Dems propose $54 million Iowa tax cut

DES MOINES - Legislative Democrats have upped the ante on tax relief, adding $55 million in income tax cuts over two years to their plan to end federal deductibility and drive down tax rates for all Iowans.

"We're really excited to do this," Sen. Joe Bolkcom, D-Iowa City, said Wednesday after unveiling changes to Democrats' tax plan to lower the state tax liability for about 60 percent of the 1.3 million Iowans who file state income taxes. "It couldn't come at a better time, a time when Iowa families need a few more dollars in their pockets."

The plan, House File 807, had been revenue neutral, but now would result in the state collecting $20.2 million in the first year and $34.9 million the next year. That's a "major tax cut," Gov. Chet Culver said, who hopes Republicans will join in supporting the plan his party touts as middle-class tax relief.

That's unlikely, according to House Minority Leader Kraig Paulsen, R-Hiawatha.

"If it is a tax cut, Republicans believe now is a good time to reduce taxes," he said, but predicted the majority party's plan will result in a $154 million tax hike in two years when federal income tax cuts expire. "Once you get rid of the Des Moines math, it's still a tax increase because they eliminated the largest deduction for most Iowa middle-class taxpayers and you'll pay income taxes on money you never received."

Federal deductibility is a provision in the Iowa tax code that allows Iowans to deduct their federal income tax payment when calculating their Iowa tax liability. Eliminating it, Republicans say, would result in a tax on a tax.

Democrats' tax plan would use the $600 million windfall from eliminating federal deductibility to drive down tax rates for all income brackets. As a result, Shomshor said, 60 percent of Iowa income tax filers would have a lower tax bill, 14 percent would see no change. The remaining 25 percent would see no change or higher taxes. Iowans with adjusted gross incomes of $125,000 or more would be likely to pay more.

Partly to get the support of the governor and a majority of legislators, Rep. Paul Shomshor, D-Council Bluffs, and Sen. Joe Bolkcom, D-

Iowa City, who chair their respective chambers' Ways and Means Committees, raised the standard deduction from $1,750 to $2,710 for single filers and from $$4,310 to $5,420 for couples filing jointly and added a $100 refundable college student tax credit. Together, that lowers the tax liability for about 825,000 Iowa income tax filers.

According to the Department of Revenue, which has run more than 50 versions of the plan, those Iowans making less than $125,000 would, on average, pay tens of dollars less in income taxes. Those earning more than $250,000 would likely pay as much as $900 more per year, the department said.

As examples of the tax relief, Bolkcom and Shomshor pointed to tables in the fiscal analysis showing that people with adjusted gross income of less than $20,000 would pay an average of $40.42 less under the Democrats' plan.

Paulsen flipped the page to a table showing that 10,909 - 2.6 percent - of the people with adjusted gross incomes of less than $20,000 will pay an average of $54.49 more

"They've moved around the numbers and changed the ratios, but it continues to be a tax increase within every tax band and across all tax bands," Paulsen said.

Bolkcom acknowledged there are lower income Iowans who will pay more, but pointed to an increase in the Earned Income Tax Credit and child care credits.

"A few more hundred dollars in their pockets will be meaningful," Bolkcom said.

They'll have a lot less when the so-called Bush tax cuts expire, Paulsen, said, pointing to a projection Iowa tax revenue would grow $155 million.

"This continues to be about raising revenue so the state can spend more," he said.

Bolkcom conceded that would be true if the federal tax cuts expired, but with President Obama and congressional Democrats are talking about middle-class tax relief he doubts all those cuts will go away.

If they do, "we can come back and lower our rates to balance the budget and not raise taxes," he said. Last year, Bolkcom said, the Legislature decided not to tax about $60 million in federal stimulus checks - rebates - Iowans received rather than reap a windfall at Iowans' expense.

Eliminating federal deductibility, Bolkcom said, increases the state's control over its fiscal house.

Shomshor and Bolkcom predicted they will have the votes to pass the bill when it gets debate4d next week. There's been speculation Democrats were having trouble getting 51 votes in the House. Majority Leader Kevin McCarthy, D-Des Moines, said at one point he had 52 votes but was waiting to get his "ducks in a row" before bringing the bill to the floor.

"We'll have the 51 when we're ready to run the b ill," Shomshor said, but stopped short of saying he has a majority now.