A proposal to give taxpayers the option of paying a flat income tax won the support of the Republican-controlled Iowa House on Wednesday.
The legislation was approved 53-46 in a party-line vote. Under the plan, taxpayers could pay a flat 4.5 percent tax on income instead of the current progressive tax. Most deductions and credits wouldn't be available to those paying the flat tax.
Supporters argue such a system would simplify the tax process, while opponents say a flat tax provides costly breaks to the more affluent. The current tax system has nine rates, ranging from 0.36 to 8.98 percent, depending on income level.
Rep. Chip Baltimore, R-Boone, who managed the bill on the House floor, said the plan would make Iowa more attractive compared with other states with low or no income tax.
"This is a bill that is going to benefit people of all income brackets all across the state of Iowa," said Baltimore. "This will improve our competition with other states."
Analysis by the non-partisan Legislative Services Agency shows a flat tax would cost the state $412 million in lost general fund revenue in the fiscal year that starts July 1. The agency also estimated it would cost the state about $65,000 in the current fiscal year and $65,000 in the upcoming fiscal year to institute the new tax.
Democrats in the House said the flat tax would provide substantial tax cuts to top earners. They also said charities could suffer because people might chose not to give under a flat tax system that doesn't provide a deduction for donations.
"A lot of people give from the heart, but there's also incentives in the tax code," said House Democratic Leader Kevin McCarthy, D-Des Moines. "It's a bad bill."
Republican lawmakers in the House amended the bill to include another proposal to use surplus budget funds to give tax credits to taxpayers. The surplus has been estimated at up to $800 million. Democrats argued that using the funds this way would prevent legislators from pursuing other tax proposals, like property tax reductions.
If these proposals become law, both would apply to the 2013 tax year.The legislation now moves to the Democratic-majority Senate, where it has little chance of winning support.