Need to end Iowa’s excessive Drug Stamp tax.

Thanks to Lee Rood for her expose’ in The Des Moines Register about the financial devastation of an Iowa citizen that was caused by Iowa’s drug tax.  As Rood reported, Stephanie Hilgenberg was arrested in 2016 after police found about $5,000 worth of meth in her purse.  She was convicted and served time in prison.  She is now free and working to support heself and her two kids.  But she still owes the Iowa Department of Revenue about $150,000 in tax, penalty and interest!  She had failed to pay the “drug stamp tax” required in order to avoid the penalties and interest.

Iowa’s Constitution prohibits excessive fines, but this is technically a tax, not a fine.  Again as Rood reported, part of the strategy of the tax was to use as a negotiating lever to get small time dealers to give up their suppliers.  In our failed drug wars, the little guy is often sacrificed as a means to what drug warriors consider  more important ends.

Drug addiction is a terrible thing.  But we will be better served as a society by treating addiction under a medical model rather than a criminal model.  Education works better than punishment.  One step in the right direction would be to repeal the punitive stamp tax that is added to the injury caused by drug prohibition.  State legislatiors should take that up next session.

Link to Register article by Lee Rood:  https://www.desmoinesregister.com/story/news/2019/06/12/illegal-drugs-iowa-crime-law-convictions-selling-drug-tax-stamps-meth-department-revenue/1416512001/

Don’t increase Iowa Sales Tax to fund Natural Resources and Outdoor Recreation Trust Fund

I agree with Iowa Senator Ken Rozenboom that people who voted for the Iowa Constitutional Amendment which created the Natural Resources and Outdoor Recreation Trust Fund were expressing their “feel-good” support for cleaner water and expanded recreation opportunities in Iowa.  The Register’s opinion polls also make it pretty clear that a majority of Iowans are willing to pay a higher sales tax to fund these priorities.

As a long-time river canoe paddler, I want clean waters in Iowa as much as anyone.  But raising the sales tax is the wrong approach to pay for the prevention and clean-up.  Here are three good reasons why Iowans and the Iowa Legislature should not increase the sales tax in order to fund the Trust Fund, and why the Constitutional Amendment should be repealed:

First, much if not most of the money will go to pay for subsidies or other incentives to the polluters to encourage them to stop polluting.  (Only 7% is guaranteed to go to trails.  All other categories are not guaranteed to go to recreation.)   Historically, we have required polluters to stop polluting our common environment or otherwise pay fines or other penalties to force them to stop polluting and to pay for cleanup of pollution they caused.  Taxpayers should not be bailing out polluters.  Taxpayers should especially not pay rent to farmers to temporarily “set aside” land from production in order to reduce run-off.  As we’ve seen under the federal program, if the payments stop or crop prices get too high, many farmers put fragile land right back into production.

Second, if we were to increase the sales tax,the only way to stop the spending would be to repeal the Constitutional Amendment.  Eventually, the need for tax money to pay for pollution prevention or clean-up will come to an end.  But the Constitutional Amendment has no sunset provision so money put into the Trust Fund will be required to be spent according to the fixed formula until the amendment is repealed.  We really need the flexibility of a legislative solution rather than a rigid Constitutional Amendment to solve our water pollution problem.  The Constitutional Amendment should be repealed.

Third, the sales tax is a regressive tax that is disproportionately paid by relatively poorer people.  Poorer people pay a larger percentage of their income in sales taxes than do higher income folks.

It is true that Iowa’s waterways are unacceptably polluted.   This is a problem that we need government regulation to solve.   A more just and fair way to finance the clean-up of our waters would be to put a tax on the pollutants – namely farm fertilizers and other chemicals.  All such taxes collected could be put into a clean water trust fund, which a majority of Iowans support.  There should also be appropriate fines to pay the cost of cleanup related to livestock sewage or other pollutants that are spilled into our waters.  The basic and just principle is that polluters should pay the costs of prevention and cleanup, not general taxpayers.

Regarding improving recreational opportunities, we have already made significant progress  toward providing more and better quality outdoor recreational opportunities for Iowans.  We should continue on our current incremental path that has worked well rather than significantly increasing taxes.

Don’t extend SAVE in Iowa – the school infrastructure sales tax

School districts in Iowa are lobbying hard to extend the SAVE one percent sale tax that goes to fund school infrastructure.  The current tax does not end until 2029!  Why do school districts want to extend the tax now, when they still have tax money coming in for about 11 more years?   It is because they have already spend all of their future sales tax revenues through bonding.  Many metropolitan school districts already have beautiful facilities, and several central Iowa school districts just passed school bond referendums to pay for additional new facilities.  We now need to get back to letting the individual school districts, and their own taxpayers, decide whether or not they need additional tax money.  Contact your state legislators and urge them to oppose this future tax increase.

Is getting rid of a special interest loophole the same as raising taxes? When general tax rates are being reduced?

