November 17, 1995
Second of four meetings
Minutes prepared by Susan Crowley, Legal Counsel
Organizational staffing by Mike Goedert, Senior Legal Counsel
Call to Order. Chairperson Halvorson called to order the second meeting of the Business Taxation Study Committee at 10:10 a.m. on Friday, November 17, 1995, in Room 22, State Capitol, Des Moines.
Adjournment. After a luncheon recess, the Committee reconvened at 1:50 p.m. and adjourned at 4:00 p.m.
Next meetings. The third and fourth meetings (out of four) of the Business Taxation Study Committee are scheduled for Wednesday, December 13, and Thursday, December 14.
Nature of Credit Unions. Mr. Patrick Jury, Vice President of the Iowa Credit Union League, spoke to the Committee about the nature of credit unions, their place in the financial community, and how they differ from banks. Credit unions are not-for-profit cooperatives owned and governed by their members. Credit unions were created to provide financial assistance to working consumers and small businesses. According to Mr. Jury they occupy a small portion (5.7 percent of combined assets) of the financial market in Iowa.
Purpose of Credit Unions. Because it is member-owned and controlled, Mr. Jury averred that the only purpose for a credit union's existence is to provide service to its members. A staple of credit union financial services is small loans to consumers. As of year-end 1994, credit unions had loaned out 74.9 percent of their deposits. Fifty percent of the remaining deposit amounts are kept in liquid investments should loan demand increase, Mr. Jury stated. Credit unions are required to apply surplus income in one of three ways: (1) capital investment; (2) financial enhancements to members, such as increased interest on savings accounts or interest reductions or rebates on loans; (3) increase access to or the content of product and service offerings.
Taxes Paid by Credit Unions. The moneys and credits tax is imposed on state-chartered credit unions at a rate of five mills on each dollar, i.e., $5 per $1,000, of legal and special reserves with the first $40,000 of the reserve amount exempt from tax. The money and credits tax collected from each taxing district within a city is apportioned 20 percent to counties, 30 percent to cities, and 50 percent to the general fund of the state. Tax collected from each taxing district outside a city is apportioned 50 percent to counties and 50 percent to the general fund of the state. Credit unions also pay property taxes, sales tax, and employer-related taxes. Federally-chartered credit unions are required by federal law to pay only state property taxes and employer-related taxes. Ninety-eight percent of the credit unions in Iowa are state-chartered.
Distilled Spirits Council of U.S. Ms. Claudia Brewington illustrated for the Committee the effect of Iowa markups on the price of alcoholic beverages in comparison to the prices in surrounding states. Iowa state and local taxes account for 31 percent of the Iowa price of alcoholic beverages and federal excise taxes account for 24 percent. Ms. Brewington stated that if the markup were reduced, the increase in revenues due to increased consumption and decreased out-of-state purchases would outweigh the loss from the lowered markup. She cited a study by Dr. Ken Stone, Iowa State University, in support of this thesis. Employment in the alcoholic beverage industry would also rise.
Alcoholic Beverages Division. A representative of the Alcoholic Beverages Division of the Department of Commerce informed the Committee that the Stone study which concluded that alcohol consumption in Iowa should be closer to the rate of consumption in contiguous states and that a lowering in the markup from 50 percent to 40 percent would provide that consumption increase, failed to consider the following factors which strongly affect alcohol consumption rates:
The Division's study concluded that the loss of state revenue if the markup were reduced from 50 percent to 40 percent, after factoring in the gain from recapturing out-of-state sales, would be $4,413,141.
References to per capita consumption in Iowa refers to the amount of liquor sold in the state and not to the amount actually consumed by Iowans.
U.S. West. Mr. Chris Zamora, Property Tax Manager, U. S. West Communications, informed the Committee that the divestiture of the Bell system in 1984 wrought a great change in the telecommunications industry. This, combined with technological innovations in telecommunications services, has increased competition in the telecommunications industry by allowing companies to provide telecommunications services that, heretofore, were unavailable. Under Iowa's property tax system, not all companies that provide telecommunications services are assessed by the same methods, which results in unequal taxation. Specifically, both the real and personal property of local exchange telephone companies are assessed and taxed, while other companies providing telecommunications services are taxed as commercial property, i.e., only the real property owned by the company is taxed. This creates a competitive disadvantage for local exchange companies. U.S. West requests that the Committee recommend legislation providing for fair and equitable property taxation of those industries providing telecommunications services.
Mr. Zamora estimated that if assessments were more equitable, U. S. West would have tax savings of between $8.5 million to $16 million. However, it was noted that these savings would not all inure to U. S. West's benefit but would be considered in reducing its rate structure since rates are based upon expenses under state law.
Discussion. Discussion was held on the effect change in assessment would have on valuations in the state and the rationale for the present assessment methods. It was stated that the method of central assessment was adopted not because of the monopoly of the companies within an industry but because the valuation of such a company went beyond a taxing district. Thus the company was taxed as an operating unit. Railroads and telephones were allotted the assessment valuations to taxing districts based upon mileage while the remaining centrally assessed entities were allotted based upon rates of costs within taxing districts to total costs.
