Agreement on taxes holding up Sine Die

Center Focus

Agreement on taxes holding up Sine Die


We’re still in hurry-up-and-wait mode at the Capitol. We finally saw budget targets and the introduction of a few budget bills this week. However, the education and health and human services budget bills — bills that fund most services for children and families — are still being worked on behind closed doors.

Both the House and the Senate adjourned Thursday morning after a “gavel-in, gavel-out” session. They did not debate any bills. Senate rank-and-file members have been gone since Tuesday night. But leadership remained in Des Moines and Gov. Kim Reynolds canceled an economic development trip to New York to work on budget and tax negotiations. 

The Senate, House and Governor are all in agreement on expanding the sales tax to cover more services and e-commerce, but their respective tax bills differ in many other ways. The Senate has proposed a substantially larger tax cut than the House or the Governor that would target both corporate and personal income taxes. The House tax cut targets only the individual income tax. 

All three proposals have their problems, but the Senate tax bill is the most problematic of the three, with huge tax cuts that would dramatically reduce revenue and lead to Kansas-style service cuts. But one Senate proposal (also in the Governor’s plan), ending federal deductibility, makes a lot of sense. Federal deductibility allows Iowa taxpayers to deduct federal income taxes on their state income tax returns. It is far more valuable to those at high incomes, decreasing their Iowa taxes substantially, so eliminating it would make Iowa’s tax system more progressive. 

Federal deductibility also makes Iowa’s top income tax rate (8.98 percent) look much higher than it is in fact, because almost no Iowan actually pays that rate after deducting federal taxes. Iowa is one of only three states that allow taxpayers to fully deduct federal income taxes (another three allow partial deductions). If Iowa removed federal deductibility, the top rate could be lowered below 7 percent without any loss to the state (assuming no other provisions to reduce revenue). Removing federal deductibility and lowering rates would also blunt the argument — however inaccurate it is — that Iowa’s tax rates make it uncompetitive with other states. 

Both chambers should be back to work at the Capitol next week. The rumor is that they could wrap up by Saturday, but we’ll only know for sure we are done for the year when we hear the magic phrase “Sine Die.”

04/20/2018 10:28 AM |Add a comment
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