What is Federal Deductibility?
Currently, Iowa is one of three states in the nation to permit tax filers to deduct all tax payments made to the federal government in calculating their state income tax liability. For example, if an individual makes $50,000 and pays $15,000 in federal taxes, their base income for state tax purposes is $35,000.
Why Federal Deductibility is important
For many taxpayers, the amount of tax payments made to the federal government is the only – or largest – deduction available to them. For example, 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 the child and dependent tax credits.
Why HSB 284 is bad for Iowa taxpayers
- An issue of Fairness:
Double taxation (tax on a tax): eliminating federal deductibility will allow the state to tax income never realized by taxpayers (i.e. $15,000 example above).
Winners and losers: Under the bill 692,713 or 50.9% of Iowa taxpayers will see no change in their tax liability or see their tax liability increase in tax year 2009. The bill increases taxes on some Iowans to pay for a tax cut for other Iowans.
- 450,292 or 33.1% of all taxpayers will see a tax increase.
- 242,421 or 17.8 % of taxpayers will see no change in their tax liability.
- 667,314 or 49% of taxpayers will receive a tax cut.
40% of the individuals (180,300) whose taxes will increase under the bill make less than $40,000 per year.
69% of the individuals (314,885) whose taxes will increase under the bill make less than $70,000 per year.
12,470 individuals who make more than $200,000 will receive a tax cut under the bill.
If you were to combine the total tax liability of the winners, losers and individuals that would see no change the average of the largest tax cut an individual would receive equals less than $63 or .17 cents per day.
* Corporations continue to have the ability to deduct 50% of their federal taxes paid from their state income tax.
- 2011 tax increase:
On December 31, 2010, or tax year 2011, the federal tax cuts of 2001 & 2003 will expire increasing federal taxes on Iowans by approximately $160 million to $180 million. Nothing in HSB 284 requires this additional revenue to go towards tax relief, or prevents the legislature from using this revenue for additional spending.
- Negative impact on small businesses, farmers and local economies:
The majority of Iowa businesses and farmers income is taxed at the individual rate. If their tax liability increases, they will either eliminate jobs or pass the added expense to the consumer to absorb the cost. Once again, Democrats re making it harder to be an employer in Iowa.
- Retroactive applicability:
Many businesses in Iowa have made decisions based off the assumption they would have the ability to deduct their federal income taxes to calculate their base income for state tax purposes. Reaching back and changing the rules in the middle of the tax year undermines those planning decisions.
- No protection for taxpayers from future changes
Nothing in the bill prohibits the legislature from going in and changing the tax brackets in future years. This leaves taxpayers vulnerable.
For a Bill Analysis of HSB 284 click here.