Department of Employment Services. Ms. Pat Sampson reported on the status of Iowa's Unemployment Compensation Fund for 1995. Unemployment compensation benefit payments totaled $150 million in 1994, down from $174.2 million in 1993. Employer contributions totaled $158.9 million in calendar year 1994, a decrease of $10.9 million from 1993. The Unemployment Compensation Fund balance at year-end was $696.4 million, an increase of $52.6 million from 1993.
Rate Comparisons. Ms. Sampson reported that Iowa, at 1 percent, has the lowest new employer tax rate for nonconstruction industries. The rates for the other states range from 1 percent to 4.4 percent. Furthermore, the estimated average unemployment compensation tax rate for all Iowa covered employers, set at 1 percent, is the sixth lowest of the states. The rationale for maintaining the fund balance in excess of $700 million is to ensure solvency during a severe recession. The federal government recommends the balance be one and one-half times the amount needed to pay benefits during Iowa's worst recession in the last 10 years. Using this as a guide the fund still needs about $180 million more.
Machinery and Equipment Recommendations. Mr. David Lyons presented to the Committee suggested changes to the machinery and equipment division of Senate File 69, enacted during the 1995 legislative session. The recommended amendments were developed by the Department officials and interested parties.
Iowa Seed Capital Corporation. Mr. Gregg Barcus informed the Committee that the Iowa Seed Capital Corporation is a state-funded seed capital fund that invests in start-ups with new products or processes and is designed to foster development of small businesses. Investments are generally structured as royalty agreements or equity participation. The corporation is designed to foster development of small businesses.
Qualified Venture Capital Company (QVCC). Mr. Holmes Foster underscored the need in Iowa for a nonprofit corporation to organize, capitalize, and fund an Iowa-based small business investment company to increase availability of funds for investment in Iowa small businesses. The General Assembly has already enacted legislation authorizing this, but more legislation is needed, namely enabling legislation for an umbrella organization, the Qualified Venture Capital Company, and an income tax credit as an incentive to encourage initial and continuing investment in the QVCC. Mr. Foster stated that small businesses are an essential component of Iowa's economic development success, but these companies have few sources of venture capital needed for start-up or expansion costs. Mr. Foster reviewed for the Committee the existing sources of public and private venture capital in the state.
Greater Des Moines Chamber of Commerce Federation. Mr. Kent Sovern told the Committee that there is a shortage of venture capital in Iowa for many businesses seeking to expand market share, develop new products, or expand production. Private venture capital companies primarily serve already-established and mature companies. Other sources of financing, generally loan guarantees and grants from state and federal government, are limited due to the extremely competitive application process and the heavy demand on limited funds. Mr. Sovern reviewed for the Committee some existing sources of venture capital, public and private, in the state. The Federation recommended to the Committee that the Legislature authorize the creation of local and regional "qualified venture capital companies" through use of state general funds and encourage investment in these venture capital companies by allowing tax credits for investors.
Federal Tax Update. Mr. Lorin Knapp reported to the Committee that federal congressional conferees had reached tentative agreement on a tax package as part of the broader budget reconciliation bill, HR 2491. The major business tax provisions in the compromise legislation relate to the following:
The legislation also repeals some business tax breaks, disallows interest deductions on corporate-owned life insurance policies, and simplifies some tax provisions relating to pension plans.
Franchise Tax. Mr. Carl Castelda, Deputy Director, Department of Revenue and Finance, reported on the 1995 change to the franchise tax law on financial institutions which disallowed a deduction for those expenses incurred in investments in federal securities by investment subsidiaries. The Department is concerned that large banks may simply charge expenses for investments in federal securities to bank-owned holding companies. Whether or not this has occurred will not be discovered until 1995 tax returns have been filed.
Department of Revenue and Finance. Mr. John Christensen reported on federal legislation reforming the Subchapter S corporation laws, which, in turn, will have an impact on Iowa's taxation of Subchapter S corporations. The object of the legislation is to reduce restrictions on Subchapter S corporations. Mr. Castelda compared computation of Iowa individual income tax on resident and nonresident sole proprietors, partners, and Subchapter S shareholders and discussed a study being done of Subchapter S corporation taxation, including a breakdown on filing status of businesses.
Private Business Interests. The following private businessmen appeared before the Committee to discuss taxation of Subchapter S corporations:
The presenters individually discussed the tax disincentives experienced by Subchapter S corporations located in Iowa.
Mr. Lisle stated that, generally described, Iowa Subchapter S corporations are small, growing manufacturing companies. In 1986, there was an increase in Subchapter S filings because federal corporate tax rates were raised above the federal individual rates. The presenters agreed that Iowa law should allow a deferral of tax on Subchapter S corporation income that is capitalized. This would allow Subchapter S corporations to accumulate tax-free earnings to provide their own capital financing. Mr. Weitz noted that another economic development tool that could be provided through the tax system would be to allow Subchapter S corporations to apportion income in the same manner that regular corporations do under the single factor (sales) formula. Concern was raised that data on the effect of changing the law or keeping it the same is lacking. In addition, the benefits from proposed changes would also benefit those who do not need additional capitalization.
OTHER INFORMATION FOR THIS COMMITTEE:
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