The title to an essay by  A.J. Spiker’s recently published in the Des Moines Register was, “Republicans must ignore pleas to raise our taxes”. (11/262017 – see link below.)  The essay advocated for not raising tax rates on carried interest income – bonuses earned by hedge fund managers and real estate development managers. He urged our Senators to make sure the tax bill did not get rid of the special low capital gains tax rate for carried interest.  Regular people who earn the same type of bonuses pay taxes at ordinary Earned Income tax rates.  For years, carried interest has been tax at this lower special rate and those who benefit from it simply don’t want to lose it.  (The same seems to be true for people in every special interest group that gets politically favored tax breaks.  The ask our elected representatives to get rid of all the special tax breaks… except for mine…  which is vitally important to job creation!)

I thought that a stated goal for tax reform is to simplify our 70,000+ page the tax code.  In large part, this means getting rid of the many many special interest tax breaks, and then lowering the tax rates for all.  If certain individuals lose their precious special interest tax breaks and actually have to pay more in taxes, so be it.  They should feel lucky for what they got in the past.  This is part of “draining the swam” that our President has called for.  I urge our elected federal representatives to resist the tremendous pressure that they are under from those who received the tax breaks and their lobbyists, and proceed to get rid of the carried interest and many other special interest tax breaks, and lower general tax rates for all.

Link: https://www.desmoinesregister.com/story/opinion/columnists/iowa-view/2017/11/24/gop-must-ignore-pleas-raise-taxes-carried-interest-capital-gains/887643001/

Trump’s proposed tax rate for “pass-through” businesses is unfair

President Trump has proposed a maximum 25% tax rate on income that individuals receive from “pass through entities”.  Pass through entities are businesses that don’t pay corporate income taxes, but rather pass their net income each year through to the owners to be taxed as part of the owners’ individual tax return.  These pass through entities include S-Corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.  Currently, income from pass through entities is taxed at the same rate as any other ordinary income – up to a maximum rate of 39.5%.  (President Trump’s proposal for ordinary income for most taxpayers is a maximum tax rate of 35%.)  He justifies the lower tax rate for pass through entities because, he says, these pass through businesses are the job creators.

This begs at least two questions:  Do pass through entities really create more jobs than non-pass through entities?  Even if so, why should the income of an employer be taxed at a lower rate than an employee if they earn the same amount?  Tax fairness would dictate that two people with the same income would pay the same amount of tax, regardless of source.

Regarding job creation, it is important to know that pass through entities are not just manufacturers, wholesalers or retailers, who may or may not be job creators.  They are also professionals such as doctors, lawyers, accountants. Most hedge funds and private equity funds are pass through entities.  About 95% of all businesses are pass through entities.  Of those, about 99% have revenues of less than $10 million.  The 1% of pass through entities with revenues of more than $10 million earn about 83% of all profits!  So, some pass through entities are very large, and many owners of pass through entities have very high incomes.  Is it fair for business owners to pay at a 25% rate while regular workers with the same income pay at a 35% rate?  I don’t think so.

I expect to write several blog posts on President Trump’s tax proposal.  The idea of reducing tax rates is a good one – especially if the total plan is revenue neutral and doesn’t increase our $20 Trillion debt.  This means that tax reform that reduces rates must also reduce special tax breaks for politically favored groups and/or reduce spending.  I hope that Congress, which controls all tax legislation, will not “bet on the come” – that is assume future tax revenue will increase due to future growth in the economy.  Our government uses a 10 year look forward to determine the deficit/surplus effect of any change in taxing or spending.  In recent decades, it seems that all tax and spending changes have significant costs up front with the promise of savings toward the end the the 10 year period.  Let’s not keep doing that.

Source: https://www.brookings.edu/research/9-facts-about-pass-through-businesses/

Don’t extend school infrastructure for 21 years – to 2050!

The Iowa House of Representatives should definitely not pass HF 230 – to extend the school infrastructure sales tax for another 21 years – to 2050!

In 1998, we were told that the 1% local option tax for school infrastructure would be temporary – for 10 years.  In 2008 the temporary tax was changed from a local option to a state-wide sales tax, and was extended for another 22 years – to expire in 2029.  Even though we still have 12 years left of the tax, school districts are pressuring the legislature to extend the tax for an additional 21 years!

Why would they want to do this?  Because years ago, they borrowed against the future taxes and have already spent the taxes that will be collected during the remaining 12 years.  If the tax is extended again, you can bet that some school districts will again quickly borrow against the future taxes and spend the money decades before the taxes are collected.

Do we really need this much money for school infrastructure.  Some school districts might need the money, but it appears that many school districts are flush with money and already have excellent facilities.  We really should wait until 2029, then allow local school districts have their own local option tax if the local taxpayers believe there is still a need.

Corporate tax inversion is not cheating

The Register, today 11/27/2015, called corporations “tax cheats” when they try to avoid taxes by changing their “tax home” to a different country with lower rates.

These companies are not cheating. They are playing by the rules. This is what happens when the U.S. has the highest corporate tax rates in the world. We (the U.S.) don’t only tax U.S. based corporations on income earned in the U.S., we also tax them on income earned outside the U.S. – minus a credit for foreign taxes paid.  (That way, we make sure they pay the full U.S. rate on all income.)

