Democrats Unveil Tax Plan; Opposition Mounts Campaign

In a battle that's been 30 years in the making, Iowans for Tax Relief is launching a massive television, radio, and direct-mail campaign to fight an elimination of federal deductibility that's poised to begin moving through the Democrat-controlled legislature next week.

"I don't believe there will be a Republican vote for it, and we're going to make it real hard for them to have 51 votes to pass it," said Ed Failor Jr., president of Iowans for Tax Relief. "It's such a simple thing to explain. That money that's taken out of your paycheck, the state of Iowa wants to make you pay a tax on that, that you never get to spend. I can infuriate almost anybody with that immediately."

The Muscatine-based group will spend "hundreds of thousands of dollars" on its ad campaign, which it expects will last three weeks or until the end of the legislative session. The TV ads were designed in December and January in anticipation of Democrats trying to eliminate federal deductibility this year. Hundreds of thousands of direct mail pieces will also be sent out.

Iowa is one of only three states with federal deductibility, along with Louisiana and Alabama. Governor Chet Culver, Senate President Jack Kibbie, and House Speaker Pat Murphy have all voiced support for eliminating federal deductibility this year.

Democratic legislative leaders on Thursday unveiled a plan that would generate $595 million by eliminating the ability of Iowa taxpayers to deduct their federal tax liability on their state income-tax returns. It would then take all of that money to reduce Iowa's tax rates and increase tax credits for families, the elderly, and the blind, so the state won't take in more money.

"The proposal would provide a middle-class tax cut, make our income-tax system more fair, simpler, and more competitive, especially as we look at addressing this deepening recession," said Senator Joe Bolkcom (D-Iowa City), chair of the Senate Ways & Means Committee.

Representative Paul Shomshor (D-Council Bluffs), a certified public accountant who's chair of the House Ways & Means Committee, said the change will improve Iowa's business climate by making the state's tax rate closer to that of Nebraska, Kansas, and other Midwestern states with a simpler tax structure and similar rates.

"Iowa looks like under the current tax system that they have an artificially high income tax rate at 8.98 percent," Shomshor said. "We're compared to the other four highest states - California, Vermont, Rhode Island, and Oregon. I don't think we want to be compared to those other four states."

Under the Democrats' plan:

• The state's top personal-income tax rate would be lowered from 8.98 percent to 6.98 percent, and all other rates would be adjusted downward as well.
• The elderly/blind personal credit would increase from $20 to $40
• The Earned Income Tax Credit would increase from 7 to 8 percent
• The child and dependent tax credit would increase by 5 percentage points and would be extended to those making between $45,000 and $49,999

An Iowa household earning between $30,001 and $40,000 would see their taxes go down by $35.28, while those who make between $80,001 and $90,000 would lower their tax liability by about $62.66. On the flip side, a family earning between $125,001 and $150,000 would pay $45.55 more and a household making $250,001 or more would pay $1,377.28 more in taxes, according to estimates by the Legislative Services Agency.

"Every income class below $125,000 sees a tax cut or no change," Gronstal said. "We want to put money in the hands of middle-class taxpayers. So obviously, you've got to take that from somewhere."

Bolkcom maintained that the plan is "revenue neutral": "At this time, given the economy, given the recession we're in, it wasn't appropriate to ask Iowans for more," he said. "This proposal is about providing relief to middle-class taxpayers, not adding to their burden."

But House Minority Leader Kraig Paulsen (R-Hiawatha) immediately threw water on the proposal and said he didn't predict any Republican votes on the Democratic tax proposal.

"I've got a problem eliminating Iowans' largest tax deduction on their income-tax form," Paulsen said. "Make no mistake, it's about raising revenue. And even if it's not about raising revenue in the first year, it's gonna be about raising revenue in the second year when the federal income-tax rates go up and Iowans don't get to take advantage of that tax deduction."

Senate Minority Leader Paul McKinley (R-Chariton) pointed to how the proposal would increase taxes on those who make $125,000 or more, which he said includes small businesses.

"Anytime we can reduce taxes, that is a good thing," McKinley said. "However, when you look at where the engine for growth in this state resides, it is in small business. This will be a tax increase. ... If we're raising taxes on those earning above $125,000, I would suggest that a large number of those are small businesses."

Driving the need for the change this year is information from the Iowa Department of Revenue that expiration of the Bush tax cuts will cause a $150-million to $200-million hole in the Fiscal Year 2011 state budget because Iowans will have more tax to deduct on their state income taxes. Eliminating federal deductibility will help fill that projected shortfall, Senate President Jack Kibbie (D-Emmetsburg) said.

Culver and Lieutenant Governor Patty Judge have said they are open to the idea of eliminating federal deductibility if it is revenue-neutral. Spokesperson Phil Roeder said Thursday that while the governor's office is reviewing the legislature's proposal, "an initiative that is not only revenue-neutral but would mean a tax cut for the majority of Iowa's working families is a step in the right direction, especially during the current economic recession."

To see how Scott County legislators feel about federal deductibility, click here.