It contributes little to the state budget. No tax would attract business.

Former Mason City Mayor Roger Bang called recently with a “what-if” question about Iowa’s corporate income tax.

Eliminating that tax is something Des Moines accountant Joe Kristan and others have been pushing behind the scenes in recent months, but with little headway.

I told Bang there was zero chance of the Legislature eliminating the tax this year, so most people don’t care what would happen. He agreed, but said people should start thinking about it anyway.

Kristan, who writes a tax blog for Roth & Co., has a rationale for eliminating the tax. It goes like this: The corporate income tax is not a big income producer. It is expensive to administer. Also, Iowa’s high tax rate discourages new businesses from locating in the state.

So, why not get rid of it?

One reason, he admitted, is that too many businesses with highly paid lobbyists benefit from the complicated network of tax credits that has grown over the years to mitigate the cost of the tax.
As things stand today, many businesses can all but wipe out their Iowa tax bill with credits. Some big businesses even get money back from credits that are refundable, such as the research and development credit.

The credits have been around so long that they are part of the business model at many companies.

To give an idea of how out of whack the system is, Kristan points to Iowa’s official 2010 budget.

The budget projects that businesses will pay $341 million in corporate income taxes this year. It also shows they’ll get back a little more than half that in refunds, leaving the state with net corporate tax receipts of $165 million.
That may sound like a lot, but it’s only 3 percent of the $5.4 billion available for state government services.

The bulk of the state’s net income comes from personal income taxes, $2.55 billion, and sales and use taxes, $2.15 billion.

Sin taxes on alcohol and tobacco sales generate nearly twice as much net income – $321 million – as the corporate income tax.

Another problem with the corporate income tax, Iowa State University economist David Swenson said, is that “it fluctuates a lot.”
In fact, this year’s net take from the tax – after refunds have been paid – is less than half the net collected two years ago in the fiscal year that ended June 30, 2008, right before the economy went bad.

That’s a huge drop, and it makes planning difficult.

By comparison, the combined drop in personal income, sales and use tax receipts was 2.2 percent.

There’s also a fairness issue, Swenson said.

Several companies that employ thousands of Iowans already don’t pay Iowa income tax, or pay very little tax, because the bulk of their sales are outside Iowa and profits from those sales are not subject to Iowa income tax.
That’s on top of the taxes that aren’t being paid because of credits.

As a result of the ongoing film tax credit scandal, lawmakers are looking at capping or eliminating several of Iowa’s 35 existing tax credits.

That’s fine because the state needs to keep a better handle on tax credits than it has in the past.

Swenson said: Tax credits should be “straight forward practical assistance to firms that knock off the rough edges associated with business start-ups.”
But, he said, “you don’t want to underwrite them” to the point where the state provides an unfair competitive advantage.

When lawmakers start playing around with the tax code, it’s easy to create distortions because one taxpayer’s gain is another’s loss.

Don’t expect any meaningful change this year, because lawmakers don’t have the time to fully explore Kristan’s proposal for eliminating the corporate income tax. But it is definitely worth looking into after the session.
Even Kristan can’t fully defend his proposal. He admitted there are too many unknowns.

But it stands to reason, he said, that if the corporate income tax is eliminated, or even severely reduced, Iowa will gain a competitive advantage over surrounding states in attracting business.

Right now, Iowa’s top corporate tax rate, 12 percent, is higher than any surrounding state.

Few businesses actually pay that rate because of all the credits and other loopholes.
There are obvious advantages in having a corporate tax code that is easier to understand and apply.

Between now and next January when the Legislature returns, somebody needs to do the math and figure out a cleaner system than the one we have now.

Most business leaders believe that a consistently low – or no – corporate tax rate is attractive to new businesses and economic growth.

If that’s true, put a number on it.

And if you don’t believe it’s true, accountant Tom Pflanz of McGowen Hurst Clark and Smith in West Des Moines said, then why have so many businesses in Sioux City moved across the river to South Dakota, where there is no income tax?

