terry-branstad-condition-of-stateBy Dale Mastarone

Our Honorable Iowa Governor, Terry Branstad, imputed in his Condition of the State, 2013, speech that there was a state budget surplus approaching $1 billion and that it should be returned to the People in Iowa. The first assumption to be reached could likely be a rebate of income taxes paid. Another state governor did make that promise once, and managed to have it carried out, and that was Jesse Ventura in Minnesota back in the late 90s of the past century. Jesse Ventura is no longer governor of Minnesota and since he was replaced Minnesota returned to a spend-then-tax policy. What must be recognized is that there is a proposed bill currently in the Iowa House whereas the surplus should be returned to the People.

Following are certain (non-scientific) assumptions of what could happen if Iowa returned taxpayer funds that were collected but found to be un-needed to meet state obligations pursuant to Iowa’s Constitution and statutes. First assume that not all of the reported nearly $1 billon in state coffers would be returned to the folks that really own it and are entitled to it, aka those who paid in more in taxes than was needed to pay for state services. Why not, for example, pick $800 million to work with and keep the remainder in a so-called “Rainy Day Fund”?

To begin with, if that $800 million was not sent back to the rightful owners and not spent, instead kept in an interest-bearing account, the interest earned would not cover the rate of inflation, so there would be no gain whatsoever, more than likely a loss of value. In the meanwhile elected officials that are dedicated to spending OPM (“Other People’s Money”) would certainly be coveting it with itchy palms.

There are three major forms of state taxation in Iowa that account for the bulk of revenue to state coffers, and these are the personal income tax, corporate income tax and state sales tax. Over-collection of those three led to the surplus. Yes, there are certain use-taxes such as fuel tax, licensing fees, etc., but those are presumed to be dedicated to road building and upkeep, and in the case of hunting and fishing licenses to the maintenance and improvement of habitat, etc.

Computerized state records exist that show how much each and every Iowa individual and corporation paid and when in income taxes so it should not be a big deal as to how much each income taxpayer should be rebated pursuant to their personal share of the $800 million suggestion.

On the other hand it is not only Iowa citizens that pay state sales tax, out-of-state travelers in Iowa contribute to sales tax revenue collected, so the rebate should be reasonably confined to just income tax payments made by Iowa citizens and corporations whereas verifiable records are available. In the meanwhile those Iowa citizens and corporations that paid plenty of sales taxes (but no income taxes) will still realize substantial monetary benefits from the rebate plan; more on that later hereinafter in closing paragraphs.

Assume that $800 million is returned to those that are entitled to it, what will it do for the State of Iowa? A very simple answer is increased tax collections by the State of Iowa because much of that money will be spent into the local economy. It is often stated that when a dollar is spent into a local economy it “turns” 7 times before it leaves the local economy. Perhaps it is best to be modest and use an assumption of five “turns” in a local economy before that dollar goes out of Iowa. Now further assume that merely half or the $800 million, or $400 million rebated to taxpayers, is actually spent into Iowa’s local economy where it is subject to the 6% sales tax. Five “turns” of $400 million is $2 billion, and 6% of $2 billion is $120 million into the Iowa treasury coffer! Most likely the rebate paid would be spent by the recipients before 30 days pass. Now where in the world can one obtain a practically guaranteed return on investment (“ROI”) of $120 million with initial “investment” of $800 million in 30 days (or less)?

The immediate foregoing does not include increased taxable personal income nor increased corporate income taxes that ultimately end up due in 2014 because of increased volume of business. How many multiple millions of dollars could that amount to that would not otherwise become due and payable if increased employment and increased business transactions would not have happened if the rebate had not been put in place to start with?

* * * * *

What about those who are not on record of paying personal or corporate income taxes, of what benefit would a rebate of a portion of income taxes paid be to them? After all, many Iowans and Iowa corporations are under the level required to pay income taxes but they do have the burden of state sales tax on most of their purchases except for groceries. Perhaps the simplest explanation is to state that everyone in Iowa pays corporate income tax, in addition to state sales tax. For example, the homeless individual just hitch-hiking through Iowa pays Iowa corporate income tax when he or she stops in at a Casey’s or Kum and Go and coughs up 2 bucks for a slice of pizza. And commercial property tax is included in the cost of that slice of pizza. Same goes for an apartment dweller, he or she is paying property tax included in the monthly rental payment! Everybody pays corporate income taxes and commercial property real estate taxes — one way or the other!

The bottom line is that reducing the tax burden by not over-collecting is the best way of keeping prices of goods and services down so that all Iowans see a benefit, whether they pay income taxes or not. When over-collections occur such funds should be immediately returned to those that have the fundamental and natural right to it, to invest or save those funds as they wish. It’s the rightful owners’ property, after all, and it should not be in any way considered to “belong” to the state. (Does the money stolen really belong to the bank robber?)

With its current treasury surplus Iowa has a premiere opportunity to set an example for the other 49 states by returning the over-collections to those that rightfully should be able to spend their own money as they wish. And, given that happens, increased less-burdensome tax collections would be the immediate result as set forth above, and from there decreased rates of taxes should be the ultimate goal. The fruits of Iowans’ labors should not be stolen from them, those folks that work are entitled to the fruit of their labor to do with as they wish.

It is illogical to assume that anyone would want to start a business in, for example, Illinois or California, because of those states’ debtor status and tax burdens. (People and businesses are currently fleeing those states in great numbers.) A rebate to Iowa taxpayers would certainly make Iowa one of the best states to do business in and attract investment. Such rebate, standing alone, would attract investment without a ton of other special “tax breaks” and concessions. Why not set the stage to have them come to Iowa with hat in hand instead of vice versa?

America has long been touted as the “Land of the Free and the Home of the Brave”. Go back in history to the Boston Tea Party where it has been stated that it was the “intolerable” reputed 3% tax on tea protecting the East India Company from competition that fomented the battle for American freedom, principally from taxation without representation. Taxation WITH representation can proceed in Iowa with a rebate of income taxes that led to a surplus, a product of over-taxation, along with properly constrained spending in the past two sessions of the Iowa Legislature, urged on by the Branstad/Reynolds administration. The “Brave” in the Iowa legislature who believe and assert that it is intolerable to overtax the Iowa people need to step forward and stand shoulder to shoulder to work to give back to Iowans what belongs to them alone.

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  1. Dale, thanks for a very rational, well written article. I have two caveats. First, what if we fall back into a recession in 2013 or 2014 and tax revenues drop, or even plummet? Given the current economic climate that’s a very real possibility. We could then find ourselves in another deficit situation and scrambling to either make difficult cuts or raising taxes to fund shortfalls.

    Second, there’s also the issue of future pension liabilities that remain unfunded and little prospect of earnings overcoming those shortfalls. Lacking major pension reform, those liabilities will only grow further beyond the state’s ability to fund them, and become an every increasing percentage of the states’ annual budgets.

    As to the first, maybe the “rainy day fund” is sufficient as long as the legislature is prepared to respond quickly with sufficient cost cuts. As to the second, I suspect the answer is simple, but quite challenging, and that would mean major pension reform.

  2. Good article Dale. The bottom line is it’s our money, not the states. And as we both know, no politician can resist spending any pile of money left lying around, so send it back to it’s owners.

Comments are closed.

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