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From Governing’s
“It seems to be that we forgive the sales tax for those with good lobbying efforts,” complains Patricia Harper, the ranking Democrat on the state Senate Ways and Means Committee. Gerald Bair, the recently retired revenue director, agrees it might be a good idea to be more vigilant about follow-up. “If we’re giving out that much in exemptions,” he says, “we need to see if we’re getting the payback.”
Still, it seems likely that most of the existing breaks will remain in place. Few argue with the popular exemptions for farm machinery and agricultural feed, and even critics such as Harper acknowledge the positive impact of some incentives intended to spur economic development. A few breaks have even improved the fairness of the system: In 2001, the legislature approved a partial rollback of the regressive utilities tax. There is also a campaign to simplify Iowa’s personal income tax structure. A 10 percent across-the-board cut in the tax in 1997 — costing the state treasury about $200 million per year — did nothing to untangle the web of deductions, credits and exemptions taxpayers must interpret to calculate their liabilities. The form is 75 lines long, much longer than those of most other states, and that doesn’t include schedules that need to be attached. California’s 540 2EZ form, by comparison, fits on a postcard. “We have such a complicated system that almost no one does their own taxes,” Harper says. The combination of a simpler form and fewer deductions would likely raise voluntary compliance rates. One popular deduction — for taxes paid to the federal government — stands as a roadblock to simplification. In 2000, the last year for which statistics are available, the deduction cost the state just under $600 million; it reduces the effective income tax rate by 3 percent. There are some who want to keep the deduction, on the argument that eliminating it amounts to a back-door tax increase. Still, the governor wants it abolished, and so do many legislators. “This is a top-tier item for me,” says Republican state Senator Larry McKibben, chairman of the Senate Ways and Means Committee. One item the legislature will be forced to resolve: Last year, the state Supreme Court ruled that Iowa was unfairly taxing racetrack slot machines more than those on riverboats. The revenue from racetrack slots had been charged at a 32 percent rate, while the water-bound versions paid a top rate of 20 percent. The state would like to find a way to set the rates equally without losing any of its current $60 million a year in gambling revenue that goes to the general fund. The gambling take is only about 1 percent of the overall budget, but Iowa, like most states, needs every dollar it can find. Last year, a decline in income tax receipts cost the treasury 1.6 percent of its revenue. And as in other states, the picture won’t improve much for the remainder of this fiscal year, or next. More than $400 million in one-time spending adjustments and transfers will be required to balance the 2004 budget, and even then it will be a test. Second-quarter returns showed a slight improvement over last year, but Dennis Prouty, director of the state’s Legislative Fiscal Bureau, is only cautiously optimistic. “A year ago, they were so far down that any improvement makes it look good on paper,” he explains. Where Iowa has genuinely looked good is in its revenue management, and particularly in the efficiencies it has gained through leveraging technology. A new data-mining system permits cross-referencing of databases to uncover delinquent taxpayers, and has brought in more than $23 million in unpaid taxes. This data warehouse also allows for better selection of revenue-producing audits, and provides support for an outsourced, performance-based program to detect non-filers. The big problem is that Iowa’s tax officials are about to lose ground as they struggle against the effects of painful budget cuts on their own agency. The budget for the Department of Revenue and Finance was slashed 34 percent between fiscal years 2001 and 2003, forcing elimination of dozens of auditors and limiting taxpayer services at some branch offices. And the austerity isn’t over yet. “Somewhere between 20 and 25 percent of the staff is going to be eliminated within the next two to three years,” says Bair. The spending cuts have prompted some creative management ideas. During the last income tax season, the state couldn’t afford to hire its usual crew of temporary data-entry personnel. So it promised taxpayers their refunds within two weeks if they filed electronically; those who filed on paper were told they’d face an estimated 12-week turnaround time. The result: 46 percent took the electronic option, either through telefiling, Web filing or software used by third-party preparers. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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owa’s is one of the better-balanced state tax systems: Levies on income, sales and property all bear a roughly equal share of the fiscal burden. Even so, the current budget crisis has prompted a closer look at the way the system works.For example, Iowa offers about $1.2 billion a year in sales, use and corporate tax exemptions and credits. Some legislators question what the state is getting for that money.