(Source: The Des Moines Register)

On January 27, 2010, the House Ways and Means Committee met for the first time of the 2010 legislative session. The meeting was short and to the point. Several bills were assigned to subcommittee, including House File 807 the highly controversial bill to eliminate federal deductibility, and then the meeting adjourned.

As you know, federal deductibility gives taxpayers the ability to fully deduct 100% of all federal tax payments on their state income tax returns. This is extremely important for low and middle class income earners. For many of them, this is the only and largest deduction available to them. For example, low and middle income taxpayers who do not own a home or have children cannot utilize income tax deductions and credits available to others; such as mortgage interest, property taxes and child and dependent care tax credits. Moreover, it is an issue of fairness. It is not fair to taxpayers to be required to pay state taxes on income never realized. Eliminating federal deductibility is a tax on a tax plain and simple.

If enacted, House File 807 will create winners and losers in every tax bracket. Taxes will increase for some taxpayers regardless of how much they make. The cumulative tax increase on Iowa taxpayers over the next five years under the plan is over $400 million.

It is no surprise that Iowans are outraged over the proposal. Last year, hundreds of concerned citizens filled the House chamber to convey their displeasure with the tax increase. In addition, the National Taxpayers Union released a poll on January 12, 2010 that states 77% of Iowans support keeping federal deductibility and believe it is in their best financial interest.

House Republicans will standby Iowa taxpayers and continue to fight against this fundamentally flawed proposal that seeks to increase taxes on hardworking Iowa families. While it is never wise to allow the government to increase the amount of hard earned dollars it withholds from individuals, it is especially destructive to do so during tough economic times. Iowans know better than government on how to spend and invest their money and House Republicans are committed to allowing them to do so.

• Start gathering your records: Round up any documents or forms you’ll need when filing your taxes; receipts, canceled checks and other documents that support an item of income or a deduction you’re taking on your return.
• Be on the lookout: W-2s and 1099s will be coming soon from your employer.
• Try e-file: When you file electronically, the software will handle the math calculations for you. If you use direct deposit, you will get your refund in about half the time it takes when you file a paper return. E-file is now the way the majority of returns are filed.
• Check out Free File: If your income is $57,000 or less you may be eligible for free tax preparation software and free electronic filing. The IRS partners with 20 tax software companies to create this free service.
• Consider direct deposit: If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.
• Remember this number 17: Check out Publication 17, your federal income tax on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
• Child Tax Credit: You may be able to take this credit on your tax return for each of your children under the age of 17.
• Child and Dependent Care Credit: You may be able to claim the credit if you pay someone to care for your child under the age of 13.
• Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
• Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.
• Higher Education Credits: Education tax credits can help offset the costs of education.
• Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan.

Under current law health benefits for current school employees must be paid for from the district’s general fund budget. HF 2001 allows districts to shift that cost onto property taxes.

Potential Property Tax Impact: $380 million

House File 2040 – Property Taxes Can be Used for Any General Fund Purpose
This bill allows districts to use the board approved portion of the Physical Plant and Equipment Property Tax Levy (PPEL) for any General Fund purpose. The bill specifies that districts may do this for the FY11 and FY12 school year. The bill opens any board-approved PPEL dollars generated in that fiscal year and any like unspent dollars to any general fund purpose.

There are three potential far reaching implications for this temporary “help”.

1. HF 2040 trumps an elected local school board’s vote to levy property taxes for school infrastructure related purpose.
2. HF 2040 could create an incentive to levy. Not every district has a board-approved PPEL levy. Opening up the use could prompt those school boards to initiate a new levy to supplement their general fund.
3. HF 2040 raises questions about the SILO/state sales tax. Under Iowa law SILO/state sales tax proceeds can be used for any PPEL purpose proceeds Questions are being asked whether districts can deposit SILO proceeds into the PPEL fund.. Hopefully this language can’t be interpreted as opening the SILO/sales tax for any general fund purpose.

Potential Property Tax Increase: Unknown.

In his state-of-the-state message, Culver promised to cover just a fraction of the $540 million “promissory note” looming for K-12 funding.

The $540 million hole in the school aid formula for FY11 was created by two across-the-board cuts, one-time TARP money (federal stimulus) money, 2 percent allowable growth and the statewide voluntary preschool program.

