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1 Federal, State and Local Tax Policy By Mike Lipsman, Manager Tax Research and Program Analysis Section Iowa Department of Revenue Economics 344 – November.

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Presentation on theme: "1 Federal, State and Local Tax Policy By Mike Lipsman, Manager Tax Research and Program Analysis Section Iowa Department of Revenue Economics 344 – November."— Presentation transcript:

1 1 Federal, State and Local Tax Policy By Mike Lipsman, Manager Tax Research and Program Analysis Section Iowa Department of Revenue Economics 344 – November 1, 2007

2 2 Overview  Comparison of Federal, State, and Local Revenue Sources and Expenditures  Major Tax Policy Considerations  Tools of the Trade  Current Tax Policy Issues  Information and Data Sources

3 3 Federal Revenue Sources (Total 2005: $2,153.9 Billion)

4 4 Major Federal Responsibilities National Security and Defense Diplomacy and International Relations Social Insurance Financial Markets and Banking Regulation Interstate Commerce Energy and Natural Resources Environmental and Consumer Protection Scientific and Health Research

5 5 State Revenue Sources (Total 2005: $8,468.4 Million)

6 6 Major State Responsibilities Primary and Secondary Education Higher Education Primary Highways Economic Development and Work Force Assistance Welfare and Mental Health Courts and Corrections Public Health Insurance, Securities and Utility Regulation Agricultural and Natural Resources

7 7 Iowa Local Government Revenues (Total 2005: $6,573.2 Million)

8 8 Major Local Responsibilities Primary and Secondary Education Streets, Water and Sewers Public Transportation Police and Fire Services Parks and Recreation Libraries and Museums Planning and Economic Development

9 9 Revenue Share by Level of Government Revenue SourceFederal (%)State (%)Local (%) Individual Inc Tax43.5%26.6%0.9% Corp Inc Tax13.1%2.2%0.0% Social Insurance37.3%0.0% Sales & Use Tax0.0%20.3%6.7% Franchise Tax0.0% 1.4% Excise Taxes3.4%10.7%0.0% Motor Veh Licenses0.0%4.5%0.2% Property Tax0.0% 50.2% Other Taxes1.1%3.6%0.8% Non-Tax Revenue1.6%32.1%39.8% Total100.0%

10 10 Major Policy Considerations Impact on the Economy Impact on Different Population Groups Impact of Government Revenue Raising Capacity Impact on Taxpayer Compliance and Government Administration

11 11 Policy Themes Disconnect between Revenue and Expenditure Decisions Intergeneration Conflict and Gamesmanship Class Warfare Market versus Government Solutions

12 12 Impact on the Economy Relative Cost of Investing in Physical Capital versus Human Capital Influence on the Location and Types of Business Activities Encouragement of Risk Taking Promote Competitiveness of Domestic Businesses Influence Consumer Spending Decisions

13 13 Distributional Impacts Effects on Different Income Groups Effects on Different Filing Statuses Effects on Different Geographic Areas Effects on Different Age Groups Effects on Different Business Sectors Effects on Different Forms of Business Organization Effects of Different Size Businesses

14 14 Revenue Impacts Revenue Adequacy Revenue Stability Public Debt Inter-Fund Transfers/ Creative Accounting Inter-Jurisdictional Transfer of Fiscal Burden Reserve Funds

15 15 Tools of the Trade  Types of Studies  Methods of Analysis  Analysis Horizons  Sources of Information and Data

16 16 Types of Studies Revenue and Refund Estimates Fiscal Impact Estimates Contingent Liability Studies Economic Impact Studies Tax Expenditure Studies Tax Gap Studies Program Evaluation Studies

17 17 Methods of Analysis Spreadsheet Models Time Series Forecasting Models Econometric Forecasting Models Micro-simulation Models Regional Impact/ Input-Output Models Computable General Equilibrium Models

18 18 Analysis Horizons Short-Term versus Long-Term Static versus Dynamic Analysis

19 19 Sources of Information and Data National and State Economic Forecasts State and County Employment State and County Personal Income State and County Population State and County Economic Activity City, County, and School District Government Revenue and Expenditures Taxpayer Micro-Data/ Tax Returns

20 20 Federal Policy Issues Alternative Minimum Tax Tax Shelters and Tax Evasion Energy Policy

21 21 Alternative Minimum Tax

22 22 Abusive Tax Shelters Example: Foreign Trust Scheme A taxpayer's business is split into two trusts. One trust would be the business trust that is in charge of the daily operations. The other trust is an equipment trust formed to hold the business's equipment that is leased back to the business trust at inflated rates to nullify any income reported on the business trust tax return

