DES MOINES — Iowans could see an estimated $1.538 billion cut in their individual federal income payments in tax year 2018, but the changes could mean they pay an extra $260 million over three years in higher state taxes due to Iowa’s federal deductibility law, according to a state report released Friday.
Director Courtney Kay-Decker and analyst Amy Harris of the Iowa Department of Revenue said their preliminary analysis of the federal tax reforms passed by Congress and signed by President Donald Trump last month would reduce overall income tax liabilities for 1,440,402 Iowa taxpayers by more than $1.538 billion.
The cuts would range from an average of:
• $186 for those making $20,000 or less, a 155 percent reduction, for 431,285 Iowa taxpayers.
• $639 for those making between $20,001 and $40,000, a 49 percent reduction for 325,496 taxpayers.
• $1,076 for those making between $40,001 and $80,000, a 20 percent reduction for the 354,375 Iowans.
• $2,639 for those making $80,0001 or more annually, a 9 percent reduction for 329,246 Iowans.
“We knew this reform was going to have a really big impact,” Kay-Decker told the state Revenue Estimating Conference on Friday.
Because Iowa is one of three states that allows its taxpayers to fully deduct their federal tax liability on their state income tax returns, revenue experts calculated that Iowa would collect an extra $16 million in the current budget year that ends June 30; an additional $106 million in fiscal 2019; and $138 million in additional state revenue in fiscal 2020 when the changes are fully implemented, according to the report.
The agency officials did not include corporate tax law changes in the preliminary analysis.
“It is crystal clear that nearly every Iowan at every income level will benefit from federal tax reform,” said Brenna Smith, spokeswoman for Gov. Kim Reynolds. “However, we believe Iowa families should not be punished with higher state taxes as a result and will look at our options for returning that money to them.”
David Roederer, chairman of the Revenue Estimating Conference and Reynolds’ budget director, said he expected the governor would reveal in her Condition of the State address Tuesday whether she would recommend this year’s estimate of up to $16 million in increased state revenue should be used to help pay down a projected state budget deficit of $37 million by June 30 or rolled into a tax cut plan she hopes to formulate with majority legislative Republicans during the 2018 session that opens Monday.
“The good news with the federal tax changes is that Iowans are going to be paying a lot less into Washington than they’ve had to pay in the past,” he said. “The question though is then how does Iowa react to that.”
Rep. Guy Vander Linden, R-Oskaloosa, chairman of the House Ways and Means Committee, said he expected his committee, in consultation with the Senate and governor, would begin discussing plans for a comprehensive tax reform package for Iowa. He noted the numbers of still very preliminary and couched in agency disclaimers pending more analysis.
“It’s pretty early,” he said. “I think we still don’t know enough to be able to say, yeah, absolutely, we’ve got this all figured out. It’s going to be an interesting process,”
Vander Linden noted the higher state tax collections were more than he expected, but the overall federal cut for Iowans seemed too high.
“But again, this is very, very preliminary so I don’t want to bet the ranch on these numbers,” he said.
Rep. Dave Jacoby, D-Coralville, ranking member of the House Ways & Means Committee, said more accurate tax data is needed before policy changes are made, but Democrats believe any tax changes or reforms considered this year must keep the state budget balanced, be fair and simple for all Iowans, and provide relief for the middle class.
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“Democrats will not support a tax plan that simply mirrors the new federal law and rewards corporations and the wealthy at the expense of Iowa families,” he said.
“Even with the new data provided today by the Department of Revenue, the state budget is still in deficit, and it isn’t even enough to pay back the money Republicans put on the state’s credit card last year,” Jacoby added.
Tom Sands, a former GOP legislator who now leads the Iowa Taxpayers Association, said the good news from Friday’s numbers that once the federal and state tax issues shake out, most Iowans are going to pay less income tax. Also, the federal changes put Iowa in the rare position of being able to make major reforms to a tax system that is complicated and has uncompetitive individual and corporate income tax rates.
“I think this is a great opportunity that has been handed to us, and we need to capitalize on it and let policy dictate the direction we go and not politics,” Sands said.
“This gives us the opportunity to do some true reform here in Iowa. We shouldn’t be so tied with our federal deductibility to every decision the federal government makes — whether it’s up or down or positive or negative,” he added. “We are fine with the elimination of federal deductibility as long as it’s offset by a true rate reduction and is not just a revenue grab. We would be fine with that.”