Implications of State Spending Cuts: The Need to Maximize Federal Funding and Generate Revenue for Iowans

1. Implications of State Spending Cuts:The Need to Maximize Federal Funding and Generate Revenue for Iowans Lily French Iowa Policy Project

2. Immediate Consequences of Spending Cuts • In a recession, we need to “keep people employed and buying things” – budget cuts reduce the total level of spending within a state’s economy • Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are damaging to the economy because they reduce consumption … this effectively prolongs the recession and delays recovery throughout the state • Puts vulnerable families who depend on state services at risk during tough economic times

3. Spending Cuts Hurt Our Future • Budget cuts result in more jobs lost in Iowa – from the public and private sectors • Bigger hole to climb out of during recovery • Reduces resources for an increasing number of economically vulnerable families • Family well-being in jeopardy and children fare worse as adults = decreasing productivity of future workforce • Revenue/budget problems carried into the future

4. Iowa Slow to Regain Jobs Lost (Every Job Counts) Job Growth Comparison – Iowa Nonfarm Jobs Source: The State of Working Iowa 2008, Iowa Policy Project

5. Families’ Well-Being Declines • Foundation for Child Development in its 2009 Youth Well-Being Index Report concludes “virtually all progress made in family economic well-being since 1975 will be wiped out.” • Report shows impact of the current recession on children will be dramatic and long-lasting • rising child poverty rates • declining # of children in households with at least one parent with secure employment • declining median annual income for all families with kids • negative ripple effects on children’s social relationships, community connectedness, health, and safety/behavior Report available at: http://www.fcd-us.org/usr_doc/Final-2009CWIReport.pdf

6. Cutting Away Iowa’s Future • Children who fall into poverty during a recession fare worse as adults • Earn less • Achieve lower levels of education • Less likely to be gainfully employed over their lifetimes • More likely to have poor health • Less productive workforce, decreased tax revenue, and increased public spending -- First Focus “Turning Point: The Long Term Effects of Recession-Induced Poverty”

7. Opportunities for Iowa • Expanded federal funding to help struggling families in this time of economic need: • Child Care Assistance • TANF Emergency Contingency Fund • Supplemental Nutrition Assistance Program

8. Increasing Child Care Assistance through ARRA • Iowa was awarded $18.1 million to expand child care assistance • To date, only $2.4 million has been used for that purpose • Remaining $15.8 million is being held for DHS budget shortfalls in other programs • Violates ARRA legislation intent

9. Child Care Assistance in Iowa

10. CCA Expansion to 200% possible without state cost • Use remaining CCDBG stimulus funds to expand CCA eligibility to 200% and institute adjusted co-payment schedule Cost of 200% (with adjusted co-pays) $21.6 Million Immediate Annual Tax Revenue - 6.8 Million Cost to the State $14.8 Million Existing ARRA CCDBG funds $15.8 Million • First year of expansion would be fully covered by existing ARRA funds designated for child care & increased tax revenues

11. If no action is taken… • Lose an opportunity to make needed program changes which reward work and serve more families • Negative implications for CCDBG reauthorization in 2010 • Sending message to Congress that Iowa does not need additional child care services (first reauthorization since 1996)

12. Additional TANF Funds through ARRA • Iowa can draw down $65.5 million from TANF Emergency Contingency Fund for: • Increased basic assistance = rising caseloads • Increased spending on subsidized employment or short-term non-recurrent expenses • Caseload increase will draw $10.5 million; leaving $55 million still on the table

13. Draw Down Options with No State Cost • Count DHS flood recovery funds as MOE. • Partner with United Way, homeless prevention organizations, and/or food banks – counting their expanded food and crisis housing services as MOE. • Partner with Iowa Community Action Agency Association to count utility company contributions. • Expand County General Assistance Programs. • Partner with private sector to offer gift certificates or vouchers to needy families at discounted rate to the state.

14. If no action is taken… • This is a use or lose opportunity; Iowans will not benefit from the additional funds • Negative implications for TANF reauthorization in 2010 • Congress will analyze how the additional TANF funds were used (or not used) as an indicator of state needs in reauthorization

15. Food Assistance in Iowa

16. Expansion of SNAP • Iowa is able to expand Food Assistance through “Categorical Eligibility” • Since 1999, states have been able to set their own asset and gross income policy via categorical eligibility. • Many states have already taken advantage of this option.

