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April 2012 Policy Study, Number 12-5

   

The Negative Consequences for Iowa of an Enterprise Value Tax

   

Methodology Appendix:

   

 

We used United States government data from the Department of Agriculture, the Bureau of Economic Analysis (BEA) of the Commerce Department, the Internal Revenue Service (IRS), and the Congressional Budget Office (CBO). These primary data were supplemented with widely respected and accepted public sources such as the North American Industry Classification System (NAICS) and Bloomberg. Calculations using this data can be replicated and checked by any interested reader following the steps outlined below.

 

Inputs Used: In this study, we report on a “model” of what we project the increase in government revenues to be if an EVT is adopted. We conservatively assume that only half (50 percent) of businesses would be subject to the EVT. Given that the EVT would only apply when a partnership is sold, the model again conservatively assumes only an annual 5 percent turnover rate. Using price-book data from Bloomberg for an average of the last ten years, the total taxable gain on sales (sale value minus enterprise value) is calculated.

 

Iowa’s share of taxable gain on sales was estimated based on Iowa’s share of private earnings by industry. This data has been published by the BEA. Iowa’s estimated taxable gain on sales is $872 million for 2010, the most recent year for which data is available. This tax rate is computed with a blended rate of 25 percent capital-gains rate and 75 percent ordinary income tax rate. Our model used data collected from the Internal Revenue Service, U.S. Department of Commerce’s Bureau of Economic Analysis, and Bloomberg. PII staff then performed the necessary calculations.

 

The estimated increase in the capital-gains tax liability under current law and the EVT was derived by multiplying the taxable gain on sales by the blended rate under the two scenarios and taking the difference. The blended rate is conservatively weighted 25 percent towards the capital-gains rate and 75 percent towards the ordinary income tax rate.

 

Impact on Iowa’s Agricultural Sector: Table 1 presents an overview of the importance of the agricultural sector to the economy of Iowa. Note that 6,990 farms are organized as partnerships. The EVT takes aim at partnerships with “specified assets” which would ensnarl Iowa farms that have derivative contracts, asset income, and other investment income listed on their balance sheet. It is clear that the EVT will have significant impact on this sector. Table 2 breaks out the market value of agricultural products by commodity group so we can see potential impact of the imposition of an EVT on these various sectors.

 

Impact on Iowa Jobs: All of these calculations are in the context of the American Jobs Act proposals to put more Americans back to work. However, our calculations indicate that imposition of an EVT will actually reduce employment both nationally and here in Iowa. Simulating the State Tax Analysis Modeling Program (STAMP) created by the Beacon Hill Institute to estimate such jobs impact, we present a simple proportions projection based on a prior study on a similar topic in Table 3.[16] We compared Iowa and Massachusetts based on the Beacon Hill Institute study and computed job loss based on that comparison. Specifically, we generated a ratio based on a comparison of what they projected the increased taxation would be in their state with the imposition of the EVT with our projection of the increased taxation in Iowa with the imposition of the EVT, and multiplied that ratio by their projection of job losses in Massachusetts to achieve a projected job loss for Iowa.

 

Tax Increases with Changes: The estimated tax impact of the EVT is dependent on the validity of the assumptions used in the model. Therefore, we present Table 5 in the Results and Analysis section to show the sensitivity of the tax impact estimates to changes in the assumptions.

 

To further illuminate the potential negative impact of the imposition of an EVT both nationally and here in Iowa, in Table 6 we break out the net impact by industry for the most recent year in which data is available (2010).

 

   

 

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