Skip to Content
  Contact Us

Notes from Regional Strategic, Ltd.

Tag: Taxes

SF 615: An Impact Model Based Policy Analysis

Posted on by

The Iowa Legislature is currently working on a bill (SF 615) to impose work requirements on able bodied adult recipients of Medicaid. The bill passed the senate on Tuesday, March 27. It was passed with amendments by the house on Wednesday, March 28, and sent back to the senate. It will likely be passed and signed into law during the week of March 31, 2025.

On the face of it, it is kind of hard to figure out what this means. The governor apparently put forth the bill, but neither the governor’s office nor the departments of health & human services, public health, revenue, or management & budget provided any information to the Legislative Service Bureau on costs, savings, or fiscal implications of the bill.

Either they don’t know, don’t care to know, or don’t want anyone else to know the implications of SF 615. One can easily find estimates on the internet that 75 percent of Iowa adults on Medicaid already work, but it is hard to determine the potential exemption status of the other 25 percent.

To its credit, the Legislative Service Bureau did provide some important estimates to underpin the analysis presented here:

  • The bill will generate Medicaid savings of $3.1 million to the State of Iowa in the first year
  • The bill will generate savings of $17.5 million in the second and subsequent years
  • The funding percentage split between federal and state is 88.4 percent federal and 11.6 percent state

This means that when the state saves $3.1 million in the first year, the federal government will save $23.6 million, and when Iowa saves $17.5 million the second year, the federal government will save $133.4 million. Summing these up, during the first year while the State of Iowa is saving $3.1 million it will be cutting health care expenditures in the state by $26.7 million. During the second year the state will save $17.5 million by cutting statewide health care expenditures by $150.9 million.

So far, this has all been derived directly from the estimates made by the Legislative Service Bureau.

The United States Bureau of Economic Analysis (BEA) generates estimates of expenditures for each state. Assuming the healthcare expenditures eliminated by SF 615 are spread through the system on an equivalent basis to Iowa’s overall health expenditures, they can be run through an input-output model to see how they will affect the entire Iowa economy. The model was set up using coefficients available from the BEA.

Four scenarios were set up – two each for first year and for second year reductions in health care expenditures. In the first scenario for each year, health care expenditures were cut, and no other changes were made. In the second scenario for each year, it was assumed that the State of Iowa’s estimated savings were concurrently returned to taxpayers as household income (equivalent tax cut scenarios spread proportionately to income distributions).

Scenario One: First year health care expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $3.1 million
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $17.3 million
  • Statewide jobs reduction – 307 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.9 million

Job losses will fall predominantly in these sectors:

  • Health care – 189
  • Finance & real estate – 28
  • Professional, management, & administrative – 23
  • Wholesale & retail trade – 21

Additionally, a very rough estimate of state general revenue fund tax loss can be made by dividing state net tax deposits (Iowa Department of Revenue) by earnings by place of work (BEA) for Iowa. That calculation results in 8.75 cents in general fund tax deposits per dollar of payroll in the state.

This estimated tax loss would be $1.5 million. It would not include losses in non-general state income, such as the lottery or liquor, and it does not include local government receipts, but it would still amount to approximately half of the state’s anticipated savings from restricting access to Medicaid.

Scenario Two: First year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $16.4 million
  • Statewide jobs reduction – 287 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.0 million
  • Estimated general revenue tax losses – $1.4 million

Job losses will fall predominantly in these sectors:

  • Health care – 185
  • Finance & real estate – 24
  • Professional, management, & administrative – 21
  • Wholesale & retail trade – 17

Scenario Three: Second year health expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $17.5 million
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $97.7 million
  • Statewide jobs reduction – 1735 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $61.5 million
  • Estimated general revenue tax losses – $8.5 million

Job losses will fall predominantly in these sectors:

  • Health care – 1068
  • Finance & real estate – 155
  • Professional, management, & administrative – 128
  • Wholesale & retail trade – 119
  • Manufacturing – 38

Scenario Four: Second year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $92.9 million
  • Statewide jobs reduction – 1620 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $56.7 million
  • Estimated general revenue tax losses – $8.1 million

Job losses will fall predominantly in these sectors:

  • Health care – 1047
  • Finance & real estate – 134
  • Professional, management, & administrative – 121
  • Wholesale & retail trade – 95
  • Manufacturing – 33

Some thoughts

Regardless of the merits of imposing work requirements where the great majority are already working (recall that the governor and affected state departments declined to provide details regarding those merits), this is not simply a state budget reduction effort. It will significantly affect payrolls, employment, profits, and tax receipts across the state.