Here’s a quick breakdown of the $540 million funding hole:

$238 million – Culvers’ October 2009 – FY10 10 percent ATB
$32 million – Culver’s December 2008 – FY09 1.5 percent ATB
$200 million – One-time TARP (Federal Stimulus funding)
$43 million – 2 percent allowable growth for K-12 school aid
$20 million – Estimated increase in 4 yr old preschool program
$7 million – 2 percent allowable growth for categoricals (Teacher Comp, Class Size, Professional Dev.)

Culver promised to partially backfill $100 million of the $235 million October ATB cut and to fund 2 percent allowable growth for the K-12 funding formula.

That leaves an overwhelming $400 million that will likely fall on Iowa taxpayers.

Taxes and Fees Memo

The components used in calculating the cost of government are: days worked to pay for federal spending (111), days worked to pay for state and local spending (49), days worked to pay for federal regulations (42) and days worked to pay for state and local regulations (23). In 2009, 61% of the national income will be consumed by government, 30% designated on federal spending alone.

The author of the study Monika Ciesielska states “the driving factor for this development is that all components of the cost of government – federal spending, state and local spending, and regulations – are now increasing faster than national income, which shrank as a result of the financial crisis in 2008.”

It doesn’t take an economist to figure out that risky federal bailout and spending schemes are bankrupting the national economy and taxpayers are working harder and longer because of it. Moreover, the recent debt and spending plan executed by Governor Culver and Democrats in the state legislature will surely result in piling more taxes on the backs of hardworking Iowa families. Higher taxes will force individuals and businesses out of the state, which will further damage an already weak economy. In fact, the 10 states in America with the highest tax burdens lost approximately 441,000 residents and nearly $13 billion of net income in 2007. Over the last 10 years, those same states lost more than three million residents and $82 billion in income.

House Republicans are committed now more than ever to limit the unsustainable growth of government spending and make government more efficient. House Republicans strongly believe the government must work for the people, not the other way around as is the case today. As has been the case throughout the last year, House Republicans will continue to offer commonsense solutions to save taxpayer dollars and reorganize the way state government is providing services.

The entire 2009 Cost of Government Report can be accessed at: www.costofgovernmentday.org

According to a federal and state tax analyst for H&R Block’s Tax Institute, “in times when more revenue is needed and the tax gap widens, absolutely the Internal Revenue Service is going to step up audits.” Another federal tax expert and Ohio State University professor recently stated, “you’re not going to find a document that says this, but it’s very clear that in a budget deficit, increased tax collection is another source of revenue.”

Since the end of the first session of the 83rd General Assembly, many House Republicans have been contacted by their constituents – individuals and businesses – regarding encounters with Iowa Department of Revenue officials conducting tax audits, billing and collection activities. Individuals, non-profits and small businesses who believed they were playing by the rules; operating under the same procedures they had for years are now being audited and questioned for the first time. In some cases, they’re being told they owe tens of thousands in back taxes, penalties and interest to the government dating back 10 years. Many complaints members of the legislature have received are similar, my filing behavior hasn’t changed and I pay may my taxes, why now? Why at a time when we are struggling to make ends meet is this happening?

Accordingly, House Republican Leader Kraig Paulsen penned a letter to Iowa Department of Revenue Director Mark Schuling asking these very questions. Specifically, the Republican leader questioned whether or not the Department has changed the scope and procedures on how it conducts its audits, if it establishes quotas of any kind or has increased audit activity as a result of Iowa’s ailing economy and projected budget deficits. The answer? No…sort of. The Department’s answer on quotas is somewhat unclear. While the Department claims there are no quotas it does admit “The Compliance Division does establish goals for hours spent, revenue established and revenue collected….based on the number of employee hours available for the audit programs…”

As stated in the Republican leader’s correspondence, House Republicans believe all Iowans must pay their taxes but also must be treated fairly and respectfully. And, those responsible for enforcing Iowa’s laws should do so accurately and consistently. During these turbulent economic times individuals and businesses should not be undeservedly targeted. The hours and energy spent on complying with burdensome Department of Revenue paperwork and interviews, are hours not spent working to build small businesses that create jobs and contribute to Iowa’s economy. For individuals, it’s time away from work without pay, income eventually spent on goods and services the economy depends upon being consumed.

