Sales tax exemptions, often handed out as political favors, cost Iowa an estimated $2.4 billion a year in revenue.
The list of exemptions, including everything from animal feed and grain dryers to car-wash soap and dry-cleaning chemicals, gets longer every year, and no lawmaker wants to suggest a repeal for fear of being called a tax raiser.
“Once these exemptions are on the books, it becomes extremely difficult to revisit them,” said Sen. Joe Bolkcom, D-Iowa City, who is chairman of the Senate Ways and Means Committee. “It’s portrayed as a tax increase.”
Cutting taxes is the national trend, which means less money for schools, roads, police and social programs.
Sales tax in Iowa is 6 percent, or
7 percent in communities with a local-option sales tax. Retailers are required to remit the tax to the state, which collected nearly
$2.7 billion in sales tax in 2011.
The public benefits directly from many sales tax breaks, including one that waives taxes on most food products. The food exemption costs the state an estimated $335 million a year in revenue, but most food shoppers have gotten used to not paying an extra 6 percent on groceries.
But other sales tax exemptions are head-scratchers for average Iowans.
“Inert gases? Wow,” Diana Lenz of Iowa City said as she scanned a list of exemptions and stopped on one that allows manufacturers to avoid sales tax on argon, nitrogen and other inert gases. “Some of this just seems ridiculous.”
Nineteen tax breaks specifically benefit farmers, while costing the state an estimated $237 million in revenue. Farmers skip sales tax on animal feed and bedding, farm machinery, irrigation equipment, chemicals and drainage tile, among other purchases.
Tim Johnson, senior researcher and policy analyst for the Iowa Farm Bureau, said those tax breaks are justified, considering the impact of farming in Iowa.
“Agriculture makes up about one-sixth of jobs in the state. We feel that $237 million is a good economic investment for the state,” he said.
Casinos, massage therapists, modular homebuilders, dry cleaners, movie theaters, nonprofits and others also benefit from tax breaks. Newspapers aren’t required to charge readers sales tax when they buy a paper, which cost the state $3.4 million in revenue in 2005.
The passage of a recent sales tax break to car washes shows how one industry’s pet peeve can become state law.
For decades, car-wash owners tried to persuade Iowa lawmakers to exempt car washes from having to pay sales tax on the stuff they buy, including water, soap and electricity.
The group argued that because many car washes still use coin-op machines — which don’t accept pennies and nickels — they couldn’t easily collect sales tax from customers.
Car-wash owners call it double taxation — paying tax on your raw materials and on the final product — but this is only true if the car washes choose not to charge their customers sales tax on their washes.
Two groups, the Heartland Carwash Association and Petroleum Marketers and Convenience Stores of Iowa, lobbied for a car-wash sales tax exemption considered by the Iowa House and Senate this year.
Rep. Tom Sands, R-Wapello, introduced House Study Bill 660 in the Ways and Means Committee, which he chairs.
“This is a small issue to the state, but a big issue for the industry,” Sands said.
Following the money
The Petroleum Marketers group, which gave Sands $350 in 2009, increased its 2010 contribution to $1,000. The group gave Sands $1,000 on Nov. 10, 2011, two months before the start of the 2012 legislative session, and $3,000 on June 22, after the car-wash legislation passed.
It’s common for groups to give donations to committee chairs, such as Sands, and lawmakers often accept donations only from groups whose interests they already support.
The timing of the gifts from Petroleum Marketers doesn’t imply pay back for shepherding the legislation, Sands said.
“That isn’t the way it’s done,” he said. “It certainly isn’t the way it’s done on my committee.”
The car-wash exemption ultimately was merged into a Senate bill that included tax credits for solar energy systems and geothermal heat pumps, issues championed by the Democrat-controlled Senate.
When asked about the recent contributions to Sands’ campaign, Dawn Carlson, president of Petroleum Marketers, said: “Rep. Sands is in a very important position where he has the ability to hear from businesses. We appreciate the fact he listened to small business owners.”
The car-wash exemption levels the playing field between car washes and car dealerships, which haven’t had to pay sales tax on automotive fluid for decades, Carlson said. The break has a $400,000-a-year fiscal impact.
Iowa’s sales and use tax receipts for fiscal 2011 were $2.7 billion, and Iowa’s budget for fiscal 2013, which started July 1, is $6.24 billion.
The Iowa Department of Revenue’s position is that sales tax revenue isn’t lost when an exemption is put into place.
“If the tax is not due in the first place, the tax revenue cannot be considered to be lost,” department spokeswoman Victoria Daniels said.
Mike Owen, assistant director of the Iowa Policy Project, an Iowa City-based research group, disagrees.
“People should make no mistake: It is a loss of revenue,” Owen said. “When they make an exception to the law, that is a choice to spend the money before it goes into the treasury. It still has the same impact on the budget.”