18. USDA says “Yes” as well “In these times of rising caseloads and shrinking State budgets, expanded categorical eligibility can benefit States by simplifying policies, by reducing the amount of time States must devote to verifying resources, and by reducing errors. It can benefit families hurt by the economic crisis…” -- USDA Memo to Regional Administrators September 30, 2009

19. How Iowa could benefit from categorical eligibility… • Provides additional resources to a greater number of working families • Provides a direct infusion of cash into Iowa’s economy, as benefits are spent quickly and locally on food • DHS estimates $12.4 - 24.7 million in economic benefits from raising the income limit to 160% FPL • DHS estimates $20.3 - 33 million in economic benefits from dropping asset tests with the income limit increase to 160% FPL • Reduces state workloads

20. 2010 Reauthorization • What we do now not only determines how much support Iowans struggling through this recession will receive… but impacts the future funding for our state • Up for Reauthorization Next Year: • Child Care Development Block Grant • Temporary Assistance for Needy Families • Supplemental Nutrition Assistance Program

21. Looking for Revenue in Difficult Times • Business tax credits in FY2010: $421 m. • Profit-shifting loophole: $50-$100 m. • Gov’s FY 2011 budget proposal eliminates 8 credits, caps credits at $185 million, and eliminates refundability of RAC for companies with over $20 million in sales = $52.5 million in additional revenue Good Start; More Can Be Done!

22. Responsible Responses Look at Revenue (Taxes) Tax expenditures, incentives, and loopholes have grown dramatically and largely unchecked over time … do not account for all the budget deficits but definitely contribute to them.

23. Tax Credits and Economic Development Most business credits are intended to stimulate economic development • Do they work? • Are they the only way, or the most cost-effective way, to promote growth? • How can we tell a good from a bad one?

24. State Government’s Traditional Role in Promoting Economic Growth Make Iowa a place where businesses will want to locate and where their employees will want to live. • Education: Provide a skilled workforce, good schooling for workers’ children • Infrastructure: Sound, well-maintained system of roads, water, sewer • Quality of Life: Public safety, recreation, health care, arts and entertainment

25. The New Role: Subsidize Business When is that justified? • Developing industries: Tax credits for ethanol and wind power • Limited duration to get an industry off the ground, to the point where growth is self-sustaining What to avoid: • Paying businesses to do something they would do anyway • Giving subsidies when there are not adequate revenues for essential services

26. New Vs. Old Subsidies to business reduce revenues and hence the state’s ability to perform its traditional functions that provide the foundation for economic growth: education, infrastructure, and quality of life In budget deficits, unnecessary subsidies are not just a waste of money: they harm state economic growth

27. What Can You Do? • Support recommendations of the Tax Credit Advisory Panel, endorsed in Governor’s proposed FY 2011 Budget • Urge greater transparency – fill likely lead to more revenue in future • Urge the adoption of Combined Reporting

28. Tax Credit Panel Recommendations • Transparency ... recommends the Revenue Estimating Conference list types and amounts of tax credit claims included in its tax receipts calculations for each meeting. • Transferability ... recommends eliminating transferability (“sale”) of all state tax credits. • Return on investment ... recommends Panel members develop a process for calculating a return on investment for each tax credit. • Sunset tax credits ... recommends five year sunset for tax credits. • Cap tax credits ... recommends moving all business-related tax credits under the $185 million cap created last session. • Eliminate some credits ... recommends eliminating 8 tax credits, most notably the film tax credits. Most of the other credits are either not being used, or the panel has determined they are not necessary because of changing economic conditions. • Eliminate refundabililty of the Research Activities Credit ... recommends eliminating Research Activities Credit refunds for companies with gross receipts in excess of $20 million per year.

29. Profit Shifting Loopholes Cost Iowa Millions in Corporate Tax Revenue Tax loopholes are real, and can be plugged. Iowa tax law allows multi-state companies to do business here, make money here, and shift the profits out-of-state to avoid Iowa taxes. Cost: $50 to $100 million in additional revenue every year. Almost all of this tax avoidance comes from large, multi-state corporations headquartered outside Iowa (ex: Wal-Mart, Toys R Us).

30. Combined Reporting Still a Good Idea “Combined Reporting” prevents profit shifting by combining the profits of all the company’s subsidiaries. Levels the playing field for local firms Proposed by Governors Vilsack and Culver Used in 16 states for over two decades Recently adopted in 7 more states, for a total of 23, including NE, KS, MN, IL & WI Current bill: SSB 3122 (Jochum, Feenstra, Quirmbach)

31. Voter Views • Key findings: • Iowa voters generally believe the wealthiest Iowans and multistate corporations benefited most from tax cuts over the last 20 years; • More than six in 10 Iowa voters believe those same groups — wealthy individuals and big companies — do not pay their fair share of taxes in Iowa; and • By large margins, Iowa voters believe small businesses, the working poor and middle-income Iowans either pay too much or about the right amount in state taxes. www.iowafiscal.org

