Always an appropriate image regarding tax promises
On this matter, we don’t care what other states due.
This item from Iowans for Tax Relief (ITR) is very well presented providing a good primer on Iowa tax policy and burdens. We support their analysis and emphasize that no matter what the tax rate trade-off a legislator might promise in order to eliminate deductibility of federal taxes on your Iowa tax return, they cannot be trusted not to increase rates later so that any temporary dollar for dollar trade-off is lost. The philosophical reasons mentioned regarding objecting to “taxing a tax” we adhere to as well. Unless there is a provision in the Iowa Constitution to limit taxes, Iowa deductibiltiy of federal taxes should be maintained. Posted here with permission.
Long-Standing Support of Federal Deductibility
Iowans for Tax Relief has for decades supported the current law that allows Iowa taxpayers to deduct all federal income tax payments on their Iowa income tax returns. Our defense of this deduction remains steadfast. Federal deductibility is simple fairness. Iowans should not be forced to pay a state income tax on money used to pay their federal income tax. This is money the average taxpayer never touches, sees, or has any discretion over how it is spent. The federal deduction is not the only example of this kind of fairness in the Iowa tax code. Those who itemize their deductions also have the right to deduct property taxes on their Iowa income tax returns. Simple fairness says governments should not tax income that is used to pay another tax. Federal deductibility is one of the best examples of this philosophy and must remain a part of the Iowa income tax code.
There have been many proposals to combine the elimination of federal deductibility with a reduction in personal income tax rates. Some have attempted to be revenue neutral, although they would change the distribution of the tax burden. On paper, such a proposal can look inviting. However, in practice, such a trade would soon lead to higher income taxes. The federal “Tax Reform Act of 1986” is a painful example of what happens when you trade lower tax rates for elimination of various deductions. In the name of “simplification”, many tax deductions were removed, the definition of income was broadened, and tax rates were lowered in return. This tax “reform” was short lived. In 1990 and again in 1993 the income tax rates were raised. Thus, taxpayers are now forced to pay higher tax rates on an expanded income base that was originally justified by a promise of lower rates.
This is a mistake Iowans for Tax Relief continues to work to avoid in Iowa. This trade would not be tax reform—it would be double taxation and would inevitably result in higher income taxes. Iowans for Tax Relief favors lowering actual taxes on all Iowa families and businesses.
Some persons attack federal deductibility as an obstacle to a “progressive” individual income tax structure. They argue we must eliminate federal deductibility in order to make our income tax more “progressive”. In reality, Iowa’s individual income tax system is already steeply “progressive”— even with the existence of the federal income tax deduction.
As Graph 1 illustrates, when income rises, so rises the percentage of income that is paid in Iowa personal income taxes. Adjusted Gross Income (AGI), which the Iowa Form 1040 identifies as Net Income, may be the most meaningful measure of an individual’s income. Iowans with AGI of less than $20,000 pay one half percent of their taxable income in Iowa personal income taxes, while those over $100,000 pay over 6.5% of their taxable income in Iowa personal income taxes. The deduction for federal income taxes clearly does not prevent Iowa from having a “progressive” income tax structure. Anyone who desires an income tax system that “soaks the rich” ought to be extremely satisfied with Iowa’s current income tax law.
Opponents of federal deductibility claim the deduction allows “wealthy” Iowans to avoid paying their “fair share” of Iowa personal income taxes. This is simply false. Graph 2 clearly shows the top income earners in this state are paying a huge share of the total Iowa personal income tax burden. In fact, the top 10% of Iowa taxpayers pay over half of all Iowa personal income taxes. The next 25% of taxpayers pay about 1/3 of the burden, the next 30% pay about 16%, and the bottom 35% of all Iowa income taxpayers pay less than 1% of total Iowa personal income taxes.
We must also be careful how we use the words “rich” and “wealthy” when discussing Iowa taxes. It takes only an AGI of $75,000 to qualify as part of Iowa’s top 10% of income tax filers. The blue bars in Graph 3 represent the percentage of returns, while the red bars represent the % of total tax paid. As the graph moves from left to right, you can see the burden of funding our state shifting to “the rich”, especially when we define rich as making $75,000 a year. Thus, eliminating the federal deduction in an attempt to make Iowa’s tax system “progressive” seems redundant. In fact, attempts to “soak the rich” may indeed make them so “wet” that they will move to states with a “drier” tax climate.
It is a mistake to treat federal deductibility as an island—to focus on this one deduction and ignore Iowa’s total income tax system. When examining Iowa’s tax code we must view federal deductibility as one of many determinants of actual tax incidence.
In Graph 4, we examine the effect the entire Iowa personal income tax code has on taxable income as a percentage of adjusted gross income, for taxpayers at all income levels. Does the tax code benefit some income groups more than others? Or, are taxpayers treated about the same? The data shows that when you examine the Iowa personal income tax code as a whole, taxpayers at all income levels receive roughly proportional benefits from all the various deductions, exemptions, and rates. The tax code treats Iowa taxpayers roughly the same, with each income bracket paying taxes on between 70-80% of their Adjusted Gross Income.
Survey after survey has shown the members of Iowans for Tax Relief support keeping this important component of tax fairness. No matter what issues are included, the fight to maintain federal deductibility consistently is identified as a top priority on our membership surverys. Federal deductibility is right in principle and it is sound economics. It is fair and it is the will of the people. It must be kept. Iowans for Tax Relief will continue to fight vigorously for every Iowan’s right to deduct all federal income taxes on Iowa returns.
*All data taken from 2013 Iowa Individual Income Tax Annual Statistical Report, 2013 Returns Filed in 2014. Report Publication Date: June 2015.
