percent of the amount a taxpayers gives to a student tuition organization that is set up to provide scholarships for students attending private schools.

The measure had wide and bipartisan support, passing unanimously in both the House and Senate last month.

The Tax Foundation recently released a report detailing the North Carolina Legislature’s efforts to reform their tax structure.  Below is the report along with a PDF version with tables, references and other pertinent information not included here.

Introduction

This week, the Finance and Appropriations Committees of the North Carolina House of Representatives approved legislation that would significantly reform the state’s tax system. House Bill 998 would reduce individual and corporate income taxes while broadening their bases, in addition to lowering the combined state-local sales tax and expanding the tax to some services. These changes move North Carolina away from income taxation and towards consumption taxes in an effort to increase future economic growth and make the state more rate-competitive with its neighbors. They would also reduce distortions and waste associated with a complicated and non-neutral tax code.

The legislation will move to the House floor and, if passed, would be sent to the Senate where comparable legislation has been considered. Last month, Senate Republicans debuted their plan, which is now being considered by the Senate Finance Committee as Senate Bill 677. This proposal contains similar elements but is much more robust than the House plan because it more comprehensibly broadens the income and sales tax bases in addition to addressing the economic issues associated with taxing business inputs.

Both the House and Senate legislation would dramatically improve North Carolina’s ranking on our State Business Tax Climate Index. The state ranked 44th in business tax friendliness in our 2013 Index. Had the House plan been in effect, the state would have ranked 19th. If the Senate plan were in place, the state would have ranked 13th.

House Lawmakers Consider “Tax Simplification and Reduction Act”

House Republicans are currently considering groundbreaking legislation with the explicit goal of phasing out North Carolina’s reliance on income taxation.[1] In particular, the plan would:

• Collapse the state’s three individual income tax brackets into one and lower the rate to 5.9 percent;
• Eliminate the personal exemption, cap local property tax and mortgage interest deductions, increase the standard deduction and child credit, limit the generous $50,000 deduction for net business income, and repeal charitable contribution credit for non-itemizers and severance wage deduction;
• Lower the corporate income tax to 5.4 percent; and
• Reduce the franchise tax to $1.35 from $1.50 per $1,000 of the tax base; and
• Lower the combined state-local sales tax from 6.75 percent to 6.65 percent[2] while broadening the tax base to include certain services.

A detailed list of changes can be found in Table 1, below. As a supplement to this legislation, House lawmakers have already passed a bill that would eliminate the state estate tax which now awaits action in the Senate.[3]

On the state level, the legislation in its entirety (including estate tax repeal) is expected to cost nearly $1 billion over the next five years and $212 million over fiscal years 2013 and 2014.[4]Local governments are projected to see annual funding increases due to the method by which the legislation would alter distribution of certain tax revenues to municipalities.[5]

Under this plan, sales tax base expansion is very moderate, because it is only expanded to include “businesses that already collect sales tax for goods.”[6] This means that only those service providers that already sell goods, and thus already collect sales tax on those goods, would be required to do so on the services they offer. Further, it retains the state sales tax exemption for prescription drugs and food, two popular exemptions that are aimed at helping lower-income North Carolinians, but still significantly narrows the tax base.

This proposal allows most individual income tax expenditures, such as the Earned Income Tax Credit, to sunset as scheduled.[7] However, more than twelve tax expenditures (currently with no sunset provisions) are left untouched.[8]

Overall, the plan is a moderate but promising reform of the state tax code. It should be applauded for its individual income tax bracket reduction and rate lowering, as well as its corporate income tax and franchise tax rate reductions, although more could be done to broaden tax bases.

Senate Pushes “Tax Fairness Act of 2013”

An alternative plan[9] currently under consideration in the Senate Finance Committee would cut taxes by a total of $1 billion by the time it is fully implemented in 2017.[10] Though similar to the House proposal, the Senate legislation goes much farther in many respects. The proposal would:

• Lower the individual income rate to a flat 4.5 percent;
• Completely remove the personal exemption, standard deduction, and itemized deductions, though the taxpayer would pay no income tax on the first $15,000 of earnings;
• Retain existing child credit, repeal the mortgage interest deduction and net business income deduction, remove other individual income tax carve-outs,[11] and apply income tax to certain retirement income;[12]
• Reduce the corporate income tax rate to 6 percent and repeal several corporate tax credits;
• Reduce combined sales tax rate to 6.5 percent and broaden base to include most services, food, and prescription drugs; and
• Repeal the estate tax.

The Senate plan creatively ties the business input sales exemption to payment of the franchise tax. Business inputs should be exempted from the sales tax because this practice leads to sales tax pyramiding.[13] The language of the Senate Republican plan states that “sales of capital equipment purchased by a business subject to the franchise tax . . . or to a farmer for use by the farmer in the planting, cultivating, harvesting, or curing of farm crops or in the production of dairy products, eggs, or animals” and any “service [now taxable] . . . that is provided to a business subject to the franchise tax . . . for use in that business” will be exempt from the sales and use tax. Any sales tax reform enacted in North Carolina should include a provision such as this to ensure no sales tax pyramiding occurs.

