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April 2012 Policy Study, Number 12-5

   

The Negative Consequences for Iowa of an Enterprise Value Tax

   

Why the EVT is bad for Iowa:

Impact on Tax Burden:

   

 

We ran our analysis using three scenarios: with current tax law in place, with the Bush Tax Cuts being allowed to expire after the temporary extension we are currently in, and finally with the Bush Tax Cuts expired plus the Medicare Investment Surtax from ObamaCare (the “Patient Protection and Affordable Care Act”). The current law has a tax rate of 30 percent, adding the expired Bush Tax Cuts results in a tax rate of 34.7 percent, and the final scenario has a 38.5 percent tax rate.

Prior to presenting the impact on Iowa, we will first look at the impact on a national level. Our model shows that under the three different scenarios the following would be the total capital-gains taxes paid:

 

1. Current Law (30 percent) = $17,515,000,000
2. With Expired Bush Tax Cuts (34.7 percent) = $23,353,000,000
3. With Expired Bush Tax Cuts and Medicare Investment Surtax (38.5 percent) = $27,791,000,000

 

As you can see, we are looking at a significant increase in capital-gains taxes paid, especially as the Bush Tax Cuts expire and the ObamaCare taxes come on line: a 33 percent increase in capital-gains tax from current law to the Bush Tax Cuts expiring; and a 59 percent increase with the Medicare Investment Surtax plus the expired Bush tax cuts. And these are before the added negative impact of imposition of the EVT!

 

With the increased EVT burden, we will be faced with the following capital-gains tax scenario:

 

1. Current Law (30 percent) + EVT = $35,030,000,000
2. With Expired Bush Tax Cuts (34.7 percent) + EVT = $40,518,000,000
3. With Expired Bush Tax Cuts and Medicare Investment Surtax (38.5 percent) + EVT = $44,955,000,000

 

If we look at the percentage increase from our current law without the EVT to the current law with the addition of the EVT, the calculation tells us that there will be a 100 percent increase in capital-gains taxes with the imposition of the EVT, a 131 percent increase with EVT plus expiration of the Bush Tax Cuts, and a 157 percent increase with the expiration of the Bush Tax cuts and Medicare Surtax under implementation of ObamaCare. Anyone who has to deal with budgets knows that if any given line item increases 100 percent — or more — that you have to dramatically cut other areas.

 

What does this mean for Iowa? The same depressing negative consequences face Iowa:

 

1. Current Law (30 percent) = $94,000,000
2. With Expired Bush Tax Cuts (34.7 percent) = $126,000,000
3. With Expired Bush Tax Cuts and Medicare Investment Surtax (38.5 percent) = $150,000,000

 

When we add in the EVT to the capital-gains tax everything goes up:

 

1. Current Law (30 percent) + EVT = $182,000,000
2. With Expired Bush Tax Cuts (34.7 percent) + EVT = $218,000,000
3. With Expired Bush Tax Cuts and Medicare Investment Surtax (38.5 percent) + EVT = $242,000,000

 

The key finding of our analysis of this data is that both nationally and here in Iowa the addition of an EVT will double the tax burden on the income of those who are subject to the EVT! If the Bush Tax Cuts are allowed to expire after the temporary extension we are currently in, the impact on the economy will be even more burdensome, and if ObamaCare is not declared unconstitutional by the Supreme Court this coming June nor repealed by Congress after the November election, the burden will grow even more.

 

As noted in the Methodology Appendix, the impact of an EVT is dependent on how much turnover of property there is in the economy. To show the sensitivity of this analysis we look at the impact of decreasing the turnover rate by one percent and increasing the turnover rate by one percent both for Iowa and the nation as shown in Table 5.

 

 

If turnover is only four percent, instead of the five percent assumed in our model discussed above, the negative consequence for the economy will be reduced here in Iowa from an increased tax burden of $182,000,000 to $151,000,000. However, if turnover is actually six percent instead of four percent or five percent, the impact increases to $226,000,000 here in Iowa.

 

Not all sectors of the economy will be impacted equally by the imposition of an EVT. In Table 6, we break out the $182,500,000 of impact by industry sectors. We bold the four industry sectors that would suffer the greatest dollar increases in tax burden: Finance and Insurance ($54,900,000), Real Estate and Rental and Leasing ($38,000,000), Information ($33,000,000), and Manufacturing ($11,200,000).

 

 

   

 

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