Defending his veto of a tax measure designed to help lower and middle-income working Iowans, Governor Terry Branstad hinted yesterday that he won’t allow any expansion of that tax credit unless legislators approve corporate income and property tax reform costing more than twenty times as much.

Branstad used his line-item veto power to remove the Earned Income Tax Credit expansion from Senate File 533, the so-called “standings” appropriations bill. The provision would have helped at least 225,000 households with income below $48,000 by expanding Iowa’s Earned Income Tax Credit from 7 percent to 10 percent of the federal level. Branstad vetoed the same tax credit expansion when signing a different bill in April. Both times, the governor said he preferred to “approach tax policy in a comprehensive and holistic manner.” Critics noted that Branstad didn’t veto two other tax credits that were also in Senate File 533.

At Branstad’s regular weekly press conference on August 8, a reporter asked him about blocking the earned income tax credit. The governor alluded to his plan to cut corporate income taxes, which would cost $200 million per year in state revenue, and his preferred approach to property tax reform, which would eventually cost $250 million per year in state reimbursements to local governments. He added,

“When the legislature failed to act on that (the commercial/industrial and corporate income tax cuts) I thought it was appropriate that this be vetoed so that it can be looked at as part of the whole mix,” Branstad said.

A reporter asked him a follow-up as to why he picked the earned income tax credit to veto but left the others in place.

“The other ones didn’t amount to much and this one has significant implications,” Branstad said.

The earned income tax credit expansion would have cost state government about $28.5 million over two fiscal years.  Pages 4 and 5 of this pdf file include details about the tax provisions Branstad left in the standings bill. One cost the state $0.9 million in fiscal year 2013 and $1.25 million in subsequent years. The other would cost state government $3 million and local governments $16 million, beginning in fiscal year 2014.

While those breaks are less costly than the earned income tax credit, they are also less helpful to Iowans and the economy as a whole. The Iowa Fiscal Partnership pointed out,

The state EITC affects over 225,000 Iowa households, all of whom are working. Ninety-five percent of the benefits go to working families with children, all of whom have income of less than $48,000.

The EITC improves tax fairness, boosts income available to families raising children and reduces poverty. Research has shown it helps the economy, especially in difficult times.

Because of the federal EITC, most families with children do not owe federal taxes until their income is above $42,000, but Iowa’s income tax begins taxing families when their income is above $22,000. A family of four making $30,000 in Iowa would have received a state income tax reduction of about $97 through enactment of the EITC increase, if Governor Branstad had not vetoed the measure.

While this is not a lot to some families, it makes a difference for families who are working and trying to raise their children on what is only a little above the poverty level.

Stagnating incomes in Iowa have coupled with growing costs of basic household necessities to force tough choices on moderate-income working families trying to make ends meet. Money earned due to the EITC is spent on those necessities. It is one of several policy options that offer a way to both help the economy, and fill gaps between low-wage work and the cost of living.

Iowa’s tax structure is regressive, with lower-income households paying a larger percentage of their income in taxes than the wealthiest Iowans; see the table on page 46 of this report by the Institute for Taxation and Economic Policy. Iowa is one of just three states that offer an unlimited deduction of federal income taxes for state tax purposes, which is a huge break for people with higher incomes. (Legislators considered ending federal deductibility in 2009 as part of a reform package including lower income-tax rates at all levels. However, that bill lacked enough support to clear the Democratic-controlled Iowa House.) The Institute for Taxation and Economic Policy found that “the best-off 1 percent of Iowans enjoy 31 percent of the benefit” from federal deductibility provision. That costs the state approximately $642 million per year.

Yet Branstad can’t abide a $28.5 million tax credit for lower and middle-income households.

The Des Moines Register headline on Jason Clayworth’s story reads, “Iowa tax breaks for the poor were too costly as compared to others, Branstad says.” I interpret the governor’s remarks differently.

When Branstad said the tax credits he left in place “didn’t amount to much and this one has significant implications,” I don’t think he was talking about the earned income tax credit’s price tag so much as its importance to Democrats who control the Iowa Senate. They made clear during the long 2011 session that expanding this credit is their top tax policy priority. House Republicans were willing to go along in exchange for their own top priority, putting some surplus revenues into a so-called “taxpayer relief fund.” Branstad left the relief fund provision alone when he item-vetoed the earned income tax credit for the first time in April.

The Iowa House and Senate should have overridden Branstad’s veto of the earned income tax credit, but by late April legislators were bogged down in many other disputes related to the state budget. Senate Democrats didn’t push for an override, and I’m sure House Republican leaders would have declined to confront the governor over this issue. So, the tax credit got folded into the standings bill. The proposal will return during the 2012 legislative session, but Branstad seems determined not to give an inch to working families until he gets hundreds of millions of dollars in tax cuts for corporations.

I checked the website of the conservative group Iowans for Tax Relief today to see whether the group had commented on Branstad’s July 28 item veto. No, still nothing from the self-styled “taxpayers’ watchdog” on a tax credit that would have helped hundreds of thousands of households. The longtime leader of Iowans for Tax Relief criticized Branstad’s first veto of the provision. Soon after, the organization lost five key staffers. The only statement Iowans for Tax Relief has released since the legislative session ended was this call for PAC contributions to help elect a “pro-taxpayer” (i.e. Republican) Iowa Senate majority in 2012. The statement focuses on the same priorities Branstad has emphasized: slashing corporate income taxes and sharply reducing commercial property taxes.

Any comments about taxes in Iowa are welcome in this thread.

Final note: Speaking of messed-up tax policies, Andrew Cannon of the Iowa Policy Project called attention to a report on why sales tax holidays are a “boondoggle.” Iowa’s annual two-day sales tax holiday just happened during the first weekend of August. Analyzing those policies around the country, researchers from the Institute on Taxation and Economic Policy found,

– they do not target sales-tax relief to low-income families that are most affected by sales taxes, but offer it to the wealthiest families as well;

– they do nothing to stimulate local economies, because the purchases would be made anyway; and

– for the other 363 days of the year, they leave a state tax system unchanged in its favoritism toward the wealthy.