This proposal is the most robust in terms of income tax base broadening. It closes multiple tax expenditures in the individual and corporate income tax code that distort behavior, adds unnecessary complexity, and requires higher rates to compensate for a small tax base. Further, the Senate plan expand the sales tax to cover more than 130 services,[14] which would make North Carolina’s sales tax base the broadest in the country and enable significant reductions in complexity and distortions. By comprehensively expanding to all services at one time, this removes the political incentive for certain service providers to lobby for special tax exemptions.[15]

Crafting Optimal Tax Reform Legislation

Income Tax Reform Reduces Distortions and Improves Neutrality

Income taxation, by definition, taxes wealth creation. It disincentivizes the activities that add productive value to the economy—work and investment. The best way to mitigate the deadweight loss associated with income taxation is to levy a tax that is as flat and as broad-based as possible so that the rate can be kept low. This minimizes economic distortions and keeps the structure simple and neutral.

Both tax reform plans flatten and lower the individual income tax rate in addition to reducing the corporate income tax rate. The Senate plan offers the most significant individual income tax rate reduction, while the house proposal lowers the corporate income tax rate the most.

Each tax reform plan closes income tax expenditures and other tax preferences to varying degrees. Each would eliminate the $50,000 business income deduction, a tax expenditure that costs over $131 million annually.[33] The House plan does little individual income tax base broadening, while the Senate proposal would eliminate many of carve-outs.

Neither of the plans do a complete job of closing corporate income tax carve-outs, though S.B. 677 goes the farthest. It closes twelve corporate income tax expenditures, totaling approximately $22.7 million annually.[34] Unfortunately, neither bill touches one of the largest and most inefficient tax expenditure programs—the film production tax credit, which forces the state to forego $35.8 million annually. Closing such programs not only eliminates inefficient programs but also brings in more revenue for the state to use as it sees fit.

Applying the Sales Tax to Service Transactions Modernizes Antiquated System

Most states exempt service transactions from the sales tax base due to the fact that sales taxes were implemented in the 1930s, a time when the goods industry dominated the economy. Now, services make up the majority of the U.S. economy. In North Carolina, services make up more than 70 percent of the economy. [35] By exempting these transactions from the sales tax, the state is effectively subsidizing those industries and foregoing a significant amount of revenue.

Each of the tax proposals expand the sales tax to some degree, though S.B. 677 again does so most comprehensively. It would expand the sales tax to cover over 130 additional services, all of which are taxed in at least one other state. Further, the plan takes care to ensure business inputs are exempt from the sales tax to avoid tax pyramiding, arguably the most important aspect of sales tax reform.

H.B. 998 expands the base to cover services that are tied to the sale of goods. That is, taxes are levied on service providers that already sell goods and that they argue are already reasonably equipped to act as sales tax collectors. Unfortunately, the House plan does not expressly exempt business-to-business transactions.

Franchise Simplification Reduces Distortions and Waste

North Carolina currently levies a complicated franchise tax on certain businesses within the state. It requires firms to first calculate three separate tax bases and then pay the tax on the highest of the three. The tax is levied on C corporations, S corporations, electric membership corporations, and LLCs that elect to be taxed as corporations under the federal tax code.[36] The House plan would lower the rate of taxation, but not expand the base.

The complicated nature of the franchise tax wastes time and monetary resources. Broadening the base to include LLCs would allow the rate to be lowered for all firms subject to the tax. This is desirable since it is essentially a tax on capital stock, and taxing this will disincentive capital accumulation, a driver of economic growth.

Tax Reform Proposals Would Improve North Carolina’s Business Climate

Both the House and Senate tax reform plans would significantly improve North Carolina’s score on our State Business Tax Climate Index.[37] In 2013, North Carolina’s overall score was 44th—meaning that only six states scored worse than North Carolina. Table 2 outlines how the House and Senate plans would each have changed North Carolina’s 2013 Index rankings.

Both pieces of legislation would have drastically improved North Carolina’s 2013 Index ranking, moving the state’s overall rank up at least 25 spots. The House plan would move North Carolina to second best among its neighbors, while the Senate legislation would make it the most business-friendly in the region. S.B. 677’s robust expansion of the sales tax base and its provisions to exclude business inputs make it stand apart from H.B. 998 in the Index’s sales tax category. However, the House plan outperforms the Senate plan in terms of the corporate income tax due to the lower rate.

Conclusion

North Carolina’s tax system is in need of reform. The system includes high, graduated-rate individual income taxes, a corporate income tax that exceeds its neighbors’, and a sales tax base that excludes a large portion of transactions. By flattening and lowering individual income taxes, the system becomes fairer, simpler, and more neutral. Lowering corporate income taxes brings the rate more in line with those of neighboring states and encourages business investment. Expanding the sales tax base to services would bring in additional revenue and level the playing field between producers of goods and services.

Ideally, the final piece of legislation will flatten and lower the individual income tax, lower the corporate income tax and franchise tax rates, significantly broaden income tax bases by closing costly tax expenditure programs, broaden the franchise tax base to include all companies with limited liability, and expand the sales tax to include services without causing tax pyramiding.

