Reynolds hints tax plan will phase out Iowa's federal deductibility

Governor Kim Reynolds campaigns at Aurora Coffee Co. in Marion on Saturday, February 3, 2018. (Cliff Jette/The Gazette)
Governor Kim Reynolds campaigns at Aurora Coffee Co. in Marion on Saturday, February 3, 2018. (Cliff Jette/The Gazette)

MARION — Gov. Kim Reynolds expects to release her plan for state tax reform this week, calling for the elimination of federal deductibility — but perhaps not immediately.

“We continue to run the numbers to be sure that whatever we do is sustainable,” the Osceola Republican said after an “Unleashing Opportunity” campaign-style stop Saturday in Marion.

While federal deductibility — which allows Iowa taxpayers to deduct what they pay in federal taxes from their taxable income for state tax purposes — may sound like a good idea, Reynolds told more than 100 people at Aurora Coffee Co., it’s standing in the way of meaningful reform that reduces tax rates.

It’s not the first time an Iowa governor has proposed ending the tax code provision dating to the 1930s. Reynolds’ former boss, Gov. Terry Branstad, proposed it in the 1980. Democratic Govs. Tom Vilsack and Chet Culver tried it, too.

A 2010 study estimated the value of federal deductibility to Iowa taxpayers was nearly $575 million. Even so, Reynolds argued, that won’t be good for Iowans “because when those federal taxes go down, if we don’t do something in Iowa to reform our tax code, then our Iowa taxes are going to go upon those same individuals we’re trying to pass savings on to.”

Her goal is to change the state tax code to “significantly” reduce rates and eliminate federal deductibility “and pass those savings on to all you people working hard every single day.”

Reynolds was vague on the details of her tax plan that likely will include lower rates and changes to capture sales taxes from online purchases. She and her staff are running the numbers “to find where we can get the biggest impact.”

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“I’m going to eliminate it,” she said of federal deductibility, but in a sustainable way. “Whatever is feasible, my plan will ultimately eliminate federal deductibility.”

One consideration, she said, is slow revenue growth that limits what’s available to spend on state priorities and how much tax relief the state can afford.

Representatives of Iowans for Public Education told her the state isn’t spending enough on K-12 schools. But Reynolds defended the commitment, pointing out that state aid to local schools has increased by more than $730 million since Republicans took control of the governor’s office in 2011.

Members of Indivisible Iowa demonstrating outside the coffee shop weren’t impressed.

“It’s hard to find something positive (Republicans) have done for us,” retired educator Elwood Garlock said. “They’re not supportive of the things that offer Iowans opportunity.”

l Comments: (319) 398-8375; james.lynch@thegazette.com

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