It is important for taxpayers to educate themselves on the rules and guidelines of the federal and state tax code. This can be confusing and frustrating. For information on federal tax compliance tips, individuals can visit www.irs.gov. To receive information on state tax compliance tips, individuals should visit www.iowa.gov/tax Moreover, if you’re trying to navigate through the grueling audit process, know your rights. The Iowa Department of Revenue has created a website outlining taxpayer rights, this information can be accessed at http://www.iowa.gov/tax/educate/78619.html

As has been the focus of the House Republican Caucus, the State of Iowa faces enormous budget shortfalls. The legislature may still have to act to balance the Fiscal Year 2009 (FY09) budget. The FY10 budget will likely have a deficit of more than $60 million, and even more concerning is the FY11 budget is facing a $1 billion spending gap. Accordingly, House Republicans have offered several ideas to trim government spending in order to balance Iowa’s books. If fact, last session House Republicans offered amendments to numerous budget bills totaling more than $300 million in savings to Iowa taxpayers. Unfortunately, those proposals were rejected by Governor Culver and his allies in the legislature.

It appears that rather than make state government more efficient and eliminate unnecessary spending, some members of the legislature would rather pair back and eliminate tax incentives. Aside from the film production tax credits, what other tax incentives are on the Democrats’ chopping block? While we’ll learn more in the coming months, as interim committees meet, about other ideas to reduce Iowa’s budget deficit, it is safe to say that nothing is off the table and reducing and eliminating tax credits is a live round.

Since February, House Republicans have been talking to anyone who will listen about the reality of a stealth tax increase creeping up on struggling Iowa families if the legislature failed to act. Unfortunately, the legislature did not act and now Iowans are feeling the pain. Iowa taxpayers are beginning to receive letters from their tax preparers stating they have to pay a portion of their 2008 refund back to the State of Iowa. The reason for this is because the Democrat led legislature didn’t think it was important to adopt changes to the tax code made by Congress in 2008.

Because Iowa tax laws are rooted in federal tax code, each year the Iowa Department of Revenue proposes the Internal Revenue Code Update, legislation to modify Iowa’s income tax code to reflect the changes made to the federal income tax law. Each year as a matter of state public policy the Iowa legislature typically conforms or couples with the changes made by Congress, but the legislature also has the ability to not conform or uncouple. There have been instances throughout the years when the legislature conformed with some provisions and not others. However, it has been at least 20 years since the legislature failed to pass an Internal Revenue Code Update Bill.

Because it is so rare that the legislature fails to pass an Internal Revenue Code Update bill, the Department of Tax and Revenue provided guidance to tax preparers and filers to file returns as if the legislature would couple with the federal changes outlined in HSB 105.

Accordingly, Iowans filed their taxes under the impression they would be able to reduce their state tax liability by taking advantage of many important tax benefits made available to flood victims, college students, parents and teachers. The same tax benefits afforded to Iowans for federal tax purposes. Unfortunately, Democrats thwarted House Republican efforts to consider and pass HSB 105. In fact, a vote was taken to pass the coupling bill in the House Ways & Means Committee in February, but was defeated as all Democrats voted no.

Attached is a table provided to the Legislative Service Agency from the Department of Revenue outlining the federal tax changes and the cost of providing struggling Iowans with relief. A few key tax benefits and their estimated costs Democrats are asking Iowans to pay State Government include:

• Deduction for college tuition and related expenses – $12 million
• Deduction for educators out of pocket expenses – $650,00
• Itemized deductions for disaster losses, no AGI test or minimum – $2.5 million
• Ability to carry back losses attributable to disaster – $4.75 million
• Bonus depreciation for qualified disaster property – $24 million
• Expensing of qualified disaster expenses for small businesses – $285,000

According to the chart below the total cost of coupling is $54 million. The total cost of disaster related coupling provisions is roughly $31 million.

Click for larger chart