An Update on Federal Deductibility

From Republican Leader Kraig Paulsen:

Update: Repeal of Federal Deductibility is tax increase in every tax bracket!

Yesterday’s newsletter addressed the Democrat proposal to eliminate federal deductibility; a tool that allows Iowans to deduct our federal income taxes from our ordinary income prior to calculating our income for state taxes. This is the largest, and in some cases the only, tax deduction available to many hardworking Iowans.

Last night the House Ways & Means Committee passed out the proposal on a party line vote. 14 Democrats voted aye – 11 Republicans voted no. House File 807 is the new bill number as the bill moves forward and becomes eligible for debate in the House.

After having additional time to study the proposal, we have discovered exactly what we expected: more Iowans than originally stated are going to see a tax increase. It is disheartening to hear this explained to Iowa’s taxpayers as a tax cut for two-thirds of Iowans. The facts tell us– it is not.

Under the Democrats’ proposal, 50.9 percent of Iowans will either see no change in their tax liability or see a tax increase in 2009. 40% of the individuals receiving a tax increase make less than $40,000 per year. 69% of the individuals receiving a tax increase make less than $70,000 per year. See the breakdown of HF 807 at

And believe it or not, over 10% of the individuals receiving a tax decrease in 2009 make over $100,000 per year. Based on the discussion last night in committee it appears to be hit or miss as to who the real winners and losers are.

Additionally, the Democrats have failed to inform Iowans about the implications of their proposal in 2011. On December 31, 2010, the federal tax relief of 2001 and 2003 will expire. It appears now that Iowans’ federal income tax liability will increase by $160 – $180 million. This means that you’ll lose the ability to deduct your federal taxes less than two years before your federal taxes are set to dramatically increase.

Finally, the Democrats’ proposal has the potential to put Iowa small businesses in an even deeper hole. Because many Iowa small businesses are structured as individual tax payers they too will see their taxes increase. The way many of these businesses will try to absorb this cost is by eliminating jobs or by passing the added expense onto the consumer. Either way, our struggling economy will continue to suffer under this plan.

Make no mistake this bill is a tax increase on Iowans in all tax brackets from day one. And within a few years it will result in a huge tax increase for almost every single Iowan.

When this bill is considered by the legislature, House Republicans will fight on behalf of all taxpayers and their ability to keep more of their hard earned dollars.

  • Paul

    Once again, I completed my tax returns and cursed their complexity. After working through the federal return, I’m faced with a state return that seems to be designed to add to my frustration.

    How about a state tax form with three steps: 1) copy your federal AGI, 2) count your dependents, 3) look up your tax in a table?

    Ending federal deductibility is a small step in the right direction. It simplifies my return. I’m for it if it is generally revenue neutral.

    (It also gets rid of this weird result that the IIT revenues go up/down when the FIT rates go down/up. Why would we want to cede control of our budget to the whims of DC like that?)

    It may make the Iowa income tax a little more “progressive”. I’m not sure if that’s a good thing or a bad thing (I’ve been an above average earner, so it may cost me a little), but I’m sure simplicity is better.

    It seems to me that both the Democrats and the Republicans are more concerned about stroking their own egos by playing political games with the tax code than they are in creating a simple, understandable way to raise revenue to pay for gov’t. In the case of federal deductibility, the Democrats seem to be doing less damage.