Some Iowa taxpayers may have to amend returns

DES MOINES – A decision by majority Democrats in the Iowa Legislature last session not to “couple” state tax laws with federal tax breaks is going to be hitting some Iowa taxpayers in the pocketbook.

Federal tax changes offering deductions, exemptions or other advantages for things like disaster-related expenses, business equipment depreciation, education-related expenses, tuition and fees, or certain sales tax charges were not adopted retroactively for state tax purposes – meaning tax filers who claimed the same benefits on their Iowa returns likely will owe money to the state treasury, said David Casey of the state Department of Revenue.

State lawmakers discussed the possibility of adopting the federal tax changes, but that issue got knotted with other tax proposals that stalled during the 2008 session and was not taken up because it carried at least a $56 million revenue price tag during an already tough budgeting cycle, said Sen. Matt McCoy, D-Des Moines, vice chairman of the Senate Ways and Means Committee.

“It was a hit to the budget that, frankly, was not an option. With respect to the complexities created by not coupling, it was primarily a budget decision that was made in light of the fact that we had such a big gap to fill,” he said. “We were well aware that it would impact Iowans and that it would impact everyone.”

Sen. Randy Feenstra, R-Hull, who tried unsuccessfully to raise the issue via floor debates and amendments, said part of the problem was a timing issue with tax preparers filing early returns with an expectation that state lawmakers would address the issue before adjourning in late April.

However, the General Assembly wrapped up the 2009 session without applying provisions of the federal Heartland Disaster Tax Relief Act and other federal tax changes to the Iowa tax code.

“Now we're in this mess,” Feenstra noted as accountants and tax preparation specialists are informing Iowa taxpayers who reduced their tax liabilities or boosted their state tax refunds by applying the targeted federal relief to their state tax filings that they will have to amend their 2008 returns.

“I was beating the drum, saying ‘let's at least be honest with the people of Iowa and tell them we're not going to couple, we're not going to do this.' But they didn't do that. They didn't do anything,” Feenstra said. “It was a significant tax increase to Iowans.”

Affected taxpayers likely include classroom teachers who claimed up to $250 in credits for buying out-of-pocket school supplies; businesses, victims or parents who claimed tax advantages for losses or costs within the designated Midwest disaster zone; or businesses claiming bonus depreciation on new investments.

“Effectively, what they (majority Democrats) did was to use this as a way to raise revenue to the state. Iowans are going to have to write larger checks to pay their income taxes as a result of their inaction,” he said. “They were trying to raise revenues so they could spend more. That's the way I read it, anyway.”

Paulsen said minority Republicans unsuccessfully offered ways to reduce state spending by $300 million in the recent session that would have made tax coupling possible and removed the need for Iowans to do their tax accounting differently for the federal and state tax systems.

“I don't recall us having a specific conversation about how it would impact flood victims,” McCoy said. “I recall talking about how it would impact middle-class Iowans and the fact that it would have ramifications that would impact families across the state.

“But I also believe we looked at the amount of money involved spread across the state and we thought it was something that could be more easily absorbed spread across the state equally than trying to come up with a solution to a $56 million problem,” he said. “Obviously, we would have loved to have had the ability to couple.”

McCoy said the situation is further complicated by the fact that the state likely ended the fiscal 2009 budget year with an imbalance that likely will have to be covered with surplus reserves. That likely will mean more across-the-board and targeted spending cuts in the current fiscal 2010 budget year, he added.

“It's going to be painful, there's no doubt about it. It's a messy problem,” McCoy said. “I think it will be very unlikely to see any major tax changes in an election year.”