PDF version of the Tax Foundation’s Report

In 2006, the state of Utah phased in a 5% flat income tax rate for all taxpayers.  Since then, most taxpayers have seen their yearly tax bill to the state decrease, with very few actually seeing a higher tax bill.  Additionally, the Tax Foundation (a non-profit, non-partisan tax policy research group) has put Utah in the Top 10 in the 2013 Tax Climate Index, while Iowa sits in the Bottom 10.

This past legislative session, House Republicans attempted to reform the state’s convoluted, confusing, uncompetitive income tax system by creating a 4.5% flat income tax (House File 478).  Under this bill, Iowa taxpayers would have the option to pay the flat rate with no exemptions or credits, or keep the current system.  This bill would lower taxes for half a million Iowans while not raising taxes on anyone.  In fact, the most beneficiaries of HF 478 would be those making between $30,000 and $40,000 a year.

House File 478 is:

• Simple
• Fair
• Flat

7 states in the country currently employ a flat tax, one of which is Utah.  A few years after Utah changed their tax system, a study came out proving that most Utahns were paying less under the flat tax system.

Bob Bernick Jr. of the Deseret News wrote:

Despite grumbling from some state income taxpayers over the last several years, a new study shows that most Utahns are paying less under the new 5 percent flat tax than they did under the old tax system.

The debate has gone on since 2006, with some arguing that middle-income Utahns were paying more and the wealthy paying a lot less.

But a new study of actual tax filings between 2005 and 2008 by the Office of Legislative Research and General Counsel shows that is not the case.

Like most tax studies, this one is complicated, with lots of charts, graphs and analysis.

Still, the study states the following:

• Approximately 97 percent of tax returns paid the same or less under the new system in place in 2008 relative to the old system in place in 2005.
• About 91 percent of tax returns paid the same or less under the new system in 2008 relative to the systems in place in 2006 and 2007.

Currently, Iowa has one of the highest top tax rates in the country (as seen in the map above).  Iowa’s tax system is confusing and costs taxpayers significant amounts of time and money to prepare their taxes every year.  Forbes Magazine reports that every year Americans spend 6.1 hours complying with the federal tax code.

House Republicans will continue to work to reduce the tax burden on Iowans and make the tax code simpler, fairer, and flatter.

From the Cato Institute

By Jason Bedrick

The unanimous decision of the Iowa legislature to expand the state’s scholarship tax credit (STC) program yesterday once again demonstrates that school choice programs grow even more popular once implemented.

Iowa’s STC expansion bill raises the credit cap from $8.75 million to $12 million and expands the types of corporations eligible to receive tax credits for donations to scholarship organizations. The bill adds no new regulations.

Six of the seven states with STC programs enacted before 2010 have subsequently voted to expand those programs. The chart below shows the legislative support and opposition in four of those states. (The expansions in Indiana and Pennsylvania were part of legislation covering other issues so they were excluded from this analysis. The chart includes information for Arizona’s corporate-donor STC program but not its individual-donor STC program, for a similar reason.)

The most dramatic shift was in Georgia’s State House, which moved in just a few years from a fairly even divide to overwhelming support. Support in Iowa went from overwhelming to unanimous. While Florida’s Senate barely moved, support has grown considerably in the House. Arizona has also had modest increases in support for school choice in both chambers.

A survey by Harvard University’s Program on Education Policy and Governance found that 72 percent of the American public already supports scholarship tax credit programs. The survey found even higher support among parents, African-Americans, Hispanics, and registered Independents and Democrats.

There have not yet been any studies measuring whether support in a given state increases after enacting an STC program, but if legislative support is a reliable proxy then the answer appears to be in the affirmative.

To see the staff analysis on Iowa’s STO bill click the link below:
House File 625 Bill Analysis

2013 End of Session Report

*Note:  All information is current as of May 22, 2013

• House File 215 – Education Reform
• House File 489 – Insurance Division
  
• House File 620 – IEDA Tax Credit Cap
• House File 648 – Debt Reducion, Pension Obligations, and One-Time Appropriations
• Senate File 295 – Property Tax
• Senate File 446 – Health & Human Services Budget (Conference Committee Report)

To see the full House Debate Calendar, click here.

• House File 512 – Confinement Feeding
• House File 616 – Targeted Jobs Program
• House File 644 – E911
• House File 645 – Wastewater Treatment Sales Tax Exemption
• Senate File 247 – Bengal and Savannah Cats
• Senate File 338 – Background Checks for School Employees
  
• Senate File 339 – School Vehicle Inspections
• Senate File 432 – Department of Revenue Efficiency Bill
• Senate File 436 – Historic Tax Credits

To see the full House Debate Calendar, click here.

• House File 640 – Biofuel Blending
• Senate File 436 – Historic Tax Credits
• Senate File 442 – Judicial Branch Budget
• Senate File 452 – Standing Appropriations

To see the full House Debate Calendar, click here.

• House File 641 – Iowa Reinvestment Act
• Senate File 396 – Government Efficiency
  

To see the full House Debate Calendar, click here.