Bad news for some on Iowa taxes

Out-of-work Iowans, disaster victims, teachers and others preparing their 2009 state tax returns are getting bad news with the likelihood that the Legislature will not “couple” Iowa tax rules with federal tax code changes again this year.

The sour note will hit Iowa taxpayers to the tune of $34.5 million this fiscal year, and it will mean some Iowans must amend their 2008 returns to pay back tax refunds stemming from federal tax breaks they mistakenly claimed last year.

“It's is unlikely we're going to find the ability to give up significant state revenue this year when we're cutting everything else in state government,” Senate Majority Leader Mike Gronstal, D-Council Bluffs, said last week.

Not conforming Iowa's tax code to federal changes in 2008 or 2009 amounts to a roughly $90 million issue over the two years, said Jim McNulty of the state Department of Revenue.

“In an ideal world, we'd love to couple and make that happen,” said Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee. “It would cost state taxpayers money to go forward with coupling, and given the cuts, particularly to education, there's just not enough money to go around to do the coupling this year.”

Not adopting federal tax provisions to the state code, McNulty said, will mean at least 10 adjustments will be required on the 2009 Iowa tax form (see list).

“It's very disappointing for taxpayers in Iowa that can't get their tax credits,” said Sen. Randy Feenstra, R-Hull. “Unfortunately, it's taxpayers that share the pain. I see it as a mismanagement of funds over the last three years as the reason why we can't couple today.”

Gov. Chet Culver had included $8.8 million in his budget request to exempt disaster victims for the 2008 tax year, but lawmakers say they can't afford any coupling as they forge a fiscal 2011 spending plan.

“Right now we don't have a lot of room in our budget for additional items,” said Rep. Paul Shomshor, D-Council Bluffs, chairman of the House Ways and Means Committee. “We're talking about what we can do, but it's just a challenge with the budget year.”

Lawmakers are working on a bill that would waive interest and penalty for disaster victims who must repay the state treasury, and Feenstra said he plans to amend that to extend it to all affected Iowans.

Along with disaster-related expenses, federal tax advantages for business equipment depreciation, education-related expenses, college tuition and fees, or certain sales tax charges were not allowed on 2008 state returns - a coupling issue that carried an estimated state budget impact topping $50 million last year.

The problem last year was that the decision not to couple was not known until the Legislature adjourned in late April - meaning tax preparers and taxpayers were given mixed signals, with some early-filing Iowans incorrectly claiming the federal benefits on their 2008 state returns while others did not, McNulty said.

State officials estimate that about 20 percent of Iowa taxpayers who were covered by the federal tax breaks took unauthorized deductions on last year's state returns.

Culver stepped in last year and directed state revenue officials to temporarily delay any enforcement against taxpayers who claimed disaster-related credits on their state tax returns that were not validated by Iowa lawmakers until the issue could be addressed this session.

Now, with no coupling action expected this session, McNulty said state tax collectors would begin compliance work this summer or fall by contacting taxpayers who may owe the state money for disallowed tax breaks they may have claimed on last year's Iowa returns.