These effects are magnified by the fact that the federal government multiplies Iowa’s investment. For every dollar the state puts into these benefits the federal government contributes $7.62. That means that for every dollar the state saves with SF 615, the state forgoes $8.62 in economic activity that generates payrolls, employment, profits, and tax revenue. The state savings of $17.5 million per year will cost the state’s economy almost $151 million in expenditures (economic activity) per year.

The magnitude of these losses, particularly in the health care industry, will force providers to abandon billions of dollars worth of investments in facilities and infrastructure. These abandonments will not magically reappear if SF 615 is subsequently modified or repealed.

It should also be noted that, as expenditures fall, payrolls are cut, profits disappear, and jobs are axed it will be harder for Medicaid recipients to find the required jobs. This will remove more of them from Medicaid. This will save the state more money. For every dollar saved in this manner, another $8.62 in health care expenditures will be removed from the economy and the cycle of disruption to the state’s economy will continue to expand.

These are a costs that deserve more analysis than the governor or the statehouse has given.

Attempting to Offset Program Cuts with Equivalent Reductions in Taxes

Posted on by

I have recently posted three analyses of the Iowa economic impacts of breaking Social Security, Medicare, and Medicaid (Privatizing Social Security, Social Security – a Local (Iowa) Perspective, and Breaking Medicare and Medicaid – An Economic Perspective from Iowa).

None of these dealt directly with the typical small-government argument that an offsetting reduction in taxes will eliminate the adverse effects of eliminating programs.

This argument is not actually true in most cases. The reason is that markets are not neutral. They are created within the context of government intervention, and government intervention is required for efficient markets to function over time. Government defines and enforces property rights. Government oversees the accessibility and stability of the money supply. Government regulates financial transactions. Government influences marginal propensities to spend resources on and between categories of goods and services through taxation, investment, and program regulations and expenditures.

For better or for worse (I am not arguing one way or another), these influences shape markets, private investments, employment, and income. Making substantial changes to the way government influences the shape of markets and the economy will generally cause significant disruptions in the system. Those disruptions generally do not even out among all participants.

This analysis looks at the effects of eliminating federal Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions (see, in particular, Breaking Medicare and Medicaid – An Economic Perspective from Iowa). To develop this perspective, I

  • Set up a model of the Iowa economy
  • Removed $14.3 billion from the specific industry groups Medicare and Medicaid funding flow into
  • Added $14.3 billion to general household income

By both removing and adding $14.3 billion from/to the Iowa economy, the net initial impact on available resources is zero. The difference between where resources are removed and where resources are added, however, still results in devastating impacts upon the Iowa economy.

The change in how this $14.3 billion is allocated in the existing economic structure will result in a statewide payroll reduction of $5.6 billion reflected in the loss of over 70,000 jobs. Not all industries would lose jobs however:

  • Finance and real estate would see an increase of over 2,000 jobs
  • Wholesale and retail trade would see an increase of over 7,000 jobs
  • Education and the arts would see an increase of over 3,000 jobs
  • Accommodation and food service would see an increase in almost 2,000 jobs

On the other side of the coin

  • Health care would lose over 80,000 jobs
  • Professional services, management, and administration would lose over 7,000 jobs

These consequences would occur because markets are not neutral. They have been shaped for over 200 years by government interventions is property rights, taxation, expenditure, and regulation. An immediate and substantial change to the rules of the game can be expected to break down large segments of the economy that those rules have helped build up.

