Smart tax policy benefits small businesses

Entrepreneurship and small business are at the heart of Iowa’s economy. Just look at the family farm.

Iowa can do more to support such businesses, particularly at the startup stages. Iowa’s Small Business Development Centers do this; and, before budget cuts eliminated funding for it, Iowa’s micro-enterprise program was recognized as a leader in supporting homegrown businesses. Iowa once had a Center for Appropriate Technology that advanced innovative solutions to building sustainable economies at the local level.

Currently, however, in the name of small business, lawmakers are considering costly additional tax breaks that go in the opposite direction. Instead of promoting entrepreneurs starting out, the Qualified Business Investment Deduction (QBID) primarily cuts taxes on extremely profitable ventures owned by the wealthiest in society — a very large share of whom make money from Iowa but don’t even live in the state.

According to Iowa Department of Revenue estimates, if established to parallel the federal deduction, QBID will cost the Iowa General Fund more than $90 million annually. The QBID provides a 20 percent discount on income reported on the individual income tax as “pass through” income from a business. An individual with wage income pays on the full amount of income reported on his or her W-2 form, but if he or she can change that into business income, 20 percent of it becomes exempt from taxation.

The Department of Revenue estimates, for resident filers, $35.6 million will go to 2 percent of filers with adjusted gross incomes over $250,000. It gets even worse when nonresidents are considered. About 7 percent of Iowa’s income tax is paid by nonresidents — people living out-of-state who make a share of their income (the portion taxed) in Iowa. These filers (whose average income is $470,000) receive 15 percent of the QBID tax break, $13.5 million overall.

The QBID is a wasteful, inefficient, and totally ineffective way to support small business, and it is unfair to working families receiving regular wages that include no tax breaks. Kansas tried exempting all such “pass-through” income and their small business growth lagged behind other states. The provision has been repealed.

Tax experts warn against providing preferential tax treatments and subsidies to stimulate the economy. Too often, they are unfair, go to those who need them least, and distort the marketplace. We need a simple and fair tax code, not one that benefits the few while making every day Iowans pay more to get the education and skills they need.

Iowa needs to support its entrepreneurs and small businesses; but not through misguided tax cuts that reduce state revenue and jeopardize what makes Iowa a good place to live and grow.

• Pam Jochum is a state senator from Dubuque and the top Democrat on the Senate Ways and Means Committee.