Branstad considering change in Iowa income tax deductibility

Taxpayers would choose federal deductibility or lower overall income tax rate

DES MOINES — Iowa taxpayers could be given the option to deduct federal taxes or pay a flat, lower state income tax rate under a plan that Gov. Terry Branstad said Tuesday is in the “discussion stage.”

Branstad said he likes the concept of giving Iowa taxpayers a choice. He also wants to improve Iowa’s competitive position with other states, which are able to market a lower effective tax rate to businesses. Iowa’s top marginal income tax rate is 8.9 percent, but the rate would be cut to the 6 percent range if federal taxes were deducted.

The governor said he is working with Republican legislators to formulate a comprehensive tax reform package for the 2013 legislative session. It would lower the rate paid by commercial/industrial property owners, limit the tax increase for agricultural and residential property classes, and provide individual and corporate income tax relief.

“We’re trying to look at how can we become competitive in all those areas,” the governor told members of the board of the Iowa Partnership for Economic Progress.

“One of the things that I think we should look at is the option to give the taxpayer the choice” to apply federal deductibility to their state individual or corporate tax liabilities or pay a lower flat tax rate with fewer deductions, he said. “You can have the present structure or you can have maybe a flat rate that doesn’t have as many deductions.”

He did not specify which deductions could or could not be applied under the flat rate option or what flat rate he would propose. “We’re running the models and looking at it, so we don’t know what the rate will be,” he told reporters.

The Muscatine-based Iowans for Tax Relief has opposed ending federal deductibility, because the group contends Iowans should not have to pay a tax on a tax. Branstad noted that his current chief of staff, Jeff Boeyink, is a former ITR executive and is “very familiar and knowledgeable” on the issue.

“We haven’t made any recommendations. We’re looking at all the options and looking at what would be the most attractive,” the governor said. “We think maintaining the option of having federal deductibility or giving the taxpayer a choice, it kind of gives the taxpayer the best of both worlds. So we think that could be an attractive option.

“But, obviously, before we make any decision for a final recommendation we will certainly consult with Iowans for Tax Relief and many other people in this process,” he added.

Iowans for Tax Relief did not immediately respond to a request for comment Tuesday.

Two years ago, the governor proposed lowering Iowa’s top corporate tax rate from 12 percent to 6 percent, but the idea stalled. On Tuesday, Debi Durham, director of the Iowa Economic Development Authority, said cutting the state’s corporate tax rate by half during the 2013 session would put Iowa roughly in “the sweet spot” of competing with other states. She also said slashing the rate would curb the need to provide hefty state tax credits to attract projects.

Adam Mason of the Iowa Citizens for Community Improvement (CCI) Action Fund said his group looks forward to the full details of the governor’s tax proposals. But he added: “It is telling that Branstad is testing his tax plans with corporate CEO’s rather than everyday Iowans across the state.”

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