This competition among countries to keep corporate income tax rates low is very much like competition among states to keep individual income taxes low. How many Iowans, who earned their wealth while living in Iowa, now live more than half of the year in Florida, South Dakota, or Texas, etc., because those states have no individual income tax? These people are not cheaters. They are following the laws. Tax competition among both states and countries is a good thing – it helps keep a check against ever increasing taxes and spending by governments.

 

Link to Register article:

http://www.desmoinesregister.com/story/opinion/editorials/2015/11/26/editorial-stop-rewarding-tax-cheats-taxpayer-funded-services/76341606/

Not all tax exempt organizations are the same.

The Register still has it wrong. (“Churches cross line with political endorsements”, 4/9/2015 – see link below.)  Churches with ministers who advocate for specific candidates should be allowed to be tax exempt.  But donors who contribute to them should not get a charitable tax deduction.

There are two types of tax-exempt organizations. First, there are the Charitable, Religious and Educational organizations, (tax code 501c3 organizations), that pay no income taxes, (and often don’t pay other taxes), plus donors get a charitable tax deduction on their income taxes for the amount of their contribution.  Second, there are all other tax-exempt organizations that pay no income taxes, (and often don’t pay other taxes), but donors do NOT get a charitable deduction. They are properly classified as tax exempt, since they are organized to not make any kind of profit, but their activities are not charitable, so no charitable tax deduction is given.

There are many tax exempt organizations that do not make any profit, but that are not charitable and whose donors don’t get a tax deduction.  They include Rotary clubs, political parties, country clubs, political issue organizations, chambers of commerce, special interest clubs, etc.  None of them try to make any profit, but they are not charitable.

To the extent that any not-for-profit organization advocates for or against specific candidates, that organization is not doing charitable work. It is doing political work. Under the principle of equal treatment under the law, donors to churches that advocate for specific candidates should not get a charitable tax deduction.  If a church wants its donors to receive a charitable tax deduction for contributions made, then the minister should not advocate for candidates from the pulpit, or through any other communication from the church.

Link to Register editorial: http://www.desmoinesregister.com/story/opinion/editorials/caucus/2015/04/08/rgisters-editorial-churches-cross-line-political-endorsements/25500433/

 

Social Security – don’t end the cap on taxable wages.

Recently, more people have called for an end to the cap on wages that are subject to the social security tax.  (For 2015, only the first $118,500 of wages are taxable, no social security tax is paid on wages above that amount.)  I think that would be the wrong way to go.  Social Security was sold to the public as a retirement plan where the amount of benefit received had some relationship to the amount paid in. It was not sold as a welfare program where the rich subsidize the poor. The benefits paid under Social Security are limited.  That is why taxable wages are limited.  Social Security is was intended to cover only a portion of a person’s needs during later years.  People should expect to continue to work throughout their lifetimes unless they save enough for their own retirement.  Unless, of course, we want to change over to a welfare system, where benefits are determined by politics rather than the amount you pay in.

Social Security funding solutions

If we do nothing to fix our Social Security scheme, our trust fund will be depleted by 2033, and then benefits will be required to be reduced by 23%!  There are only two ways to fix this problem: raise taxes or reduce benefits.  Taxes can be raised on all workers, on only certain workers, or on non-workers.  Benefits can be reduced by lowering monthly payment amounts or by raising the retirement age.  Of course, any combination of the above is possible.

Recently, more and more people have been calling for the elimination of the cap on Social Security taxable earnings.  (For 2014, earnings over $117,000 are not taxed for Social Security.  The cap is increased every year.)  The original idea for the cap was that Social Security is an insurance-type plan and taxes paid in should bear some relationship to benefits paid out.  The tax is limited because the benefits are limited.  Social Security was never intended to be, or sold to the public as, a welfare plan.  (We have a broad welfare safety net for those who are poor.)

Like so many government programs, Social Security provided benefits greater than the amount of tax collected.  Current and past retirees got their benefits and shifted much of the cost to future generations.  This needs to stop.  Wherever possible, those who receive benefits should pay the cost.  It would be morally wrong to place extra taxes on high earners just because we can.  That would be an example of tyranny by the majority.

To the extent that we do not want to reduce benefits, it seems most fair to raise taxes on all earners.  But maybe the best solution would be to continue to raise the normal retirement age.  Today we live much longer and healthier lives than when Social Security was created.  Should a required government retirement insurance plan be designed to pay for 20 or 30 or more years of retirement?  For those unable to work, we do have Social Security Disability benefits.  For those who are healthy, it seems better to delay retirement and not reduce the benefit amount.

Disclosure:  I am currently semi-retired and my earnings are below the cap.  So, increasing or eliminating the cap would not increase my SS taxes.  An overall increase in the SS tax rate would increase my SS taxes.  Most proposals to increase the normal retirement age would not affect me since I am 61 years old.