Why keep Iowa’s corporate income tax?

The Des Moines Register this weekend featured an article on an interesting idea that will help jump start Iowa’s economy:

It contributes little to the state budget. No tax would attract business.

Former Mason City Mayor Roger Bang called recently with a “what-if” question about Iowa’s corporate income tax.

Eliminating that tax is something Des Moines accountant Joe Kristan and others have been pushing behind the scenes in recent months, but with little headway.

I told Bang there was zero chance of the Legislature eliminating the tax this year, so most people don’t care what would happen. He agreed, but said people should start thinking about it anyway.

Kristan, who writes a tax blog for Roth & Co., has a rationale for eliminating the tax. It goes like this: The corporate income tax is not a big income producer. It is expensive to administer. Also, Iowa’s high tax rate discourages new businesses from locating in the state.

So, why not get rid of it?

One reason, he admitted, is that too many businesses with highly paid lobbyists benefit from the complicated network of tax credits that has grown over the years to mitigate the cost of the tax.
As things stand today, many businesses can all but wipe out their Iowa tax bill with credits. Some big businesses even get money back from credits that are refundable, such as the research and development credit.

The credits have been around so long that they are part of the business model at many companies.

To give an idea of how out of whack the system is, Kristan points to Iowa’s official 2010 budget.

The budget projects that businesses will pay $341 million in corporate income taxes this year. It also shows they’ll get back a little more than half that in refunds, leaving the state with net corporate tax receipts of $165 million.
That may sound like a lot, but it’s only 3 percent of the $5.4 billion available for state government services.

The bulk of the state’s net income comes from personal income taxes, $2.55 billion, and sales and use taxes, $2.15 billion.

Sin taxes on alcohol and tobacco sales generate nearly twice as much net income – $321 million – as the corporate income tax.

Another problem with the corporate income tax, Iowa State University economist David Swenson said, is that “it fluctuates a lot.”
In fact, this year’s net take from the tax – after refunds have been paid – is less than half the net collected two years ago in the fiscal year that ended June 30, 2008, right before the economy went bad.

That’s a huge drop, and it makes planning difficult.

By comparison, the combined drop in personal income, sales and use tax receipts was 2.2 percent.

There’s also a fairness issue, Swenson said.

Several companies that employ thousands of Iowans already don’t pay Iowa income tax, or pay very little tax, because the bulk of their sales are outside Iowa and profits from those sales are not subject to Iowa income tax.
That’s on top of the taxes that aren’t being paid because of credits.

As a result of the ongoing film tax credit scandal, lawmakers are looking at capping or eliminating several of Iowa’s 35 existing tax credits.

That’s fine because the state needs to keep a better handle on tax credits than it has in the past.

Swenson said: Tax credits should be “straight forward practical assistance to firms that knock off the rough edges associated with business start-ups.”
But, he said, “you don’t want to underwrite them” to the point where the state provides an unfair competitive advantage.

When lawmakers start playing around with the tax code, it’s easy to create distortions because one taxpayer’s gain is another’s loss.

Don’t expect any meaningful change this year, because lawmakers don’t have the time to fully explore Kristan’s proposal for eliminating the corporate income tax. But it is definitely worth looking into after the session.
Even Kristan can’t fully defend his proposal. He admitted there are too many unknowns.

But it stands to reason, he said, that if the corporate income tax is eliminated, or even severely reduced, Iowa will gain a competitive advantage over surrounding states in attracting business.

Right now, Iowa’s top corporate tax rate, 12 percent, is higher than any surrounding state.

Few businesses actually pay that rate because of all the credits and other loopholes.
There are obvious advantages in having a corporate tax code that is easier to understand and apply.

Between now and next January when the Legislature returns, somebody needs to do the math and figure out a cleaner system than the one we have now.

Most business leaders believe that a consistently low – or no – corporate tax rate is attractive to new businesses and economic growth.

If that’s true, put a number on it.

And if you don’t believe it’s true, accountant Tom Pflanz of McGowen Hurst Clark and Smith in West Des Moines said, then why have so many businesses in Sioux City moved across the river to South Dakota, where there is no income tax?

(Source: The Des Moines Register)

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  • bonnie

    I just read Utah went from 7% down to 5% and are flurishing. More businesses and more jobs. Might be worth a try.

  • June Kopiasz

    Above it states that the corporate tax ends up being 3% of the 5.4 billion available for state government services. … what “state government services” is the article referring to?