Regardless of philosophies regarding the long-term merits of one government-influenced market regime over another (and make no mistake, changes in government intervention only change the shape of government influence on the market – they do not eliminate that influence), it is important for the health of the economy that substantial changes be made slowly.

Furthermore, it is almost certain that the negative economic effects outlined above are understated. It will be worse than the results of the model shown above. It will be worse across all categories. Worse for the modeled winners as well as for the modeled losers. The reason is simple. The increases in household income (reductions in taxes) will not accrue to the same people who suffer losses of benefits.

In the model, the tax reductions were treated as increases to general personal income across Iowa. This assumes that tax reductions were proportional to incomes across the economy. That means that the people that lost Medicare and Medicaid benefits would be net losers in the transaction and everyone else would receive an unearned windfall.

A large proportion of this unearned windfall would go to high-income households with lower propensities to consume. This will result in a significant portion of the offsetting increases in income being removed from the economy as savings or financial investments. This would result in significantly lower offsetting economic activity than the model assumes. That, in turn, means the model results presented above are unrealistically optimistic.

In reality, however, this unearned windfall, these tax reductions, would not be spread proportionately across incomes within the economy. The current tax system and current proposed tax reforms heavily favor upper income households over lower income households (taxation policies are a major avenue through which government shapes the economy – see Why We Can’t Make Nice Things….). As a result, a predominant share (rather than the proportional share discussed in the previous two paragraphs) of offsetting personal income will accrue to upper income households. This will magnify the effect of lower marginal propensities to consume discussed in the paragraphs immediately above and further reduce the effect of offsetting income on benefit losses depicted in the model. For this reason, again, the economy-wide results modeled above are unrealistically over optimistic.

Regardless of the philosophical merits of any one form of government intervention over any other in shaping the economy, significant changes in these forms of intervention should not be made abruptly or haphazardly. The analysis above is clear that eliminating Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions will have a large negative impact on the Iowa economy. Markets are not neutral. They are shaped by the government. As a result, government has a responsibility to be responsible in changing the rules.

Why We Can’t Make Nice Things…

Posted on by

This all started with some import-export data from the United States Bureau of Economic Analysis (BEA) and a couple of import-export graphs from the Economic Research Service (ERS) of the United States Department of Agriculture (USDA). It is not really about imports and exports in general, however, or even agricultural imports and exports in particular. It is about how our international transactions are influenced by the United States’ system of taxation. In particular, it is a discussion of how the United States’ tax system disadvantages labor relative to other factors of production and how that disadvantage affects our transactions with the world.

The graph below is “Export value share of production, 2013-22” for U.S. agricultural and food production. While we are just looking at industry production shares and not total volumes, it is clear that U.S. agricultural and food exports are heavily weighted towards relatively nonperishable commodities, low value food products. The majority of U.S. agricultural products are non-manufactured and non value added. Since 2008, the export share of U.S. agricultural production has remained relatively constant at about 20 percent.

The second graph is “Import share of U.S. food consumption, 2011-21.” The accompanying explanatory notes indicate that imports accounted for 15 percent of U.S. food consumption for the period, and that they steadily grew as a consumption share over the period. The unstated takeaway is that imports must be significantly above 15 percent of U.S. food consumption now.

As in the export graph, we are looking at industry shares rather than total volumes or values. It is still clear, however, that U.S. agricultural and food imports are skewed towards perishable and value-added food products – high value stuff. The explanatory notes also suggest that this is due to, “…numerous factors – including relative competitiveness in production…,” but no explanation for the, “…relative competitiveness of production…,” is given. It is assumed that relative competitiveness is a given – a state of nature.

It is not.

One of the reasons the U.S. exports nonperishable, non-manufactured, low value-added agricultural products and imports perishable, manufactured, and high value-added products is the competitive position of labor within the U.S. We often hear about the competitive position of labor between the U.S. and other countries, but that is not what we are discussing here.

The uncompetitive position of labor within the U.S. is largely a creature of the U.S. tax system. The tax system penalizes labor utilization within the U.S. in a number of ways. In general, taxes on labor are high. Income taxes, which are levied on wages and salaries, earned income, are substantially higher than taxes on capital gains, which are levied on incomes derived from physical and financial capital. This artificially raises the cost of labor in production. It also artificially lowers the cost of capital in production.

