Vander Linden Capitol Update – March 9, 2017
The Iowa House was very busy debating on the floor this week, but in between debate we were able to accomplish some big things. The discussion of tax credits and their viability has started. House Republicans are working hard to ensure your money is used properly. Below you will find some helpful information concerning some issues the legislature is addressing this session. Please contact me with any questions or concerns you may have.
House Republicans Tackle Tax Credits in Unprecedented Joint Appropriations – Ways & Means Meeting
Wednesday morning’s joint meeting of the House Appropriations Committee and the House Ways and Means Committee focused on a hot topic in the Capitol and across the state – tax credits. The two committees heard from the non-partisan Legislative Services Agency covering how the tax credits work and how they impact the state’s balance sheet.
One area of misconception that many Iowans – including legislators – have about tax credits is that once they are passed by the Legislature, the credit immediately lowers state revenue. That’s not how it works. Instead of accounting for those funds in the year the credit is awarded, the fiscal impact occurs when a taxpayer redeems the credit. This means it can be several years before a tax credit award is accounted for on the state’s balance sheet. Also, some credits require a certain condition to occur before they can be paid out. Among these would be the wind energy credits, which require a turbine to be in use before the owner can collect the credit.
A number of credits are refundable, meaning that a person eligible for the credit can get a refund from the state that is larger than what they owed in taxes. The fact that a taxpayer could get a refund larger than what they owed is a concern to some in the state. Among the credits that are refundable are the Earned Income Tax Credit for lower-income individuals and the Research
Activities Tax Credit for businesses.
Some tax credits are transferrable, meaning the person who is awarded the credit can turn around and transfer or sell the credit to another taxpayer. One credit where this practice is common is the Historic Preservation and Cultural and Entertainment District Tax Credit, where developers sell the credits in order to generate capital necessary to fund their project.
The cap on the Iowa Economic Development Authority’s tax credit program is $155 million in FY 2017. For the two previous years, the amount of tax credits handed out by IEDA was less than what they were allowed to distribute. LSA believes that IEDA will also not reach its cap for this year.
With regards to any changes to the IEDA tax credit cap, Legislative Services Agency said that there would be a significant amount of time before the impact of that change would be seen on the state’s balance sheet. This is due to the amount of time it takes for a company to receive the credit and the amount of years they have to redeem it.
Over $80 million of state school aid funding is used to cover the property tax owed for a variety of tax exempt properties. The largest amount in this is $58.5 million which goes for properties in Tax Increment Financing (TIF) districts.
The state will make $74.2 million in direct payments from General Fund Revenue. The largest amounts in this category are payments to Flood Mitigation Districts of $31.2 million and funding for operations of the Department of Revenue and its Tax Gap project of $30 million.
The meeting helped to kick start a conversation about both the income tax credits, which are accounted for outside the General Fund, and the property tax credits which are funded by standing appropriations.
Reviewing these items will be part of the larger discussion on the state budget for Fiscal Year 2018.
February Revenue Figures Paint Ominous Picture
The state’s revenue figures for the month of February provides a confusing and concerning view on how tax dollars are flowing into the state. While the Legislative Services Agency revenue memo found the state ended the month with growth, it doesn’t tell the full story.
For the month, the memo states that February saw a revenue increase of 7 percent over February 2016. And for the first eight months of the fiscal year, revenue increased 1.9 percent. This amounts to an increase of $88.3 million, which is $125 million below the REC forecast of 4.7 percent revenue growth.
For personal income tax, collections were down $20.2 million when compared to last February. This number is somewhat misleading, because a substantial portion of revenue that was collected last year was instead received by the state on March 1 this year. For the fiscal year, the REC forecast was for 5.8 percent growth in personal income tax collections. Actual collections through February had grown by just 0.5 percent.
Sales tax collections were also down, showing a decline of 18.3 percent over last February. Again, the calendar had an impact on this figure. The January 2016 sales tax deposit did not occur until February, making this year’s figure look considerably worse than what it is. So far in Fiscal Year 2017, sales tax collections are down 1.1 percent. The REC’s December forecast called for sales tax growth of 1.9 percent.
Corporate income tax for the month was down $1.4 million. FY 2017 corporate tax collections are down 1 percent, just off the REC’s projection of 2.1 percent growth for the year.
Another area of confusion is the dramatic fall in the amount of tax refunds that have been paid out by the state. For the month, refunds were down $122.6 million when compared to February 2016. Why this amount is one-third the normal figure is hard to pin down. Normally, the state would have started paying out personal income tax refunds in February. But it appears that those refunds to early filers have yet to go out. It is believed that the lack of timely refunds may be due to the federal government’s efforts to improve identity verification and prevent income tax identity
theft. Regardless of the cause, the lack of refund payments has also skewed the February revenue figure.
Earlier this week, LSA released the video version of the monthly revenue memo. This provided additional data and context. Personal Income and sales tax collections were down for the month partially due to $45 million of revenue that normally would have been deposited in February. Again, the way February’s calendar fell played a role.
When factoring this revenue into the February numbers and assuming that the refunds that have yet to be paid will actually go out, LSA made a troubling finding. These factors would mean that state revenue for Fiscal Year 2017 has, so far, grown by just $8 million. That is significantly less than the $213 million growth that the state would expect to have received if revenue was meeting the REC projection of 4.7 percent.
What does this mean going into the March Revenue Estimating Conference meeting next Tuesday? It is likely that the three-member panel will significantly reduce the expected revenue growth for Fiscal Year 2017 and that will also lower the available new revenue for Fiscal Year 2018. How much of a reduction is unknown, but anyone holding out hope for better numbers or just maintaining the December forecast is likely to be disappointed.