23 23 Energy Policy Carbon Tax Tax Credits for Energy Efficient Appliances and Motor Vehicles Marketable Pollution Rights versus Regulation

24 24 State Policy Issues Motor Fuel and Other Transportation Taxes Earned Income Tax Credit Cigarette Tax Increase Phase-out of Income Tax on Social Security Income and Other Elderly Preferences 1998 Income Tax Rate Reduction

25 25 Motor Fuel and Other Transportation Taxes Motor Fuel Taxes – 22.5 cents/ gal diesel, 20.7 cents/ gal regular and 19cents/ gal ethanol (E10 and E85) Last tax rate increase in 1989 CPI has increased by 72% since 1989 Other problem is unequal registration fees for passenger vehicles and light trucks

26 26 Earned Income Tax Credit Figure 1. Federal EITC Schedule for Unmarried Taxpayers, 2007 Tax Year $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $100 $2,600$5,100$7,600 $10,100$12,600$15,100$17,600$20,100$22,600$25,100$27,600$30,100$32,600$35,100$37,600 Earned Income Federal Earned Income Tax Credit 2+ Dependents 1 Dependent Zero Dependents

27 27 Cigarette Tax Iowa tax rate 36-cents/ pack (rank: 42 nd in 2006) Increased to $1.36/pack effective March 16, 2007 Expected revenue increase from $89.5M (FY2006) to $223.1M (FY2008). Increase dedicated to health programs. Tax rates of surrounding states  Illinois: 98-cents/ pack (increase proposed)  Minnesota: $1.23/ pack  Missouri: 17-cents/ pack  Nebraska: 64-cents/ pack  South Dakota: 53-cents/ pack  Wisconsin: 77-cents/ pack (will increase to $1.77/pack January 1, 2008)

28 28 Elderly Preferences Extra Personal Credit Pension Income Exclusion ($6,000 single, $12,000 other) Phase-out of Tax on Social Security Income New Low Income Threshold

29 29 Iowa’s Aging Population

30 30 Population Pyramid or Tower?

31 31 Projected 2030 Revenue Impacts of Elderly Preferences Preference Fixed 2003 Age Distribution Projected 2030 Age Distribution Aged Credit-$2.8-0.1%-$4.1-0.2% Pension-$47.6-2.2%-$66.5-3.0% Social Security-$158.9-7.3%-$228.9-10.3% Minimum Income-$12.9-0.6%-$19.0-0.9% 2030 Law-$207.3-9.6%-$296.7-13.4%

32 32 Projected 2030 Revenue Impacts of Elderly Preferences Indexed Preference Fixed 2003 Age Distribution Projected 2030 Age Distribution Aged Credit-$5.0-0.2%-$7.3-0.3% Pension-$79.6-3.7%-$110.4-5.0% Social Security-$158.9-7.3%-$228.9-10.3% Minimum Income-$64.6-3.0%-$95.4-4.3% 2030 Law-$244.9-11.5%-$349.7-16.1%

33 33 Projected Iowa Revenues and Elderly Preferences

34 34 1998 Income Tax Reduction Iowa v US Non-Farm Personal Income Growth Trends Before and After 1998 Tax Law Changes 75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 1993.11994.11995.11996.11997.11998.11999.12000.12001.12002.1 Year & Quarter Index (1998.1 = 100) U.S. Iowa

35 35 Federal Data Sources Joint Committee on Taxation  http://www.house.gov/jct/http://www.house.gov/jct/ Congressional Budget Office  http://www.cbo.gov/http://www.cbo.gov/ Tax Policy Center  http://www.taxpolicycenter.org/home/http://www.taxpolicycenter.org/home/ Tax Foundation  http://www.taxfoundation.org/ http://www.taxfoundation.org/  Center for Budget and Policy Priorities  http://www.cbpp.org/ http://www.cbpp.org/

36 36 State Data Sources Federal of Tax Administrators  http://www.taxadmin.org/ http://www.taxadmin.org/  National Conference of State Legislatures  http://www.ncsl.org/ http://www.ncsl.org/  Rockefeller Institute of Government  http://www.rockinst.org/ http://www.rockinst.org/

37 37 State of Iowa Data Sources Iowa Department of Revenue  http://www.state.ia.us/tax/ http://www.state.ia.us/tax/ Iowa General Assembly  http://www.legis.state.ia.us/ http://www.legis.state.ia.us/ Iowa Department of Management  http://www.dom.state.ia.us/ http://www.dom.state.ia.us/ State of Iowa Home Page  http://www.iowa.gov/state/main/index.html http://www.iowa.gov/state/main/index.html

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