Income taxes are also generally levied on gross earned income and are collected immediately upon payment. Labor has very few means of minimizing or deferring their share of taxes. Labor pays gross rates. In addition, the U.S. government funds very large components of its social expenditure package (Social Security and Medicare) with direct taxes on labor. All of these increase the production cost of utilizing labor. It also increases the participation threshold of labor in production, making it less likely that labor will participate in the production process.

Conversely, recipients of receipts from physical and financial capital benefit from multiple incentives that can reduce rates that are already favored over labor (and further distort investment decisions). Among these is a very favorable schedule of depreciation, allowing owners of physical capital to claim a significant portion of receipts during the depreciation cycle as expense deductions. Recipients of returns from capital also have substantial leeway in determining when and how to realize those returns. This allows them to time and combine their receipts in tax-advantaged ways. When they do realize those returns, the recipients pay taxes at filing time rather than upon receipt. They pay net rates rather than gross rates. Furthermore, a large proportion of receipts from returns on capital is self-reported, generating substantial opportunities for tax avoidance.

Taken together, U.S. tax policy raises the relative cost of utilizing labor and lowers the relative cost of utilizing capital in the production process. At this point, one might ask, “What the heck does that have to do with the industry distribution of agricultural imports and exports?”

The answer is relatively simple. High-value food products, perishable, manufactured, and specialty foods, are generally more labor intensive than low-value foods. Through its tax policies, the U.S. disadvantages local production of high-value foods and encourages the production of low-value foods. This is mirrored in the types of food the U.S. exports and imports. There are other factors, but U.S. tax policy is a significant factor in this imbalance.

Tax policy doesn’t just affect employment and production in agriculture. Its effects are economy-wide. Luxury cars and watches are not generally products of the United States. Premium handmade shoes are generally imported, as are handmade suits. We export relatively capital-intensive goods and services. We import relatively labor-intensive goods. Both trends are supported by a domestic tax system that penalizes labor (earned incomes) and rewards physical and financial capital (unearned income).

If you recall your international trade course in undergraduate economics, trade is determined by relative input cost differentials within countries. Movement between countries equalizes internal cost differentials for both partners regardless of single-factor cost differentials between them. That means we can alter our import and export mix with the rest of the world by reducing the tax policy distortions between earned and unearned income. We are often told that unfair competition is stealing American jobs, but before anyone can be accused of cheating, we need to stop driving American jobs away with a distortionary tax regime.

In addition to the artificial cost differentials between labor and capital, the practice of funding social benefits through taxes on labor builds the cost of pensions and health care into the cost of goods on the market. This directly penalizes domestic consumers, and it increases the prices of U.S. exports, making labor-intensive exports even less competitive on the world markets. In most industrial nations, pensions are paid through general taxation and do not directly translate into export prices. In many, such benefits are paid for through value-added taxes that are only levied on goods sold domestically. This makes exports from these countries more competitive than exports from the U.S.

The tax distortions also cause fundamental economic problems and political distortions. While producers face artificially high costs of labor due to taxes, labor gets artificially low returns due to those same taxes. As a result, productive labor is often not an attractive trade-off with respect to the informal economy or household production. High labor costs due to taxes are coupled with low returns to labor due to taxes. We end up with:

  • A labor to capital cost differential that distorts our production and international trade
  • Stagnating labor incomes
  • A shortage of labor

All tied to a tax regime that penalizes earned income and rewards unearned income.

Recipients of unearned income recognize there are distortions in the labor market, but they have no interest in giving up their tax advantages. As an alternative, they insist that U.S. labor is paid too much. They fight to reduce the rights of labor to organize. They fight to reduce labor regulations that address fair payroll practices, overtime payments, working hours, and child labor. In order to get labor costs back in line, they fight to further reduce returns to labor while also defending and expanding the tax differentials that are the root of the problem.

Interested in Learning More About Regional Strategic, Ltd.? Send Us a Message

Contact Us