32. Do Iowans want tax reform? It’s not even close. Despite the tirades at the Statehouse last spring, Iowans overwhelmingly back the kind of reform that died without a vote. www.iowafiscal.org

33. Voter Views • Key findings: • Iowa voters do see several acceptable ways to raise revenue in this budget crisis; some involve targeted tax increases; • Four options carried over 60 percent of respondents — including a temporary income-tax increase for households earning over $250,000; and • Iowa voters do not favor general increases in income tax or property tax, but could support a penny increase in the state sales tax. www.iowafiscal.org

34. So, what would Iowans accept? • A majority of Iowans consider the following options acceptable ways to avoid more cuts: • Raise ‘sin’ taxes • Temporarily raise income tax on high earners, those making over $250K • Limit film tax credit • Limit research activities credit • Crack down on shifting profits to out-of-state subsidiaries (also known as combined reporting) • Raise sales tax by 1 cent • Tax profits from sale of business • End agland prop. tax credit for nonfarmers • Expand sales tax to more services www.iowafiscal.org

35. Notable points behind numbers Voters’ support for targeted tax moves follows sound economic policy National research shows, and recognized economists agree: cutting state spending is more likely to deepen recession and delay recoverythan raising selective taxes, particularly those affecting more affluent taxpayers www.iowafiscal.org

36. Conclusions Iowa’s current budget situation is the product of a severe recession and a decade of tax policies that cut revenues by over $1.5 billion. We need to address the long term structural deficit and lingering equity issues. Everything should be on the table: Closer scrutiny of tax credits and loopholes, and increased transparency, are needed.

37. Balancing the FY 2011 Budget Will everything be on the table, or will corporate tax breaks get a pass? Will essential services be cut in order to preserve millions of questionable tax credits to wealthy corporations? Will Iowa maximize the federal dollars available to us?

38. Keep in Touch! • For more information: • Lily French, Iowa Policy Project • (319) 338-0773 • lfrench@iowapolicyproject.org • Victor Elias, Child & Family Policy Center • (515) 280-9027 • victore@cfpciowa.org • Or check our website: www.iowafiscal.org

39. Data from Iowa Voter Survey

40. Who ‘wins’ in recent moves? Iowa voters have clear ideas on who has benefited from tax cuts for individuals and businesses over the last 20 years. 78% 75% www.iowafiscal.org

41. Who pays what they should? More than 6 in 10 Iowa voters believe the wealthiest Iowans and large corporationsdo not pay their fair share of taxes in Iowa. www.iowafiscal.org

42. So, what would Iowans accept? Supermajority-supported revenue options: www.iowafiscal.org

43. So, what would Iowans accept? Firm majority revenue options: www.iowafiscal.org

44. Facts on Spending & The Roots of the Revenue Crisis

45. Realities for Response 6.3% 5.3% General Fund is a smaller share of Iowa economy than it was in the 1990s. www.iowafiscal.org

46. Realities: Real Spending Down • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • Rapid rise in health insurance premiums has led to the cost of state and local government services rising faster than the consumer price index: 68% vs 47% from 1994 to 2009 • Result: General fund spending, corrected for inflation, has actually fallen since 2000 • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • Rapid rise in health insurance premiums has led to the cost of state and local government services rising faster than the consumer price index: 68% vs 47% from 1994 to 2009 www.iowafiscal.org

47. Realities: Real Spending Down • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • Rapid rise in health insurance premiums has led to the cost of state and local government services rising faster than the consumer price index: 68% vs 47% from 1994 to 2009 • Result: General fund spending, corrected for inflation, has actually fallen since 2000 • The lion’s share of state government costs are personnel costs, and health insurance costs are a major component • Rapid rise in health insurance premiums has led to the cost of state and local government services rising faster than the consumer price index: 68% vs 47% from 1994 to 2009 $2,371 $2,089 $1,985 www.iowafiscal.org

48. Revenue Roots of Crisis • Tax Cuts over the past 10 years • Increasing use of business tax credits • Increasing exploitation of loopholes in the corporate income tax • Declining sales tax revenue — Iowa tax code has not been modernized to address shifts in spending to internet sales and untaxed services www.iowafiscal.org

49. Realities for Response Revenues growing more slowly than economy www.iowafiscal.org

50. Revenue Roots: Tax Cuts • Reductions in taxes on retirement income, mostly benefiting higher income seniors (1996, 1999, 2006) • Cuts in inheritance and estate taxes (1998, 2003) • 10% income tax cut (1998) • Hospital sales tax exemption (1999) • Utility exemption in the sales tax (2001) • Insurance premium tax cuts (2004) www.iowafiscal.org