Tax Coupling Problems

Big Government Wants More Of Your Money Back!

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.

…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.

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